In the liquor world the lack of parity between the tiers is obvious to someone with firsthand knowledge of the industry. It is very difficult to challenge the power of the middle tier. From time to time a major supplier like Sazerac will yield its power over the wholesale tier but this is the exception instead of the rule. With the contraction of wholesalers and the expansion of suppliers, the market conditions worsen each year. The smaller number of wholesalers means the surviving wholesalers can exact more power in the marketplace often at the expense of the other tiers. For medium to small suppliers this is the reality they live with every day.
With market conditions less than favorable, the small supplier could look to the legal system to help its cause. Unfortunately, that does not work either as the laws are biased towards the middle tier.
A perfect illustration of the system’s imbalance is the terms of payment. In many states a retailer must pay a wholesaler within 30 days of delivery (in some states beer needs to be paid in cash at the time of delivery, wine and spirits typically has a 30-day window), which ensures the wholesaler is timely paid.
Yet there typically are not state laws which mandates when the wholesaler is required to pay the supplier. I have some clients that six months later and the wholesaler has still not paid them. Unfortunately for the state regulator, there is nothing they can do about this imbalance in parity. The regulator does not write the laws, they are an enforcement mechanism, and one can’t enforce a law that does not exist.
As a former state regulator I heard about how franchise laws are necessary because the wholesaler needs protection in case a major supplier cancels their contract after the wholesaler made large investments to service their business.
Yet, we don’t hear how a wholesaler delaying payment for six months can hurt a small supplier. As the alcohol industry has experienced tough times, suppliers are living on thinner margins, not having a significant amount of cash flow for six months may require the supplier to go out of business.
Suppliers should be forewarned to read your distribution agreements carefully and put payment terms into the agreement. However, when starting out the small supplier may not be legally sophisticated enough to negotiate sound terms as they are concentrating on running a business, or they are negotiating with the only wholesaler in the area and lack the leverage to negotiate a good agreement.
Even if they are right, it is expensive to go to court and seek a remedy!
Solution
What often times happens when a small supplier does not get paid is they are forced to negotiate down the amount they should receive from a sale of their products. Which puts the small supplier at an extreme market disadvantage.
The 30 day laws protect the wholesaler and in Illinois specifically, a retailer can’t order product from another wholesaler until they paid their bill that is past due over 30 days.
The laws provide no such protection or guarantee of payment for the supplier.
This is a market occurrence that may just need a fix to achieve parity. If the wholesaler is required to be paid by the retailer in a specific period of time, shouldn’t the wholesaler be required to oblige the supplier?
The current system is a mess and it favors one tier. But we could take at least one small step to provide parity to the system and not leave small suppliers to the whims of someone that fails to live up to an agreement. If we protect one, we should protect all!
While I won’t deny that you make some valid points on behalf of smaller suppliers, the larger suppliers actually contractually mandate payment terms. (And due to their size, can enforce their contracts) In NJ, for example, there is a 30 day credit rule, but all major beer suppliers contractually require their franchise-protected wholesalers to pay within 10 or 15 days of delivery. And those payments are usually automated debits from the wholesaler’s bank account.
This results in the same issue you point out on behalf of small suppliers, but it is the “all powerful” middle tier floating the cost of their inventory.
Your “parity” argument isn’t one between small suppliers and wholesalers, it is really between large suppliers and small suppliers. However, there will never be parity between the large suppliers and small suppliers. That’s not how markets, free or otherwise, work. Meanwhile, the current system provides more choice and variety available to consumers on than any other system yet devised.
A “free-er” market wouldn’t change this, it would make it worse. Less regulation would concentrate more power in the supplier tier, at the expense of the other tiers and smaller suppliers. Your argument for more regulation is an unusual stance for the Irish Liquor Lawyer.
Thanks Mike, I would rather have government stay out of contracts and dictate terms. I think rescinding the law is the best option, but if we are going to have it in place than it should apply across the board. Thanks for your response.