July 29, 2009
THE LIQUOR CONTROL ACT AND LIQUOR PRICES
By: Daniel Duffy, Principal Analyst
You asked for a summary of the provisions of the Liquor Control Act that either are directly concerned with prices or have a strong indirect effect on prices.
The Liquor Control Act requires each business in the liquor industry to hold a permit from the Department of Consumer Protection (DCP). Each permit has different requirements and limits the permittee's activities in different ways.
The provisions of the act directly concerned with prices (1) prohibit wholesalers from extending credit to retailers for more than 30 days, (2) require manufacturers to give all purchasers the same price discounts, (3) require sellers to post and hold their prices for the month with DCP, (4) require manufacturers and wholesalers to post a schedule of suggested consumer resale prices with DCP; (5) require wholesalers to sell to each retailer in their geographic territory; (6) prohibit selling at prices intended to destroy or prevent competition, (7) prohibit sales below cost and prescribe how “cost” must be calculated for this purpose; and (8) allow retailers to advertise the net price after manufacturer rebates are deducted.
The act, in the way that it structures the liquor industry, includes several provisions that have an indirect effect on prices. These (1) establish the three-tier system (manufacturers, wholesalers, and retailers); (2) protect wholesaler distributorships and their geographic territories; (3) limit the number of package store permits a business can have; (4) limit the number of package store permits that may be allowed in each town; (5) prohibit groceries from selling any kind of alcoholic liquor other than beer and most other types of retailers from selling any kind of alcoholic beverage; and (6) require all liquor brands to be registered with DCP before they can be sold in the state.
The effect of liquor regulation was studied by Minnesota's Office of the Legislative Auditor. The study found that several provisions have an indirect effect on prices. These include limiting the type and number of retailers that may sell alcoholic beverage, protecting beer wholesalers from having their distributorship terminated by brewers, and prohibiting distilled spirits manufacturers from establishing exclusive wholesaler territories. The study report is attached.
STATUTES CONCERNED WITH PRICES
Period of Credit
The law prohibits a permittee or backer from receiving credit in any form for longer than 30 days from a manufacturer or a wholesaler. If a manufacturer or wholesaler has not received payment within 30 days of extended credit, it must give a written notice of obligation to the retailer stating: the amount due, the date credit was given, the date the 30-day payment period ended, and that the retailer is in violation. If a retailer disputes the charge, it must send a written response to the manufacturer or wholesaler and send a copy to the Department of Consumer Protection (DCP). The response must state the basis for the dispute and the amount, if any, that the retailer admits owing. This amount must be sent to the manufacturer or wholesaler. The Liquor Control Commission chairman, or his designee, must hold an informal hearing.
If the chairman decides in the manufacturer's or wholesaler's favor, he must order the manufacturer or wholesaler to send a “Notice of Delinquency” to all manufacturers and wholesalers. The notice must: identify the delinquent retailer, the amount due, and the date the payment period expired. The law prohibits any manufacturer or wholesaler from giving credit to the retailer identified in the notice of delinquency until the manufacturer or wholesaler sends them a notice of satisfaction about the retailer.
If the chairman or his designee decides in the retailer's favor, he must prohibit the manufacturer or wholesaler from sending a notice of delinquency.
The losing party must pay the costs of the proceeding (CGS § 30-48).
Credit When There is a Change of Ownership
Whenever a package store changes hands, the law requires the seller to execute an affidavit stating all unpaid obligations and the purchasing party to execute another stating that all such obligations have been paid (CGS § 30-48(c)).
The law generally prohibits manufacturers, wholesalers, and out-of-state shippers from discriminating in any manner in price discounts among permittees. But it allows beer manufacturers and wholesalers to change the way they package beer based on whether the retailer sells for on- or off-premises consumption (CGS § 30-63(b)). Because they can package beer one way for on-premises retailers and another way for off-premises retailers, the law allows wholesalers to charge each group different prices.
The law requires manufacturers and wholesalers to post their prices with the department each month. The price, once posted, must be held for the entire month. Notice of all prices must be given to all permittees by direct mail or advertising in a trade journal. Wholesalers are also allowed by give notice by hand delivery. A manufacturer or wholesaler may amend their prices for a month to meet a lower priced posted by another manufacturer or wholesaler (CGS § 30-63(c)).
Suggested Consumer Resale Prices
The law requires manufacturers and wholesalers to post a schedule of suggested consumer resale prices for each brand (and each size) with DCP. The suggested consumer resale price must be uniform throughout the state. The law states that retailers may sell for less than the suggested consumer resale price (CGS § 30-64).
Sales within a Wholesaler's Geographic Territory
The law requires wholesalers to sell their products to each retailer in their territory. It allows wholesalers, where distance, road conditions, travel time, or similar factors substantially affect cost of delivery, to file a schedule of proposed delivery charges with DCP. The schedule can apply only after the department holds a hearing and gives written approval (CGS § 30-64a).
Unfair Pricing Practices
The law prohibits unfair pricing practices, defined as selling alcoholic liquor at a price intended to destroy or prevent competition. DCP can revoke or suspend the permit of anyone it finds, after hearing, of committing an unfair pricing practice (CGS § 30-64b).
Minimum Selling Price of Wine at Wholesale
The law prohibits selling wine to a retailer for less than the “minimum base cost” and defines “cost” for this purpose (CGS § 30-68).
Minimum Selling Price of a Distributor or Manufacturer
The law prohibits an out-of-state shipper or manufacturer from selling alcoholic liquor (all four types of alcoholic beverages: alcohol, beer, spirits, and wine) below cost and defines “cost” for this purpose (CGS § 30-68i).
Price Discrimination Prohibited
The law prohibits wholesalers from charging retailers different prices (CGS § 30-68k).
Wholesalers Prohibited From Selling Below Cost
The law prohibits wholesalers from selling to retailers below cost and defines “cost” for this purpose (CGS § 30-68l).
Retailers Prohibited From Selling Below Cost
The law prohibits off-premises retailers (primarily package stores and groceries) from selling below cost and defines “cost” for this purpose (CGS § 30-68m).
Advertising Manufacturer Rebates
The law allows retailers to advertise the existence of a manufacturer's rebate or the net price after the rebate amount has been deducted if the advertisement also states the price before deducting the rebate and the amount and expiration date of the rebate (CGS § 30-68n).
STATUTES INDIRECTLY AFFECTING PRICES
Liquor is a regulated substance—the law prohibits its sale to minors (someone younger than 21), intoxicated persons, and habitual drunkards (CGS § 30-86). As part of the regulatory scheme, most liquor sold in this state goes through the “three-tier system.” In the system, a manufacturer's sales are generally made to a wholesaler; a wholesaler's sales are generally made to a retailer. The law prohibits most backers or
permittees of one class of permit from being backers or permittees of another (CGS § 30-48). This provision serves to keep the three tiers of the industry financially separate. By limiting who may sell to whom, the law limits price competition by limiting the number of possible suppliers.
Among other things, a wholesaler permit allows its holder to sell alcoholic liquor to retailers. Once a wholesaler has had a distributorship for at least six months, the law prohibits a manufacturer from terminating or reducing its geographic territory except (1) if the wholesaler agrees in a stipulation and DCP approves or (2) for just and sufficient cause. When DCP is notified that a manufacturer intends to terminate or reduce a distributorship's territory, it must hold a hearing to determine if just and sufficient cause exists.
A manufacturer may appoint additional distributors in a territory for an alcohol, spirits, or wine product, but it must first send a six-month notice to the distributor. A beer manufacturer may appoint additional distributors, but only if it has just and sufficient cause and has sent a notice of its intent to the original distributor and DCP. For this purpose, “just and sufficient” cause means the existence of circumstances which, in the opinion of a reasonable person considering all of the equities of both the wholesaler and the manufacturer…warrants a termination or diminishment of distributorship as the case may be” (CGS § 30-17). This provision may affect prices in a number of ways. It limits the number of wholesalers a manufacturer may use to distribute his product.
The law prohibits general merchandise sellers, other than drug stores, from selling alcoholic beverages (CGS § 30-36).
Package Store Permits. The law limits to two the number of package store permits a single person or business may have (CGS § 30-48a). The limit means that a business cannot benefit from economies of scale. Further, the law prohibits package stores from selling any other commodity with 12 statutorily determined exceptions for things such as bar utensils, ice, and nonalcoholic beverages (CGS § 30-20). The law limits the number of package store permits that may be issued in a town to one permit for every 2,500 residents, as determined by the most recent decennial census (CGS § 30-14a).
Grocery Beer Permits. The law allows groceries to sell beer, but it does not allow them to sell any other type of alcoholic liquor (CGS § 30-20). This restricts the number of retailers of products other than beer.
The law requires all brands to be registered with the state. The fee for a three-year registration is $100 for out-of-state shippers and $3 for instate shippers (CGS § 30-63). The requirement can reduce the number of brands being sold in the state by creating a barrier for smaller, boutique-type brands.
The Minnesota Office of the Legislative Auditor conducted an intensive examination of the effect of liquor regulation on liquor prices in 2006. Minnesota's system of regulation has much in common with Connecticut's. Among other things, both are license states (states that license all sellers and do not operate a state monopoly at either the wholesale or retail level of distribution), restrict the types and number of retailers that may sell alcoholic beverages, and have beer franchise protection laws.
The study compared Minnesota's laws and prices with those of the neighboring state of Wisconsin and found that some provisions restrict competition and tend to increase prices and others that promote competition and decrease prices. The provisions in Minnesota law found to have an upward effect on prices include:
1. prohibiting most grocery, convenience, drug, or general merchandise stores from selling beer, wine or distilled spirits for off-premises consumption;
2. restricting the number of stores that may sell for off-premises consumption;
3. requiring retailers to purchase a particular brewer's products from a particular wholesaler; and
4. protecting beer wholesalers from having their distributorship terminated.
The provision found to have a downward effect of prices was prohibiting distilled spirits manufacturers from establishing exclusive wholesaler territories.
The Office of the Legislative Auditor is the nonpartisan audit and evaluation arm of the legislature. It is overseen by a bipartisan commission of Senators and Representatives. It was created in 1973; one year after Connecticut established the Legislative Program Review and Investigations Committee.