In a time long ago, the liquor industry set off alarm bells about Blue Cloud Distribution, Inc., a branch of Pepsi Co. obtaining liquor distribution licenses. The narrative pushed was that Pepsi Co. through the use of its chip’s portfolio would be offering back door slotting fee allowances. After much turbulence, Pepsi Co. pulled the plug on the project.

Let’s fast forward to the present where information is slowly coming out about maybe the biggest alcohol scandal in years, the intricate bribery scheme alleged to have taken place between Southern Glazer’s Wine and Spirits and Deutsch Wine and Spirits according to Esther Mobley’s piece in the San Francisco Chronicle[1]. In this scheme, the parties essentially bribed wine buyers for large retailers with Super Bowl tickets, luxury goods, and pre-paid gift cards.

Adding to the intrigue, they tried to conceal illegal activity by utilizing a third-party marketing company, called J. Go Events. According to the federal complaint, Jessica Goebel of J. Go Events acting as the intermediary between supplier, distributor, and retailer arranged the fun trips and luxury goods along with the millions in unpaid gift cards.

Ms. Goebel according to the complaint was directed by Southern and Deutsch to order gift cards for retailers. Additionally, the complaint alleges Southern directed her to submit false invoices.

The complaint also provides disturbing facts that false invoices were paid into a bank account and from the bank account employees of a supplier, distributor, and retailer could use or direct Ms. Goebel to spend on their behalf.

In essence, the parties worked an elaborate scheme to hide that they were artificially rigging the industry to favor their products and harm their competitors.

What is the Rub

This case maybe unprecedent in its stature, but I will caveat that this is a complaint and no one has been convicted of wrong doing. But if the allegations are true, it will be not only shocking, but will show the not so glamorous underbelly of the alcohol trade.

Unlike other consumer goods, where a slotting fee can be paid to the retailer for shelf placement, this practice is illegal in the liquor industry. Liquor also unlike other industries has tied-house provisions, which requires there be separation between the tiers and has specific rules so a certain brand cannot dominate shelf space.

The loudest advocate for the three-tier system, and the legal intricacies of the liquor regulatory system, the wholesale tier.

Yes, the same tier that commonly violates the tied-house provisions in major ways (just look at TTB Offers in Compromises as reference).

We can go after Blue Cloud on the potential they may engage in activity and deny them a license on this basis, but somehow the wholesaler that is engaging in bribery schemes, major tied-house violations, or exclusionary activity, all live to fight another day.

A major fine and some bad press, shake it off, because you have the resources to carry on.

The shouting on the potential of Blue Cloud versus the silence on the offenses of major wholesalers is deafening.

If the allegations in the complaint are proven true, there will be no wholesaler representatives pressing state agencies and the governor’s office to clean up the field. And some of the wholesalers that violate will do so again, just a cost of doing business.

If you are a small producer, and lucky to be even picked up by a wholesaler, you will need to compete against super bowl tickets, millions in gift cards, and luxury goods as competition to get onto the shelves.

The appalling nature of the allegations are there is no gray area or legally defensible position, anyone with even a surface level understanding of tied-house rules can identify wrong doing. The industry needs to decide whether these rules are even necessary when there are continuous violations to these rules. To deepen the morass, not only did they know it was wrong, they thought out a scheme to hide it. Unlike Watergate where the coverup was worse than the crime, in this case, they are equally bad.

[1] According to SF Chronicle Piece, J. Go Events worked with a liquor distributor identified in the charging documents as SGWS, which the reporting presumed to be Southern Wine and Spirits.