CONTROLLED CHAINS

Mention the control states to most consumers and you’re met with a blank stare. Mention them to a fullservice chain restaurant executive or anyone who’s worked in the wine and spirits industry and you’re more likely to see their eyes roll up in the head. The 18 states (and Montgomery County, MD) that make up the control system are united by the fact that every aspect of the sale and distribution of distilled spirits and wine is not only regulated by the state or county government, but controlled.

The degree to which the state gets involved in matters like signage, giveaways and allowable supplier support varies from state to state within the system and leads to a great deal of frustration for many restaurant operators trying to plan chainwide sales promotions.

Though the system may be frustrating, it’s been in place for nearly 70 years and can’t be avoided for anyone with aspirations of operating a national, or even regional business. The control states span the country and have populations ranging from Wyoming’s 499,000 through Pennsylvania’s more than 12 million. All told they account for 27% of the nation’s population as well as 27% of all distilled spirits, 23% of all wine and 28% of all beer consumption. Add in the fact that they also include major metropolitan markets such as Philadelphia, Detroit, Seattle and Cleveland and it’s obvious that the control states are a problem that must be dealt with.

The control state system came into being in response to the failures of the country’s experiment with Prohibition. The 21st Amendment gave each state the option of deciding on the best way to address the issue of legal sale and consumption of beverage alcohol within their borders (see sidebar, “A Brief History of the Control States”). To this day those that chose state governmental control still operate from the philosophy that one of the best ways to address the problems of alcohol abuse is to limit availability of product and of advertising and information about spirits, wine and beer.

Since virtually all activity that involves the promotion of beverage alcohol, including menus and signage, requires approval by state authorities, some restaurant and supplier company executives are reluctant to speak on the record. As one veteran of several chain restaurant companies, who asked not to be quoted, noted, “The laws are written in such grey terminology that you’re never sure what you can and can’t do. It seems that they can interpret them however they want on any particular day for any particular licensee.”

To many the laws are frustrating and often perplexing. In Utah for example, a restaurant is allowed to have a drink menu. The server, however, cannot present that drink menu unless a customer first asks for it. In Virginia a drink menu that features a beverage alcohol brand logo must be approved by the state prior to printing.

“We find that some of our units are just not able to participate in some nice national promotions because of state and local regulations,” said Tim Johnson, director of purchasing and beverage operations, Champps Entertainment, Inc., who noted that 22 of his company’s 47 units are located in control states. “We can do so many things in our two New Jersey locations that we can’t in Ohio. It makes it hard to have consistent programs that will work in every unit.”

“It has been a problem for us,” agrees Patrick Henry, President of Patrick Henry Creative Promotions, whose company has created drinks and promotion programs for some of the largest restaurant and hotel chains. “When you’re trying to come up with POS for a chain of 300 or 400 units it can be a nightmare. We try to rely on units in those states to tell us what we can do.”

The frustration of operators and suppliers is understandable since on occasion, developing a program that is allowable under state and local regulations is just the beginning of the problem.

“Sometimes when you’re dealing with a promotion just getting the product is a challenge,” Henry said. “We’ve had situations where we will rollout a program and the units in one state will find out they can’t get the product.”

Johnson agrees about the problems of supply. “Not only are you heavily regulated, but you’re buying from the state, so there’s no discount,” he said. “And then you have to hope the product is listed.”

He’s had first hand experience of how that problem can manifest itself. He ran a chainwide promotion featuring a flavored vodka based on the brand profile and the assurance of sales executives from the supplier that there would be no problems with product availability. “They didn’t get final approval in all states until halfway through the promotion,” he recalled with palpable frustration.

Wine is another area where chain operators find themselves with headaches. In the states where the control agency acts as the wine wholesaler operators run the risk of creating a national wine list that includes brands not listed in every control state. Special orders are usually no problem, but a single unit may have to order more cases than they really need at any one time and then have to carry the inventory themselves, rather than rely on the wholesaler.

“Beer is not a problem because none of the states handle the actual product,” explained Johnson who paused before adding, “except in merchandising.”

In concluding, Johnson noted, “They’re wonderful states to do business in but it takes some adjustments. As frustrating as dealing with the intricacies of the control system may be for many operators, it appears that like death and taxes they are inevitable. And if it’s any consolation, according to a number of long-time industry observers, it’s really much easier to do business in the control states now than it was 15 or 20 years ago. Those operators and suppliers most able to make the adjustments are the ones most likely to thrive in that environment.

THE 18 CONTROL STATES AT A GLANCE

STATE

SALES

SPIRITS

WINE

Mixed cases
1 Pennsylvania $1.26 Billion 4.9 million 5.98 million
2 Michigan $746 Million 5.7 million n/a
3 Washington $557 Million 3.2 million 606,509
4 Ohio $518 Million 3.2 million* n/a
5 North Carolina $474 Million 3.2 million n/a
6 Virginia $439 Million 2.9 million 21,250****
7 New Hampshire $346 Million 1.5 million 2.1 million
8 Oregon $271 Million 1.9 million n/a
9 Alabama $270 Million 1.8 million 115,000
10 Mississippi $184 Million 1.4 million 775,702
11 Utah $158 Million 637,345 656,727
12 Iowa $122 Million 1.1 million n/a
13 Maine $85 Million 698,247 4,968* ***
14 Idaho $78 Million 555,588* 12,248*
15 Montana $66 Million 478,876 n/a
16 West Virginia $55 Million 533,141 n/a
17 Wyoming $52 Million 356,968 309,359
18 Vermont $44 Million 313,126 16,655***

* 9 Liter cases *** fortified wine only **** Virginia wine only

SOURCE: STATEWAYS, NOVEMBER/DECEMBER 2003, “FISCAL YEAR IN REVIEW 2003”


A BRIEF HISTORY OF THE CONTROL STATES

When Prohibition was repealed in 1933 by the passage of the 21st Amendment to the U.S. Constitution, responsibility for the regulation of the wholesaling and retailing of spirits, wine and beer was placed in the hands of the 48 individual states.

Surprisingly, despite the overwhelming national sentiment following the failure of the 13 year experiment with Prohibition, four states chose to remain “dry.” Twenty-seven states opted for the creation of a
system that would license individual businesses to fill the wholesale and retail tiers (that was also the option chosen for Alaska and Hawaii). The remaining 17 states chose to allow their citizens to legally consume spirits and wine but to control the sale and distribution at the wholesale level. (The roster of control states grew to 18 in 1966 when Mississippi the last of the totally dry states opted to allow legal sale and consumption through the control state model.) Since the repeal of Prohibition beer has been handled by the private sector in both open and control states. A number of these “control” or “monopoly states” also chose to directly control the retail tier as well and got into the retailing business as well. Many of the control states have since decided to get out of the business of direct retailing and have either privatized their stores or turned that function over to authorized agents. There are still dry towns or counties in a number of the states that are considered open, including Texas, Tennessee and New Jersey.

THE CONTROL CONCEPT

By controlling channels of distribution, the system was designed to protect the public interest while at the same time providing beverage alcohol products to legal-age citizens who choose to drink. An added, and largely unforeseen at the time of its inception, benefit of the control system has been the revenue provided to help operate state governments. In fiscal 2003, the 18 control states totaled $5.2 billion in wine and spirits sales. More importantly they contributed almost $2 billion to their respective state governments, ranging from $406 million in Pennsylvania to just under $12 million in Vermont. That’s money available to operate state governments that did not come from taxes on income or other goods and services.

For almost 70 years the control concept has continued to evolve. As the system has matured, each state has made modifications and improvements that work best in its own political and demographic environment so that what most control states have in common these days is their dedication to the original mission of control.

In the early days most states actually took ownership of the product in the system. Recent years have seen a number of states move towards bailment, wherein the product is stored in a warehouse in the state, but owned by the supplier. The state doesn’t actually purchase the product until it has been ordered by a retailer and leaves the bailment warehouse. The savings realized by control states by reducing inventory costs have been significant.

Today much of the control mission is executed through the regulatory and enforcement arms of the various control boards and commissions. According to the most recent issue of StateWays magazine, only seven of the control states still operate retail outlets but most are still involved in the distribution of spirits and in many cases wine as well.

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