Opposing Alcohol Franchise Laws: The Right Thing To Do

Franchise LawsWhen issues surrounding “Franchise Laws” arise, as they are now in the state of Missouri, it is almost always a matter of dispute between wholesalers and suppliers. Retailers rarely are part of the conversation since Franchise Laws don’t directly impact retailers. Yet, as NAWR’s recent press release makes clear, wine retailers ought to oppose these anti-competitive and protectionist measures since not only do they negatively effect wine retailers, but they also impact retailers’ customers by almost always increasing the price for wine.

Though they come in a variety of forms, Franchise Laws are best understood as vehicles for protecting wholesalers from competition by erecting significant barriers to the termination of wholesale distribution contracts by suppliers.

In Douglas Glen Whitman’s outstanding short treaties on Franchise Laws in the alcohol industry, “Strange Brew: Alcohol and Government Monopoly”, the author provides one of the better descriptions of how Franchise Laws work as well as their impact:

Whitman writes that in most cases Franchise Laws “require suppliers to show ‘good cause’ for termination or nonrenewal of a contract even when the contracts in question specifically provide otherwise. what qualifies as ‘good cause’ differs from state to state, but often the term is taken to rule out economic  considerations such as failure to meet contractual sales quotas. The laws also typically require advance notice of termination, give wholesalers a month or more to cure any supposed problems, and prevent any contractual waiver of the law’s mandate. In addition they also often provide for exclusive wholesaler territories. Among the overall effects, these monopoly franchise laws inhibit competition among wholesalers, raise prices and…reduce consumer welfare.”

Relatively few industries work under franchise laws. And no other industry operates under franchise laws where a middleman wholesaler is also required by law. One can easily see why beer, wine and spirit wholesalers will defend these laws to the end: Not only is the use of the wholesaler mandated by law, but termination of a wholesaler by a supplier is made near impossible. It is this characteristic of the law that leads most observers to conclude that Franchise Law are both anti-competitive and protectionist…all in the service of the alcohol wholesaler.

Supporters (wholesalers) of Franchise laws make the case that without the protections of these law the suppliers would have unequal power over the wholesalers and would therefore be able to have undue influence over them. Mike Madigan, a Minnesota alcohol beverage attorney put it this way in a guest column at Alcohol Law Review Blog:

Franchise laws are “designed to address the unequal bargaining power existing between a “franchisor” and a “franchisee,” ensure fairness and equity in the relationship and protect a “franchisee’s” equity from arbitrary and capricious termination. Beer distributors make substantial investments of capital and personnel to create a market for a supplier’s  products within their territories.  Beer franchise laws protect that investment from arbitrary and capricious termination by suppliers.  A supplier must have “good cause” to terminate and usurp that investment.”

It’s notable that the problem of “capricious termination” be suppliers could easily be addressed the way nearly every other business address the issue. Through legal contacts that outline the responsibilities between two parties to a deal or agreement and the consequences if those responsibilities are not met.

The real problem with Franchise Laws is one that neither Mr. Madigan nor any other supporter of these anti-competitive laws usually bring up: Shirking.

Wholesalers who, as an industry, are guaranteed by law to be used by suppliers and retailers and who are protected from termination by their suppliers for nearly any reason are given no motivation for going beyond the call of duty, let alone expending normal effort to get the job done. Why should they? There are no consequences to falling below the minimal effort threshold for profit. Hence, a tradition of wholesalers shirking their responsibilities.

But where do retailers come in? Anyone working in the wine retail business is familiar with non-delivery of goods by wholesalers. Tardy delivery of goods by wholesalers. Not being offered particular products by wholesalers. Shoddy and disrespectful behavior by wholesaler salespeople. There are some who would argue that if it were any other industry, unprotected  by government mandates and laws, these wholesalers would not last a day they way they shirk most responsibilities that come from with trying to satisfy their customers and partners. But more importantly, the Franchise Laws increase the prices of goods to consumers. This is particularly the case when Franchise Law guarantee exclusive territories for wholesalers resulting in no wholesale competition whatsoever. They are free to mark up products without fear consumers will go elsewhere. Consumers suffer, but so do retailers.

The original reason for the three-tier system and the mandated use of a wholesaler between supplier and retailer, as well as for the Franchise Laws, was to assure that no producer so completely controlled a market or a retailer by becoming the primary source of supply. If anything is true today about the wine and spirits marketplace it is that the chance of any one supplier dominating a retailer or a market by controlling supply is virtually ZERO. The choices that consumers have today are incredibly diverse, whether we are talking about large or small production products. If a retailer can no longer find the brand of $8.99 Chardonnay they tend to sell a great deal of, chances are there are another 10 or 20 producers of similar or better quality $8.99 Chardonnay willing to fill the gap. The original premise for the three tier system has been completely dismantled by the proliferation of products.

But more importantly, the original premise for Franchise Laws has also been dismantled, but in this case it is due to a contraction in the marketplace. Most marketplaces and most states are controlled by two or possibly three huge wholesale companies that have, through consolidation, snapped up control of alcohol distribution for themselves. If a large producers wants to do business with a company capable of getting its products to the varied retail outlets in that area, they probably have 2 or 3 options. This is hardly a condition that puts the power in the supplier’s hands. Rather, it is a recipe for wholesaler domination of both suppliers and retailers.

NAWR opposes franchise agreements because despite what conditions they once were meant to address, today they merely serve to provide added anti-competitive protection to wholesalers who have usually purchased this protection through the political power derived from campaign contributions they have gained by being government mandated middlemen. There is no reason to give wholesalers more power than that. The hope is that in Missouri, where the current battle over the Franchise Law is being played out, this dubious notion that wholesalers need added protection from competition will be dismissed both by the state’s wine retailers as well as its lawmakers.