The Thirsty Beagle: Will SJR 68 increase alcohol prices?

Wednesday, April 20, 2016

Will SJR 68 increase alcohol prices?

When Budweiser didn't like Senate Joint Resolution 68, one of its biggest arguments was that the measure would drive up beer prices.

Most everyone dismissed that claim as a scare tactic, and Anheuser-Busch never really laid out any rationale as to how SJR 68 would drive drink prices up.

Once SJR 68 was amended to allow Anheuser-Busch to keep its distributorships (temporarily, at least) the mega-brewer got on board and supported the measure.

That left a group including the Retail Liquor Association of Oklahoma, the Oklahoma Restaurant Association and a collection of small alcohol distributors as the opposing side to SJR 68.

Of those entities, the RLAO has been the most vocal, and one of their points has been that SJR 68 would drive up prices. Unlike A-B, however, the RLAO actually forwarded a theory as to why prices would climb.

Their argument, which they conveniently were kind enough to re-hash on their Facebook page on Monday, goes like this:

"SJR 68 changes the wholesale liquor distribution system and will require liquor stores to purchase the most popular spirits and wines from only a single wholesaler. Currently, liquor stores can buy Jack Daniels, for example, from any one of seven different state wholesalers, all of whom compete against each other on price. SJR 68 will allow the producers of Jack Daniels to designate ONE wholesaler in the state for this product. That's the correct definition of a monopoly: the excessive control of the supply of a commodity. Consumers will pay for this exclusivity in higher prices."

To take it a step further, if Distributor A knows they're the only person selling Jack Daniels in the state, they'll set the price at whatever they want -- and set it higher -- because nobody can undercut them and sell it for less.

So, is that right?

Over the past several weeks, I've spoken to brewers, bar owners, small distributors, big distributors, non-resident sellers, liquor store owners, lobbyists, legislators and consumers. I've tried to get a cross section of opinions on what SJR 68 means for all these different groups.

I can tell you that the general consensus from the people I've talked to is that SJR 68 will not increase alcohol prices. I'm going to present some arguments, and they're based off things I picked up from all these people.

For starters, the RLAO is correct in saying that SJR 68 will drastically change the state's distribution model. One of the biggest differences will be for alcoholic beverages not produced in Oklahoma.

Under the current model, an out-of-state manufacturer (Tier 1) must sell its products to an in-state broker, also known as a non-resident seller (Tier 2). The non-resident seller then sells the product to a distributor, also known as a wholesaler (Tier 3). The wholesaler then sells to a retailer (Tier 4).

When you hear people talk about the four-tier system, that's what that is. SJR 68 would eliminate the non-resident seller tier, moving Oklahoma to a three-tier system -- manufacturer to distributor to retailer.

The presence of the four-tier system has long been acknowledged as a reason why brewers like Stone and New Belgium won't begin sales in Oklahoma.

As far as price goes, there is inherent logic in the idea that removing one tier -- and thus removing one level of price mark-ups -- will actually allow retailers to charge less.

So what about product exclusivity? This is a more nuanced argument, and I think it's explained best with a common-sense example. Let's continue to use the Jack Daniels example.

Let's say Distributor A has the rights to Jack Daniels, and Distributor B has the rights to Crown Royal.

Distributor A could theoretically charge a premium for Jack. But Distributor B could look at what Distributor A was doing, and decide to charge less for Crown Royal. The trickle-down effect would be that retailers would be forced to sell Jack Daniels for more than what they would sell Crown Royal for.

What will consumers do in that situation? They'll probably just buy Crown Royal. With Jack Daniels languishing on the shelves, Distributor A will have to explain to Jack Daniels why their product isn't selling in Oklahoma. That may anger Jack Daniels and eventually force them to take their business somewhere else.

OK, so what if Distributor B sees what Distributor A is doing and also raises the price of Crown Royal? Now the consumer is screwed, right? Perhaps not.

In all this debate, I heard someone make the most simple yet most eloquent point. In the end, the consumer will decide what prices will be. If consumers can afford a cost and want to spend their money, they will. If prices are too high, consumers won't spend.

Nobody is obligated to pay anything for Jack Daniels or Crown Royal or wine or craft beer or anything. Consumers will pay what they feel they can afford to pay. They can speak with their wallet. Every single tier in the system recognizes -- or should recognize -- this fact.

The consumer will tell you where your prices should be. Now, I say all this while fully acknowledging I'm not a trained economist. But what I do know is that business doesn't work out for any tier in the system if products aren't selling. It figures to be in the best interest of everyone to keep prices regulated to ensure products move.

So there you have two main arguments why SJR 68 will not drive prices up: Less tiers mean less mark-ups, and all of the tiers know that if prices are too high, they won't sell anything.

I'm sure you can make counter arguments or shoot holes in the reasoning, but these points make sense to me, and to a lot of industry people out there.

On the flip-side, one argument I have heard already from more than one liquor store owner is that when they lose a big chunk of wine sales to grocery stores -- and it seems plausible that that will happen -- they'll have to raise prices to off-set the wine revenue losses.

That's a legitimate concern, but I've talked to one liquor store owner who said he doesn't actually think that will happen. It's a roundabout theory, and not one all liquor store owners would want to hear, but it goes like this:

Some liquor stores depend heavily on the sale of low-price wines -- your Barefoots of the world. That's the exact type of wine that will end up in grocery stores. You can see the problem here, and it will in fact drive some liquor stores out of business. (The ins and outs of exactly how many stores could be shuttered is a topic for another day.)

The liquor stores that stay in business -- the bigger ones, with good selection and thoughtful customer service -- however, will still have one thing that the grocery stores don't have: Liquor. Not only can you not get liquor at the grocery store, you also cannot get it at the liquor store that went out of business that you used to go to. The liquor stores that stay in business now pick up a bunch of liquor business they didn't have before, allowing them to keep prices on an even keel.

Again, that's not just my theory -- that came from a reputable liquor store owner -- but it makes sense to me.

I share that mainly to reiterate that there are a lot of people who know a lot more about the alcohol industry than I do who feel that SJR 68 will not drive prices up. I'm just sharing what I've learned.

I encourage everyone to establish their own beliefs on this.

4 comments:

  1. What about the cost to the liquor store that wants to compete with grocery stores for cold product? There will be a substantial initial outlay for refrigeration units and installation....then additionally the monthly utility cost to keep products cold. What about this impact on prices?

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  2. Nick, forget what I've previously said about your fair and balanced reporting. You've clearly picked a side on this one and it's the side of Walmart and other big business. You made little to no effort to explain how SJR68 removes a tier then allows one tier to buy controlling interest of another tier (i.e., wholesalers in Oklahoma become puppets of out-of-state distributors)...a topic you've previously decided to punt on even though it is spelled out in SJR68. You assume that a couple of guys can't get together at lunch and illegally fix prices at whatever they want when the wholesale system is reduced from 7 to 2 companies, especially guys who don't even live in Oklahoma. You pretend that people simply won't buy alcohol if the price is too high. And you provided no examples of how this "Texas style" system results in lower or stable prices. In addition, you found one liquor store owner who doesn't understand the simple economic theory of supply and demand or, perhaps, imagines he will make a mint by being able to charge an extra 20% on spirits because there will be half the competition left from the destruction of hundreds of local liquor stores but he doesn't want to come right out and say he is looking forward to becoming a price-gouging vulture.
    If you'd like some actual examples from actual stores in a 3-tier versus 4-tier system, I've provided them at http://www.conveniencecosts.com/#!oklahoma-vs-texas/oal4v.
    Ironically, I believe this part of SJR68 would end up making me, and other surviving liquor store owners, more money because my average markup of around 15% means I net $1.50 for every $10 bottle. If that bottle is suddenly sold at wholesale for $12, I now make $1.80 per $10 bottle.
    You are doing a disservice to the consumer by presenting conjecture as fact and creating scenarios that don't happen in the real world.

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  3. "You assume that a couple of guys can't get together at lunch and illegally fix prices at whatever they want when the wholesale system is reduced from 7 to 2 companies, especially guys who don't even live in Oklahoma. " Couldn't they technically do this now...? Also doesn't competition usually end up being helpful to the consumer? Anyway...this isn't the best legislation ever written but its the prettiest girl at this dance.

    Will the price posting system still be kept in place though? I think that's what has kept our booze prices at least steady in the past.

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  4. You're right in realizing that prices (probably) won't raise so high that a product stops selling, but that's not the same as saying prices won't go up at the expense of the customer.

    There's actually a fairly large gap between the top end, the max pain point folks are willing to suffer before sales reduce enough to drive a price back down, and the low end, the minimum amount at which something can sell and still make enough money to make the whole enterprise worth it.

    Different drivers push prices up or down inside that range. Multiple sellers naturally drive the price towards the minimum as sellers cut prices to gain market share. Less sellers drive it up towards the max a market can bear as there are less sellers to punish each other for needlessly high prices.

    So -- yeah, it sounds like prices are going to go up some unknown amount, with some large chunk of the newfound profit going to the relatively useless tier in between retailers and producers. And that sucks. If prices are going to go up, we should all be wanting that profit to go _anywhere_ other than the distribution layer.

    The worst case scenario is actually both drivers listed above in full force. Higher prices at distribution, but minimum margins at retail. Prices go up, some stores go out of business, surviving stores survive on less, and we end up stuck with the Spec's of the world instead.

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