Liquor wholesalers cash in on sobriety rules

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Congressmen in both parties are rallying behind alcohol legislation they say is needed to protect our youth from binge drinking and public drunkenness. They call it the CARE Act.

Any time politicians start talking this way, it's time to ask: "Who's getting rich off of this regulation?"

The answer in this case: beer, wine and liquor wholesalers.

The history of liquor regulation is a history of regulatory robbery. In 17th century England, "large distillers of alcoholic beverages actually favored an excise on their producers because of its prejudice in favor of efficient production," according to historian Thomas Slaughter. In 20th century America, one leading prohibitionist was Coca-Cola's founder.

Liquor control laws provide the setting for an explanatory fable, created by economist Bruce Yandle, about regulatory robbery. It's called "The Baptist and the Bootlegger." The bootlegger's business depends on strict alcohol regulation that creates demand for illegal booze. While the bootlegger funds the prohibitionist politician's election, the local Baptist minister goes on stage for campaign rallies. Regulation protects special-interest profit, but it's touted as a public good.

Today, with the CARE Act, the "bootleggers" are the wholesalers. The bill creates new legal hurdles to protect state liquor-control laws from constitutional challenges. The bill's 124 co-sponsors cite public health and sobriety as the reason to defend state liquor laws. But the state laws most threatened by lawsuits happen to guarantee wholesaler profits. For instance, in most states it is illegal for brewers and distillers to sell their beer and liquor directly to a retailer -- forget about selling directly to consumers.

Alcohol wholesalers are not household names, but they're big business. Southern Wine & Spirits controls 19 percent of the market and grossed $8.5 billion last year. The industry's two lobby groups, the National Beer Wholesalers Association and the Wine & Spirits Wholesalers of America, each spent more than $1 million on federal lobbying in 2009. Their clout at the state level is even greater.

These companies buy from the producers (such as MillerCoors or Diageo) and sell to the retailers (such as your corner store, or Costco). It's called the three-tier system, and it makes economic sense: Producers don't have to keep track of what liquor stores are opening and closing, or stocking what drinks, and retailers can effectively order from a catalogue instead of calling around. Many industries have three-tier systems voluntarily.

But alcohol wholesalers enjoy bigger margins than other wholesalers. Liquor producers -- who oppose the CARE Act -- point to the wholesalers' return on equity, a measure commonly used by investors. Across the wholesale industry -- shoes, food, cars, etc. -- the average ROE is 11 percent. For beer wholesalers it's 18 percent, and for liquor wholesalers, 20 percent.

In other industries, wholesalers need to make sure they are delivering real value, because if they're not, they'll be discarded as unnecessary middlemen. In a free market, if wholesalers squeeze producers too much or overcharge retailers, the producers and retailers might circumvent the wholesalers. Wholesalers survive only as long as the convenience they provide is worth the cut they take from producers and retailers.

Unless, of course, circumventing wholesalers is illegal. Then the middleman's cut can grow without fear of being frozen out. It's regulatory robbery by the wholesalers.

You can see why the NBWA and the WSWA go to the mat defending the laws that mandate this three-tier system. They have a legitimate argument, too: Since Prohibition ended, states have set their own alcohol policy, and that's what the Constitution prescribes. A 2005 Supreme Court ruling, Granholm v. Heald, liberalized laws about direct shipping of wine, but only so far -- states weren't allowed to discriminate between in-state and out-of-state wine, but they were still free to prohibit direct wine shipping altogether if they wished. "What we don't want is single federal judges determining policy," WSWA President Craig Wolf told me. "It should be the legislature dealing with these things."

On the state level, wholesalers jealously guard the laws requiring the three-tier system. "The free market rules should not apply to alcohol" the way they do to other goods, Wolf said. The industry justifies these rules as public-health measures and as a way to protect producers from big-box stores (particularly Costco) with the purchasing power to drive down prices just as Wal-Mart drives down prices on shoes.

The wholesalers' arguments -- especially on federalism -- have some merit, but it's another case of big business using big government for profit.

Timothy P. Carney, The Examiner's lobbying editor, can be reached at mailto:tcarney@washingtonexaminer.com ">tcarney@washingtonexaminer.com. He writes an op-ed column that appears on Friday.

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