Discounts not ABV

The continuing debate regarding the sale of alcohol at convenience and grocery stores is not really about ABV, it’s about the discounts.

See, retailers are just like consumers, they want to find the best possible discount or sale they can.  They then make a better margin.  It makes perfect sense.  Except, they already know where that discount is and want the opportunity to manipulate the system.

Alcohol sales in Colorado are put through a three-tier system, the producer, the distributor, and the retailer.  It’s good for taxes, so in essence it’s good for all citizens.  The only exception to the rule is you can buy package directly from producer – brewer, vintner, or distiller.

While the end consumer has multiple options of where to purchase your bottle, 6 pack, keg, etc, the retailer has only one choice of who to buy specified products from, and the producers only have one option on who to sell to…..the debate should be about the second tier – the distributor and their ability to discount. Producers sign contracts with distributors to re-sell their products.  Once that contract is signed, they have only that choice.  Any business that sells alcohol to the public has only one choice of whom to buy specific brands from.  For example, one and only one distributor sells Jack Daniels.

Colorado laws regarding the sale of alcoholic beverages are pretty archaic.  The whole Alcohol by Volume vs. Alcohol by Weight designation never made much sense – really, .08% ABW is that big of a difference – and stopped making sense in 1987.  That’s when 18 year olds were no longer legally allowed to purchase “low” strength – ABW of 3.2% or less beverages.  Then it made even less sense when liquor stores were allowed to open on Sundays a few years ago.  That system worked prior because there were sales monopolies being practiced.  Convenience and grocery stores controlled Sundays and purchases from 18 to 20 year olds, liquor stores controlled “adults.”

Here is the problem.  With those changes chain based retailers lost their competitive advantage and they want it back, badly, and they want it back because of discounts.  Don’t think for a second that they care about providing you with great choices, we’ll get to that shortly.  That second tier really controls the entire trade of alcoholic beverage sales through their monopoly over brand control and their ability to sell those products at different prices.  They are only legally bound to never sell that product at a loss, they can not sell it to a retailer at a price lower than the one they paid the supplier.

The price the average retailer pays can be several times higher than what the distributor pays, the problem is that price is not the same for every retailer…ahhhh, the discount, and those are based on volume purchases.  The more your local liquor store, bar, or restaurant buys from the distributor at one time, the lower the price becomes.  Then that retailer has the ability to sell that product to the consumer at a lower price, think “sale,” “special,” etc.  This all holds especially true in regard to major brands.  Boutique, artisan, and craft products are rarely if ever discounted.  That is because they hold firm to their own pricing strategies.  Basically, they all believe in the value of their product and simply have to keep their pricing above major brands, due to higher costs of ingredients and process, and because they want to stay in business.  Your favorite product from one of the above could never compete in a price war with a major brand, and they do not want to. There actually is value in quality.

So if you are a retailer that happens to have the capital and storage space required to purchase the majority of the items that you sell the most of, you can create a huge competitive advantage over those that do not have equal resources.  Include retailers in that equation that are owned by national corporations, AND have the ability to drive revenue through the sale of other products that are not alcoholic beverages – think food, clothing, tires, etc. and there will be an extremely uneven playing field.

Multiply that with the fact that at least 50%, often times more, of the revenue generated by most retailers comes from less than 20% of the total amount of products they sell – think big brands (remember, those that are discounted the most) and that competitive advantage is absolutely overwhelming.  There would be no way for your local liquor store to compete with the grocery store and major convince stores in the neighborhood.

Back to great choices, you would think that adding major retailers to the equation would mean adding more space – floor / display, and storage – and then would come more choice.  That is not the case, again, because of discounts.  Why would a major, and mostly corporate owned, retailer be concerned with choice?  Keep in mind that 20% rule.  More space would simply translate into a greater ability to drive discounts.  Most of the time, brands are grouped into “families” to drive even deeper and broader discounts.

Bars and restaurants do not benefit from discounts nearly as much as other retailers. That is why you will find more specialty, boutique, and craft focused operations in this segment of retailers.  Some have figured out that 20% equation and realized that by offering DIFFERENT products, they can drive in more and more consumers, diversity works for them because they are basically a marketing opportunity for the producers. A high level of commitment from the consumer is not required.  They can come in and try a product and not be tied to a whole bottle or six-pack.  Most simply do not have the capital to purchase in large quantities, but; it still applies and in an industry where every penny counts, it certainly adds up. The volume of product sold there is nothing compared to that of other retailers.  The major inequity created with discounts for this group is related to concession pricing, think concession stand.  The actual cost of that Coors Light you are about to buy at Rockies game would make YOU turn purple.  It is drastically lower than bar around the corner, more than 50% less for the concession operators.

Without direct personal access to owners and buyers in the retail segment, the growth of the craft beer industry and the emergence of the local distilling industry would not have occurred.  Face to face meeting occurred, relationships were made, orders were placed.  That would not be the case if large chain retailers dominated the market.

Most existing retailers would simply retrofit existing stores right away.  They really would not need to add any additional staff, find that bottle of wine to go with the dinner you spent all afternoon preparing on your own, if you can, “go ahead,” they will dare you.   New jobs would not be created. Current jobs would be lost.  The small neighborhood retailer would get crushed because they would loose their ability to sell that 20% at a margin that sustained their business.

Liquor laws in California are often used as an example to show that great diversity of products, specialty products, local products, can all flourish in a market dominated by chain retailers.  Liquor, wine, and beer, are sold in grocery stores in CA.  For the most part it works.  There are tons of great products produced.  The craft beer industry was much slower to develop, and the local distilling movement has yet to really take off.  Both of those points could also be tied to the strength of the wine market, maybe.

Oh, the other thing.  Discounting is illegal in CA, every retailer pays the same price.  There are very few if any neighborhood liquor stores.

Don’t let major retailers, or those driving their interest, to make you think this debate is about anything other than money.  They want access to more.

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  • Jakemo

    Of course it’s about the almighty dollar. It’s how capitalism stifles variety.