The Slippery Slope to Amazon Direct Delivery

FILED JANUARY 17, 2019

Dear Client:

I got a couple of stories to tell you that you may not have known about the big Supreme Court case, Tennessee Wine & Spirits Retailers Association v. Blair, in which Justices heard oral arguments yesterday between two out-of-state liquor store operators and the Tennessee retailers.

The argument: Is Tennessee's two year residency requirement for liquor store owners Constitutional, given the 21st Amendment, the dormant Commerce Clause, Granholm, and about a dozen other precedent-setting cases, one even laughably reaching back to 1898?

Let's take a deep breath. This case just involves brick-and-mortar Total Wine going into any state it wants. It's not, at its heart, a three-tier case, as Total Wine buys its product from licensed distributors and is itself a licensed retailer. What this case is about, to me, is a legal slippery slope to Amazon direct shipping to consumers from producers. Read on with caution, dear reader.

But before we get into all that boring legalese, let's take a look at the petitioners.

THE GOOD GUYS. Every legal case has to have good guys to go before the cameras, and these are perfect good guys. Doug and Mary Ketchum moved to Tennessee from Utah in 2016 to help support their daughter, who has cerebral palsy, where the climate would be better for her respiratory issues. They purchased a small liquor store there thinking they could spend more time with their daughter. While they were issued their license, as non-residents their license has been in jeopardy.

They contend, and lower courts have agreed, that Tennessee law forcing people to live in the state for two years to get a license to sell alcohol and 10 years to renew a license is unconstitutional because it discriminates against out-of-state interests, a la dormant Commerce Clause, (Tennessee itself has given up defending the 10 year renewal requirement). Sad story, admittedly.

THE OTHER GUYS. And then you have the other guys who stay away from the cameras, at least in this case. We're talking about multi millionaire David Trone, the co-owner with his brother of the largest indie package store chain, Total Wine Spirits and More, who took his seat last week as a Congressman from Maryland. Trone spent more than $13 million on his first unsuccessful campaign, which became the most expensive self-funded House campaign ever, and then spent a similar amount and won this time.

Trone represents the congressional district at the heart of a constitutional challenge to partisan gerrymandering and has urged the U.S. Supreme Court -- the same Supreme Court who is supreming courtly over his liquor store case in Tennessee, to validate his controversial district as having been reasonably redrawn. So we have that possible conflict.

So who is David Trone?

He has been arrested three times and indicted by a grand jury on several alcohol beverage sales-related offenses. One arrest was for allegedly negotiating volume discounts on behalf of multiple stores and illegally advertising beer prices, and another was for allegedly circumventing state transportation regulations. These charges were later dismissed.

In 1992, Trone, his wife, June, and brother were indicted by a grand jury in Dauphin County, Pennsylvania, for owning multiple stores through Trone's consulting company, among other charges, all of which were later dropped and expunged. In 1994, a state judge dismissed 19 of the 23 counts based on "prosecutorial overreaching", and the remaining counts were withdrawn after Trone paid a $40,000 fee to cover investigation costs. After that the Trones left Pennsylvania. Total Wine & More grew from the remaining two stores in Delaware one in New Jersey. In 2016, Total Wine was served with a license suspension by the Massachusetts Alcoholic Beverages Control Commission for selling liquor below its costs, says Wikipedia. The company appealed the commission's decision, and in mid 2017 the Suffolk Superior Court sided with Total Wine. Good lawyers. So yeah, some folks have a bone with Trone.

So now this company has opened a large store in Tennessee and is questioning why the state would want its owner to live there and abide by its laws for a period of time.

LAST OF THE GRANHOLM MOHICANS. Only Clarence Thomas, Ruth Bader Ginsburg and Stephen Breyer remain on the court from the Granholm decision in 2005, which also did not split the court between liberal and conservative sides. (RBG was absent yesterday due to health issues).

SIDEBAR: I attended that hearing in 2005, before there were same-day online transcripts, but I can't think of a big brewer CEO who was around at that time, unless you count Jim Koch and Ken Grossman. Anyway, it's a different game of marbles here than back when Jennifer Granholm was governor of Michigan.

So we've read the entire transcript of the oral arguments, so you don't have to, which are really just icing on the cake,with the cake being the complaints and rebuttals and briefs and amici.

And after that reading, as a non-lawyer, one would definitely conclude that Total Wine/Ketchums prevailed over Tennessee's residency law, as it seems, you know, unfair. As direct-to-consumer bev-alc free-trader wine blogger Tom Wark tweeted yesterday: "Word from inside the #SCOTUS Chambers is that the Oral arguments in the #Wine case went VERY WELL for wine lovers and retailers."

But be careful with that interpretation. Handicapping court decisions, particularly on the Supreme Court, is notoriously difficult. Why? Because their decision is the law of the land, literally. Within 24 hours of their decisions, laws across the nation are either voided or validated (unless they stay their decision). So sometimes having harder questions on one side just means they want to get it exactly right and well-understood, and that seemed to me what several Justices were going after today.

First, a few observations that stuck out at me that haven't before in 21st Amendment cases.

-One is the issue of race. When the Tennessee lawyer said some stuff about previous case law defending state alc laws, "they weren't about permitting states to act in ways that violated the First Amendment or other, you know, individual rights, for example." Justice Sotomayor cut him off abruptly: "That's where you're wrong because the law then did provide for racial discrimination, and there's nothing in the provision that limits itself to the Commerce Clause." Ouchy boom.

-Another dramatic moment was when Justice Kagan asked, "If a state can come forward with any purpose other than protectionism, the state wins?" Trone's lawyer answered, "No, no. It's when the state doesn't come forward with anything except protectionism, the state loses." Damn.

-And finally, Justice Kagan's question about Amazon. "I'm trying to figure out what kind of opinion we could write, Mr. Phillips, that says you win, but then, when the next case comes along and the next case is somebody that says we don't like this brick-and-mortar stuff, we don't want to have any physical presence at all, and the state is preventing that, and in doing so, the state is discriminating against out-of-state companies?"

His reply was that they are all about brick and mortar and they love three tier.

SUMMARY. The state retailers' attorney argued that the 21st Amendment was enatcted to "constitutionalize" the powers that the states already had held before Prohibition under the Wilson Act and the Webb-Kenyon Act " that gave them "near complete" power to regulate the distribution of intoxicating liquor. States can do almost anything other than curb civil rights to regulate alcohol, as long as they treat in-state and out-of-state producers the same. Even if that means if the laws are deemed protectionist.

New Justice Brett Kavanaugh -- who we note really, really likes beer -- countered that he believed the 21st Amendment only narrowly bars the "transportation or importation" of liquor into a state in violation of that state's laws " meaning it just gave the state the option of remaining dry.

The attorney pushed back, responding that while Tennessee's residency requirements could potentially violate other parts of the Constitution (14th Amendment?), they do not violate the dormant commerce clause. That prompted Kagan to ask whether a better option for the court would be for it to rule that the dormant commerce clause does apply to the residency requirement, at which point the state could come back and demonstrate that it has "real health and safety concerns" that justify the laws. That didn't sit well.

THE WORM TURNS. Toward the end of the oral arguments, Justice Stephen Breyer pointed out that earlier cases had already recognized that the 21st Amendment gives states "virtually complete control" over how they want to structure their bev-alc laws, including residency requirements.

But then, near the end, Justices Kagan and especially Gorsuch worried that if they ruled for Total Wine/Ketchums, they would be opening up a pandora's box. If we rule for you, Gorsuch told Phillips, the next case will argue that the current system discriminates against out-of-state residents by requiring retailers to have a physical presence in the state. Isn't the next business model, Gorsuch continued, just to operate as the Amazon of liquor?

BOTTOM LINE: As I said, it's tough to handicap Supreme Court decisions. But to me, the state won if just looking at the law and not what's "fair". In other words, the Tennessee legislature can mandate that liquor store majority owners must show up at their stores three days a week in a scary clown outfit complete with a red balloon (to scare away children, naturally, as a public policy initiative). That would be completely under their powers under the 21st Amendment, dormant commerce clause or no commerce clause, as long as in-state owners had to do the same thing as out-of-state owners. I bet dollars to donuts that the Ketchums would adhere to this law, but I bet David Trone, clown he may or may not be, would not. It doesn't have to make sense to elite Supreme Court Justices in Washington, DC. It just has to make sense to the residents of Tennessee.

But I've been wrong before.

NBWA: STATE-BASED SYSTEM HAS ALLOWED "SAFEST, MOST ROBUST" ALCOHOL MARKETPLACE

Naturally, NBWA issued a statement at the outset of Wednesday's oral arguments in Tennessee Wine & Spirits Retailers Association v. Blair, made on the 100th anniversary of the 18th Amendment's ratification. As we know, 13 years later, the 21st Amendment struck that down, via a state-based system of regulation "reflective of the attitudes of local communities."

Chief Craig Purser noted how that enduring system "and orderly market allows Americans to enjoy the safest, most robust alcohol marketplace in the world. Eroding this time-tested system could not only limit consumer choice, but it would also harm Main Street businesses rooted in their communities " businesses that have worked hard and played by the rules. We appreciate the Justices' thoughtful questions at today's oral argument and look forward to a ruling."

In November, NBWA filed an amicus brief in support of the Tennessee Retailers. NBWA was joined by 36 state attorneys general, the National Conference of State Legislatures, the National Alcohol Beverage Control Association, 30 public health groups, the Center for Alcohol Policy, Wine & Spirits Wholesalers of America, America's Beverage Licensees, Consumer Action, Open Markets Institute and other interested parties in defending the 21st Amendment. (In total, 14 briefs were filed by a diverse group of stakeholders in support of the state alcohol regulation.)

BEERNET EXTRA: The transcript of oral arguments. Read at your own peril:
https://www.supremecourt.gov/oral_arguments/argument_transcripts/2018/18-96_i4ek.pdf

NIK ON STZ: "TEST TO LEARN"

"Constellation Brands is taking a 'test to learn' approach when it comes to new product launches," writes RBC analyst Nik Modi after Constellation's investor day. "Key innovations include Corona Refresca (tested in 2018 with a national launch in 2019), Svedka Spiked Seltzer (limited launch in the Northeast and Florida), Western Standard (limited launch in Utah, Minnesota, Denver and more markets later in 2019) and Alera (a female-oriented near-beer product that will test in 2019 in San Diego and Arizona). The bottom line: Constellation Brands is not recklessly launching products into the market. They carefully study test market information before making their decision."

Nik also reports that capacity shouldn't be an issue as others have questioned the Mexicali brewery's ability to come online. "Mexicali (when completed) will only be 10% of STZ's total beer capacity and they have enough supply with Nava and Obregon to satisfy the demand for the next several years."

DOGFISH GOES AFTER THE MICH ULTRA DRINKER WITH SLIGHTLY MIGHTY

What craft IPA is 95 calories, 3.6g carbs, 4% ABV and brewed using an Asian plant almost as expensive as cocaine by the ounce? Dogfish Head's big new bet for the young Mich Ultra drinkers: Slightly Mighty.

Dogfish chief Sam Calagione spoke to BBD this week about their big new bet, set to hit shelves and taps this spring.

They've been franken-brewing away at their multi-million dollar lab the last few years, the fruit of which has been seen in brews like SeaQuench, which is now the best-selling sour beer in the U.S. The idea for that beer had been to brew the most thirst-quenching beer that Dogfish has ever made.

But last year, they dreamt a new proposition for a new consumer: one that includes the Mich Ultra set.

"We set out to brew a beer… under 96 calories, but with all of the hop character and body of a 6% ABV IPA," said Sam.

In the end, their method would involve some traditional methods employed for brewing industrial light lagers, but also some very proprietary techniques. That included the use of monk fruit, which consumers may recognize as one of the newest (commercially) and most "natural" non-nutritive sweeteners, a competitor to things like Stevia, at a much higher price tag.

The result? Your editor has tried it, and we have to admit -- it drinks a lot "bigger" than it is, making it fuller-bodied and just much different from any of the lower-cal/session IPAs we've tried. And with less calories and carbs.

Sam explains: "Our fermentation method dovetails with techniques used to make champagne and light beer to get the beer to be as low in calories and carbs as possible -- then we use the all-natural extract of Chinese monk fruit to create more body in the beer, which acts as the canvas onto which we paint in broad strokes with bold and aromatic tropical hops."

Okay, but here's the money shot: the end product has "only one more carb and the exact same calories per serving as Michelob Ultra in a full-flavored aromatic IPA!"

And it's also good on shelf for about six months.

CHEAPER THAN THEIR FLAGSHIP. You might think the suggested price to consumer would reflect the cocaine-priced monk fruit, but Sam says utilizing less of other ingredients will offset that. No doubt in part for its less spendy target consumer, Slightly Mighty will actually cost less at the store than the brewer's flagship beer, 60 Minute.

"Because we can use less barley and less grains to make this beer, than 60 Minute or even Namaste, it is going to have a slightly lower PTC than 60 Minute or SeaQuench," says Sam. Those might be $19.99 or higher for a 12-pack; they're targeting a price of $17.99 per 12-pack of Slightly Mighty.

Cans of mostly 12 packs, but also a few 6 packs (in testing), will roll to 12-15 yet undisclosed markets, shipping late in March. The brew will also go to Dogfish's full footprint this spring in the brewer's upcoming "Activity Box," which includes all their functional, active lifestyle brands, including SeaQuench and their imminent SuperEIGHT gose with "heroic fruits." That package's suggested price is $19.99 per 12-pack.

A TRADE UP PROPOSITION FOR OFF PREM. Sam believes Slightly Mighty is a great trade-up opportunity for retailers in two ways: Bumping the low-cal, low-carb beer consumer up to craft pricing, while also nudging the craft consumer from 6- to 12-packs (the predominant pack).

DRAFT: NOT A ROTATOR HANDLE. As for draft, it's on tap at their Milton tasting room. For the full on-premise play, " it will go into half barrels only," as they're "targeting on-premise locations that can commit to keeping this on tap for at least many months at a time," says Sam.

He sees it at "high energy, high volume draft" accounts serving a "really broad demographic: younger, fitter, more into fitness," including "beach bars, outdoor beer gardens."

That's because they're targeting a different consumer than normal.

For the first time ever, says Sam, they're targeting "aspiring crafters" with Slightly Mighty. He describes a cross-section as, for example, younger Millennials into video games, maybe not as craft savvy as the die-hard consumer, and not as wealthy, but ambitious and inquisitive.

They might be a Mich Ultra drinker one week, then "and maybe something like this the next week," Sam says.


Until tomorrow,

Harry, Jenn, and Jordan


"I agree with everything you say, but I would attack to the death your right to say it." - Tom Stoppard


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