Friday, February 13, 2009

End of Liquor Distributor Monopoly?

I say it is highly likely from reading the following from the IBJ:

The nation’s largest liquor distributor is suing the state in hopes of overturning an arcane law that requires distributors doing business here to be owned by Indiana residents.

Southern Wine & Spirits of Indiana Inc., part of a Miami-based company that does business in 30 states and distributes about 20 percent of the country’s booze, filed suit after the Indiana Alcohol and Tobacco Commission said it is not eligible to distribute liquor in Indiana “due to the owners being from out of state.”

The powerful liquor distribution lobby has fought to keep the post-Prohibition-era residency requirement on the books as a means to protect its turf and prevent competitors from poaching their brands.

This is probably not a very good time for businesses to be showing their anti-capitalist tendencies. Call that the first strike.
The suit argues the state’s denial violates the company’s right to do business across state lines, a guarantee set out in the Commerce Clause of the U.S. Constitution. The company successfully challenged a similar law in Texas, getting a federal judge to overturn it in May 2007. “No federal court in memory has ever found a residential requirement as a condition to doing business constitutional,” said J. Alexander Tanford, an IU law professor who has fought with some success to allow Hoosiers to buy wine online. “This seems open and shut to me.”

Despite informing Southern in October 2008 that it isn’t eligible for a liquor permit, the state granted the company’s request for a wine distribution permit. The state dropped its residency restrictions on beer and wine distribution several years ago.

I defer to Professor Tanford and second his statement about the Commerce Clause. Call that strike two and Indiana's doing away with residency requirements for beer and wine is strike three.
Liquor distributors have lobbied to retain the law in part because they have more to lose: While beer distributors have franchise agreements with beer brands that give them exclusive rights to a brand for a set time period, liquor distributors don’t enjoy the same contractual protections. Liquor brands can switch distributors without financial consequences.

“A residency requirement is about the only thing that protects them from losing their brands without compensation,” Carmichael said. “If I were them, I’d be doing the same thing.”
I mentioned above anti-capitalist tendencies and these paragraphs should explain my meaning:
Southern’s arrival would pose a “huge threat” to National Wine & Spirits, said John J. Baker, the company’s chief operating offi cer.

He acknowledged that saving the residency law could be tough. If it doesn’t survive, the state must find another way to ensure a fair and competitive market, Baker said. He’s concerned in particular about a joint venture between Southern and Texas-based Glazer’s Distributors, announced last year, that gives the fi rms control of about 80 percent of the nation’s wine and spirits volume.

Tanford said the state has every right to require distributors to obtain licenses, pay fees and comply with a laundry list of regulations, but the residency rule is another story. He expects existing wholesalers will claim that state regulation will be more diffi cult for companies that aren’t headquartered here—an argument Tanford dismisses as hiding the real issue: a fear of competition.

If the same residency rule were to be extended to other industries, he said, something like half the companies in Indianapolis would have to shut down.

What I see could be done is more direct contracts with outlets rather than relying on the General Assembly to do the marketing and contracting work for the distributors.