Illinois makes radical changes with HB2620: PART I

The Illinois legislature recently passed HB 2620 which makes some radical changes to the liquor system. These changes include changing Brew Pubs into Class 3 brewers and providing them full retail privileges and self-distribution, allowing for cooperative purchasing agreements, and writing into law, the rules around quantity discounting.

I will cover some of the highlights of this bill, there is a lot to unpack as the changes are many. I will write more about HB2620 in subsequent posts.

Class 3 Brewers and Beer Showcase permit

The legislation creates a new license classification and a new permit, and provides privileges for transferring beer from a licensed premise to a place where a temporary license will be issued.

I will run down the exact specifics of the law and then explain what it all means in the big picture. If you want to bypass the legal explanation and go to the impact of the legislation, by all means do so.

The new legislation creates a Class 3 Brewer License, which is essentially a replacement for the Brew Pub license. The Brew Pub License will still exist, but the Class 3 Brewer License creates greater privileges for existing Brew Pubs and as a result many of the Brew Pubs will surrender their license and become Class 3 Brewers.

Under the legislation a Class 3 Brewer is the holder of a brewer’s license or a non-resident dealer’s license who manufactures no more than 155,000 gallons at any single brewery premises and no more than 465,000 gallons of beer per year in the aggregate, and is allowed to make sales to importing distributors, distributors, and retail licensees in accordance with the certain conditions set forth in the legislation.  It is required to apply for the right to self-distribution and attest to certain facts including; that its self-distribution is necessary, that it tried to maintain a relationship with a distributor, the volume of beer manufactured and sold from its location falls within allowed limits, and they must certify annually the sale of beer from the previous 12 months and what they anticipate for the upcoming 12 months.

The Class 3 Brewer may make an application to the State Commission for a self-distribution exemption to allow the sale of not more than 6,200 gallons of beer from each in-state or out-of-state class 3 brewery premises, which shall not exceed 18,600 gallons annually in the aggregate, that is manufactured at a wholly owned class 3 brewer’s in-state or out-of-state licensed premises to retail licensees and class 1 brewers, class 2, and class 3 brewers that.

Under Section 6-4(e) of the legislation, any person licensed as a class 3 brewer shall be permitted to sell on the licensed premises to non-licensees for on or off premises consumption for the premises in which he or she actually conducts such business: (i) beer manufactured by the class 3 brewer on the premises; (ii) beer manufactured by any other brewer, class 1 brewer, class 2 brewer, or class 3 brewer; and (iii) cider, wine, and spirits. All products sold under this subsection that are not manufactured on premises must be purchased through a licensed distributor, importing distributor, or manufacturer with self-distribution privileges.

The Class 3 Brewer can transfer up to 155,000 between locations.

An existing Brew Pub may apply for a Class 3 Brewer’s license if it meets all applicable qualifications, and relinquishes all commonly owned brew pub or retail licenses. Nothing shall prohibit the issuance of a class 3 brewer license if the applicant: has a valid retail license on or before May 1,2021, has an ownership interest in at least two brew pubs licenses on or before May 1, 2021; the brew pub licensee applies for a class 3 brewer license on or before October 1, 2022 and relinquishes all commonly owned brew pub licenses; and relinquishes all commonly owned retail licenses on or before December 31, 2022.

If a brew pub licensee is issued a class 3 brewer license, the class 3 brewer license shall expire on the same date as the existing brew pub license and the State Commission shall not require a class 3 brewer licensee to obtain a brewer license, or in the alternative to pay a fee for a brewer license, until the date the brew pub license of the applicant would have expired.

The legislation also outlines the delivery method in which a Class 3 Brewer and Class 1 Brewer can self-distribute to retailers, which excludes common carrier delivery and limits delivery to company owned vehicles or a freight forwarding service. This seems to be unconstitutional because it puts a more difficult burden on out-of-state brewers versus in-state brewers.

Finally, the legislation creates a new permit called a beer showcase permit, the beer showcase permit would allow a Class 3 Brewer or distributor to transfer beer from a licensed premise to a designated site for a specific event.

What this all means

Prior to this legislation (this legislation is not law until the governor signs), a brew pub could not sell its product to a retailer without going through a distributor. A Class 1 Brewer could sell its product to a retailer depending on certain conditions, without going through a distributor. The main difference between brew pubs and a Class 1 Brewer, is a brew pub can sell in addition to beer, wine and spirits, a Brewer is limited to beer from its own supply and guest taps. Now with this legislation, brew pubs will have a benefit they previously did not enjoy before, the right to full retail privileges and the right to self-distribute.

This change is needed because many brewpubs are afraid to dip their toe into the selling to retailer world, because they would need to go through a distributor and not have any idea what their market is. This leaves the brew pubs in a weak negotiating position with distributors, and leaves beer distributors in a bad place, because they are taking on a product in which they don’t know what the demand for the product is.

The Beer Show Case permit allows the Class 3 Brewers to transfer product to an event like a farmers’ market or events of this nature. Even though they are switching over to become brewers, they are maintaining the transfer benefits they enjoyed as a retailer.

The conditions for surrendering the Brew Pub license to become a Class 3 Brewer poses one interesting scenario, under the legislation “Nothing shall prohibit the issuance of a class 3 brewer license if the applicant… has an ownership interest in at least two brew pubs licenses on or before May 1, 2021”.

This begs the question, does a person that owns only 1 Brewpub become ineligible for a Class 3 Brewer License? It raises an interesting question that will definitely need clarification.

Overall positive changes for the industry which will help Brew Pubs grow.

Cooperative purchasing agreements and quantity discounts

The legislation affords the opportunity for a network of retailers to pool their power when negotiating pricing with distributors. However, some of the requirements set forth are so onerous that it may not become reasonable for certain networks of retailers to enter into a cooperative purchasing agreement.

Under a cooperative purchasing agreement, 2 or more retailers come together to form the coop and their power to negotiate is limited to wine and spirits and excludes beer.

Presently, under Illinois law, each separate licensee is required to purchase products for its own location. Even if there is a major chain such as Kroger or Whole Foods, it cannot merge its powers together to negotiate ideal rates.

The cooperative purchasing program would be available to both on premise and off premise retailers. However, a cooperative purchasing agreement must include either all on-premise members or off-premise members, there cannot be a mixture of both in the agreement. Further, a retailer can only belong to one cooperative purchasing agreement.

A cooperative agreement is valid based on certain conditions: the agreement is in writing and signed by all parties to the agreement; the agreement contains the complete license information for all parties to the agreement, which includes state and local license information and the date the retailer joined the cooperative.

The cooperative agreement must also designate an agent or agents with the authority to purchase on behalf of the cooperative group.

The legislation also lays out specific compliance requirements, which mandate that each cooperative member keep their records on-site for three years and that the list of cooperative members must be filed with the State Commission and posted on the Commission’s website. Finally, each member of the cooperative needs to be a retailer and cannot be licensed as another entity under the Illinois Liquor Control Act.

The legislation also outlines quantity discounting terms for wine and spirits cooperative purchasing agreements. All wine or spirits quantity discount programs offered to off and on premises retailers must be offered to all cooperative groups and cooperative agents.

A wine and spirits distributor can offer specific discounts based on quantities purchased. These discounts include: price reductions, cash and credits and no charge wine and spirits products in lieu of a discount. The discounts must be documented on a sales invoice or credit memoranda.

If a distributor or importing distributor offers a quantity discount for wine or spirits, cooperative purchase groups shall purchase a minimum of 250 cases in each quantity discount program. Each individual member of cooperative purchasing group may be required to make minimum purchasing requirements of: (1) 2% of cases of any quantity discount program of 500 or fewer cases; (2) 1.5% of cases of any quantity discount program of at least 501 and not more than 2,000 cases; (3) 1% of cases of any quantity discount program of 2,001 or more cases.

The legislation also requires the cooperative to maintain a minimum $250,000 surety bond at all times. If a cooperative member is  delinquent in paying its bill (under Illinois a retailer must pay a wine and spirits distributor within 30 days), the wholesalers can take the delinquent amount against the surety bond. If the bond does not cover the amount, then all retailers in the cooperative are delinquent until the delinquency is cured.

What it all means

A fight has been brewing for a long time to allow small retailers to increase their bargaining power. Under current Illinois law, retail purchases from a distributor are limited to the specific retail location. Even if someone has a chain of 5 stores, they can’t aggregate the stores to negotiate a better deal. When I was at the Commission, many small retailers complained that they could not get the same deals as Binny’s or a big box retailer, which put the retailer at a competitive disadvantage. Under current Illinois law, the more a retailer purchases, the lower the price and the greater the discount. As Binny’s and the big box retailer could purchase product at a lower price and with greater discounts, the small retailers could not match their price.

So, this legislation intends to close the gap.

But there are several issues that are interesting with this legislation. There seems to be no limiting language on the size of the retailer that is part of the purchasing cooperative. So Binny’s or Walmart could pool all their stores into one cooperative purchasing agreement and begin to get greater benefits than already enjoyed.

Also, does the cooperative choose the discount options or does the distributor? For example, if a retailer wants the discount on price but the distributor wants to offer no charge product, how do we settle the issue?

There are some troubling aspects of the legislation that somehow government mandates the minimum terms of a deal between a distributor and a retailer. Is it government’s job to step into a private transactions and mandate minimum purchasing requirements, this is something that is done in this legislation! Further can a small purchasing cooperative actually meet these minimum purchasing requirements?

The legislation also has a surety bind requirement, the only place where there is a surety bond issue with the Illinois Liquor Control Commission is when an entity is applying for a distributor license. The surety bond guarantees that a licensed wholesalers can pay tax on product coming out of bond.

Under this legislation, a surety bond will be mandated for a transaction between two private parties. Mandating terms of a private transaction is something government should keep out of.

Overall, a positive change in the right direction, but with any liquor bill, the fine print needs to be read carefully. With any liquor bill, they give something and then put so many conditions on it, that enjoying the privileges of the law become arduous and difficult.