Warehousing and Opinion and Bars/Taverns and Liquor Stores and Restaurants and Viewpoint and Distribution & Logistics

Remove barriers to lower costs

June 1, 2009

The way alcoholic beverages get from distillers and vintners to the goblets and cocktail glasses of Indiana consumers is largely unchanged since 1933. Hoosiers still bear the cost of a 76-year-old, three-tier supply chain that adds 18 percent to 25 percent to the cost of each drink.

The status quo (referred to in industry publications as "orderly markets") is now under assault: A recent opinion of the Federal Trade Commission called it "by far the most expensive distribution system in the packaged-goods industry, one that abuses power to meet the needs of concentrated local interests."

But for Hoosiers enjoying distilled spirits, the bar (pun intended) is yet higher. Indiana has a residency requirement: Liquor distributors must be Indiana residents. By preserving residency as a condition to distribute booze, our Legislature is protecting Indiana's existing liquor distributors, many of whom do business in neighboring states like Illinois and Michigan. This antiquated standard is anti-competitive and ultimately means higher prices and reduced selection for Indiana residents.

In 1933, residency served a purpose: It was nearly impossible to check backgrounds across state lines. Seventy-six years later, this is simply no longer true. In state after state, residency laws have disappeared, to encourage competition and efficiency—or under legal duress. Recent lawsuits in North Carolina, Texas, Michigan, Illinois and Washington have essentially leveled the playing field between instate and out-of-state spirits distributors. Legal action prompted Kansas to abolish its residency requirement in 2001: Thirsty Kansans now pay the fifth-lowest cost in the nation for distilled spirits. Indiana is among the few holdouts: daylight-saving-time déjà vu.

The best residency argument: "Let's keep the money in Indiana." Assuming Indiana's spirits distributors are good corporate citizens (they are), they will do good things in the community (they do) and provide good jobs for Hoosiers (they do). Fair enough. However, the same can be said of Kroger, Honda, Roche, Wal-Mart, M&I Bank, etc.—all with non-resident owners.

Even Eli Lilly and Co., far and away the state's largest corporate benefactor, has ownership spread across the globe. It's classic cost/benefit analysis: Are Hoosiers willing to restrict trade and choice so local interests can give to the community and employ people? It's worth noting that the same Hoosier drinkers are now being targeted for new taxes to fill holes in municipal budgets.

Record companies once monopolized music distribution. New technology brought free-download site Napster, forcing the music industry to make hard choices. Some record companies threw in the towel, but others decided it was time to rethink and retool. The result: Music lovers can now buy high-quality single songs for 99 cents on iTunes, the music industry is thriving by widening access to a quality product, and Metallica can still make a decent living.

Indiana's liquor distributors are in a similar situation now. (A slightly better one: No one has yet figured out how to download a free bottle of Woodford Reserve.) In 1950, there were 6,000 distributors of liquor; fewer than 600 exist today. In fact, mega-retailers with significant political clout are now mounting legal efforts in states like Washington and California to abolish the three-tier system altogether and buy directly from distillers and vintners. In a matter of years, Indiana's liquor distributors may be facing competition from the likes of Costco and Sam's Club. They can use the significant competitive advantage of good will in the community to out-compete national distributors today.

Indiana's lawmakers should jump-start the process by abolishing the residency requirement, ensuring the lowest prices and widest choices for Hoosiers who responsibly enjoy a good drink.
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Roberson is a senior lecturer of finance and coordinator of undergraduate recruitment at the Indiana University Kelley School of Business at IUPUI.

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