NCSLA 2018, Hawaii: THE FIRST DAY AND CHANGE

 

Aloha and Greetings from Hawaii where the NCSLA put on a great conference. Kudos to our Hawaiian host, and special recognition to a couple of others, President Keith Burt, and the always wonderful Pam Frantz.

This post is a run down of some important matters discussed and interesting trends occuring within the alcohol industry.

This represents the first of two blog posts on the NCSLA Annual Meeting.

 

THE DISRUPTORS

An interesting panel comprised of a representaive from a disruptor, Drizly, a representative from a former disruptor, Walmart, a representative from an established player, Diageo, and a representative of a state enforcement agency.

Drizly plays the role of disruptor by inventing an app where customers can search for product at multiple retail locations and locate a product that a customer would not have access to at their regular retail location. This provides a threat to traditional retailers in that Drizly can provide a more vast array of product. Further, the luxury of Drizly delivering the product, through a third party, to the customers is a service traditional brick and mortar retailers don’t often provide.

Walmart and the other established retailers on the block must adapt to these changes, and often times are reacting to a changing marketplace instead of disrupting the marketplace. Ironically, Walmart who once was the major market disruptor is being shaken into change by others.

Walmart reacted to change by enhancing their online presence through buying jet.com and increasing their craft offerings in beer and spirits. Increasing offerings and adding complexity in the alcohol space takes away some of the favorable attractions of Drizly.

Diaego has a lineup of bona fide national spirits brands but has also been shaken by disruption, namely from the craft spirits and the cannabis field.

It moved ahead of the curve by creating a venture capital fund to invest in craft spirits and has taken ownership in disrupting the marketplace. Diaego has not made the investment in cannabis that Constellation and Southern Glazer decided to make.

Patrick Maroney Colorado’s Director discussed how the state deals with disruptors. Often times the state can’t keep pace with disruption and is behind the curb, especially with apps such as Drizly or different and alternative ways of selling alcohol in the marketplace. However, when cannabis became legal, Colorado became very agile and set out distinct rules. 

Disruptor Takeaways

I took away from this panel a couple of interesting things to ponder.

One, could government respond to future disruptors by regulating their whole business model out of existence?

Two how do we as an industry react? Do we as an industry have a responsibility to enhance market disruption and not allow government practice to shut down healthy disruption?

Three, history forces us to beg the question, when will the cannabis disruptor show up and change the marketplace? And will the government be more agile in reacting to this disruption then they are in the alcohol space?

 

OF VALUE/ TIED-HOUSE

The panel consisted of representatives from Arizona, Delaware, Illinois, and Michigan.

Major Question on “of value”

The major question for “of value” is whether the state sanctions are a deterrence or does the industry look at the sanctions merely as a cost of doing business? If industry assumes the latter then illegal practices will continue in order to gain market share. If it is former, illegal behavior is rooted out.

The states may not be happy with the concept that the market may look at the sanctions as a cost of doing business. However, the punishments are rather small, mostly a fine, and suspensions are rare and revocations are even more rare.

The states differ in their rules. Delaware allows a wide array of practices as long as its offered to every retailer. Arizona, Illinois, and Michigan are more restrictive in what is allowed.

Make sure you know the latitude of the state practices and are familiar with the exceptions.

In concluding, the big takeaway is not in the differences in rules, but rather the question of does a state step out from the norm and decide to utilize a heavy hand in sanctioning “of value” violations?

 

DIRECT TO CONSUMERS SHIPMENTS

Bill T of wine.com posed an interesting question, what is the difference between the local resident calling up the liquor store and asking for a delivery of product versus a consumer who orders it off the web and has it delivered from an out of state retailer?

The panel’s wholesaler representative objected to Bill’s statement and stated that alcohol coming over state lines is distinctly different than a local order and delivery. And that allowing direct shipping to consumers takes away the safeguards of a highly regulated product.

Interesting Questions to Ponder

But an interesting array of questions arise from this debate. Technology is meant to increase and expand commerce, if the offerings on wine.com are restricted, are we not using the existing rules to inhibit a progressing business model?

Also, does a ban on shipments direct to consumers have unforeseen consequences? For example, Party A bids on wine at an auction house in Virginia and wants the product delivered to his residence in Illinois. Under a ban on shipments direct to consumers, shipping from the auction house is illegal. The intent of the law is to ban internet wine sales that often times do not go through the three tier system. If the wine won at auction has gone through the three tier system originally, are we going too far in banning these shipments. Alternatively, we could put an auction exception in the laws, but I don’t see this happening.

Rest of the session

The rest of the session was a great primer on Fed Ex’s procedures for shipping product into the state and their safeguards utilized.

 

HOT TOPICS

The distinguished women of this panel provided a great update on the hottest topics. Here are some highlights.

Federal Update

TTB is going after trade practice violations and increased their investigators by 30%. Whereas before they would have 2 cases a year, this year there are 51 investigations initiated. The focus has been on: 1. Commercial Bribery; 2. Exclusive Outlet; and 3. Tied House Violations. The largest fine issued was $900,000. In TTB’s view, the precedent has been set at $900,000 and the fines could exceeds these amounts.

In other words, TTB is changing the game and those “of value” sanctions on the state level that may be viewed as a cost of doing business, may now be viewed on the federal level as a serious deterrence to breaking the law.

Moving onto cannabis with alcohol infusions, the TTB has rejected various formulas and label approvals for this mix. Expect that since cannabis is still illegal from a federal perspective that no formula or label from TTB will be approved.

In another disturbing EPA practice, it seems EPA Region 9 decided to play cowboy and go after fermenters by employing a tool to measure their emissions. EPA Region 9 decided the emissions from some fermenters were harmful and decided to sanction these fermenters. Rumor has it that Region 9 decided to act without headquarter approval. Let’s hope Washington can reel in Region 9 and end this extrajudicial practice!

Technology Hot Topics

Technology keeps progressing and changing the game. We now have robots in casinos that serve and mix pre-ordered drinks. In this particular casino, only one human clearing glasses was needed in the bar. No word on how often the robots come to the table to deliver a drink while gambling!

An Argentine winery will only allow the purchase of its product in cryptocurrency, interesting question, will this become the norm and not a hot topic in let’s say five years!

Another app allows a purchaser to trace its wine from growth to package state. All steps of the wine process are interactive and at your finger tips. Yes, if you really need all this information it is there.

But technology is offering more than just robots and some extraneous information. It is actually changing the world and all three tiers are employing technology.

Ubrew used customer feedback to change an English Ale to an American Ale with lower alcohol content. Interesting that companies are using feedback to change a product on the fly!

Certain large retailers are using apps to notify customers of specials and notify customers that are located within a near radius of a restaurant, the location and pricing.

Even distributors are using the apps to increase efficiencies in orders and delivers. Using a platform named Provi, the retailers can place orders with the distributors. Instead of receiving numerous emails from a retailer looking to order, the distributor gets an organized list.

Technology keeps enhancing the alcohol experience and it remains to be seen what traditional model it gradually upsets.

Tax changes

The federal tax bill reduces the rate of tax on alcoholic liquor products, as an Irishman, I say thank you President Trump for this kind gift! However, this has a two year sunset and must be looked at again. Because it takes TTB around two years to finalize regulations, no regulations will be promulgated on tax changes.

 

CONCLUSION

I will be back with a second post in the following days, enjoy the rest of your time in Hawaii and mahalo NCSLA and Pam Frantz!

 

 

 

 

 

 

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