June 22, 2001

Memorandum: Sampling, Tasting and Related Broker Acquisition

To: Chairman John W. Byrne, Commissioner Maiola & Commissioner Russell

From: George Tsiopras, James Beck, Ivan Bass, and Alan Cox

Date: June 22, 2001

EXTERNAL REVIEW:

A Task Force was created to review the current procedures and laws relating to sampling, tasting and broker acquisition of product for these purposes. The Task Force for wine/liquor promotional practices (Ivan Bass, James Beck, Alan Cox, and George Tsiopras) agreed that the current practices of the commission for vendor/broker acquisition of product for promotional use are unclear and confusing. We also are in agreement that the industry does not have clear guidelines as to wha t is permissible in marketing wines and liquor. Specific areas of concern are Non-Profit Groups, Trade Tastings, Paid Promotional Events and Co-operative advertising.

As a group, we feel that there are two issues, first how brokers obtain product for sampling and tasting for marketing purposes and secondly what marketing practices are acceptable, as outlined in the following pages.

SAMPLES:

Relative to obtaining product, we feel that there are three general approaches to the problem.

1. The first approach includes a strict enforcement of RSA 179:32, requiring brokers to purchase their supplies directly from the commission, like any other licensee. Changes to RSA 178:26 could be made to allow discounts and/or credit, but all products w ould be purchased by the commission and resold.

   The advantages of this approach include the following;

   • Possible higher commission profits from these transactions, depending on changes to RSA 178:26.
   • Easy implementation as it uses licensee purchase procedures already in place
   • Better control and records, as all transactions are automatically traced to the purchasing license number.
   • Meets all requirements of current law and requires minimal law/rule changes.
   • More efficient for brokers in that orders would not have to be placed through the Marketing Department and then held for commission approval on the agenda.

   The disadvantages of this approach include the following;

   • Higher product costs to brokers.
   • The rigidity of this process could reduce new product introductions, which could affect future Liquor Commission revenue.
   • Difficulty for brokers in obtaining products not yet listed with the commission.
   • Possible reluctance on the part of brokers to participate due to higher initial cost of product, (which under this approach includes FOB (+) gross profit mark up vs. only gross profit mark up under the current system).
   • This approach would require the withdrawal of a full case for items not sold through the state stores, resulting in excess samples and higher costs to brokers.
   
   

2. The second approach would be to minimize Commission control over broker product. It would allow brokers to bring in product for sampling and tasting from out of state or to remove product from LAW warehouse with minimal commission in volvement. This wou ld require the Commission to modify RSA179:32, so that it only would apply to retail licensees, as shown below.

   Example language to follow this approach includes;

   179:32 Purchase of Supplies. All retail licensees shall purchase their supplies of liquor and wine from the commission or as provided by law.

   179:32-a Samples. Liquor and wine used for sampling or tasting purposes by liquor and wine vendors, manufacturers, representatives, and salespersons may be legally obtained out of state or removed from vendor owned stock in bailment warehouse(s) at th eir discretion. All such liquor and wine shall be reported to the NH Liquor Commission monthly by licensees.

   The advantages of this approach include the following;

   • Possible lower cost to brokers since they would not be required to pay the Liquor Commission for product.
   • Increase in marketing activity and possible increase in sales.
   • Removes all restriction on sampling of test products, as registration with SLC would not be required.
   • The removal of approvals, and fee processing for broker products from the commission, resulting in lower Commission costs.

   The disadvantages of this approach include the following;

   • Minimal commission control over brokers' supply of samples.
   • Loss of commission revenue from broker purchases.
   
   

3. The third approach would be to codify (by law and or rule) some form of the current system, which charges brokers an up charge or fee for samples. This approach would not run those samples through the commission's purchase and sale system. The up char ge could be a percentage of value or a flat fee per bottle.

   The advantages of this approach include the following;

   • Reduced broker costs as compared to full purchase from the Commission.
   • Revenue would be maintained from broker sampling.

   The disadvantages of this approach include the following;

   • Required implementation of a tracking system for brokers, which would in most respects duplicate the current sales tracking system for retail licensees resulting in increased costs to the Commission.
   • Accounting changes would have to be implemented to properly account for the revenue obtained.
   • This system would allow for registered products only, hence resulting in delays in obtaining product.

MARKETING:

Relative to marketing practices, we discussed three approaches as outlined below;

1. A strict enforcement of RSA179:11. With this approach, it is recommended that the Commission issue declaratory rulings or administrative rules that would clearly define and prohibit what is and what is not permitted, as outlined in the following exampl es below.

   RSA 179:11 prohibits co-operative advertising of promotional events between retail licensees and brokers/vendors. For example, currently a broker could not pay for a newspaper advertisement related to a tastings event held at a licens ed premise, as the broker is providing an item of value/ free advertising to the retail licensee.

   RSA 179:11 appears to prohibit selective allocation of product and the allocation of product for marketing.

   RSA 179:11 along with RSA178:19 appear to prohibit industry members (brokers) from providing product free of charge to events for which a fee is charged, or any event which does not meet all of the requirements of the tasting rules asc urrently written. For example, a broker could not provide free goods (e.g., wine) for a wine dinner at a licensed premise for which a fee is charged.

   RSA 179:44 could be interpreted as prohibiting brokers (all licensees) from giving alcohol to non-profit groups or other unlicensed individuals. This free product could not be used for subsequent sale under 1-day licenses or as packag e deals.

   The advantages of this approach include the following;

   • Clarity. As it would more clearly define allowable marketing practices, minimize the gray areas and provide for easier enforcement.

   The disadvantages of this approach include the following;

   • Reduction in the number of promotional events.
   
   

2. Total Deregulation of Cooperative Marketing for On-Premise Licensees. This approach would require legislative changes as proposed below.

   179:12-a Co-operative Marketing. Liquor and wine manufacturers, vendors, representatives, salespersons and/or the New Hampshire Liquor Commission may, at their sole discretion and regardless of any other provisions of statute, enter into agreements with on premise retailers for the promotion of wines and liquors.

   1. Such agreements may include, but shall not be limited to the following:

      1. Co-operative or paid advertising;
      2. Allocation of products;
      3. Package events promoting wines or liquors;
      4. Providing wines and/or liquors for such events at no cost to the retailer;
      5. Providing speakers, other personnel, and promotional material, without limitations;
      6. Exclusive marketing agreements; and
      7. Maintaining exclusive product on the retail premises.
      
      

   2. No actions taken under this section shall be deemed a violation of RSA179:11 II.

      The advantages of this approach include the following;

      • Allows for any and all cooperative marketing practices for on-premise licensees.
      • Easier promotion by brokers and on-premise licensees.
      • Potential for increased revenues, from sales within the state and from increased national promotion of events in NH by alcohol industry members.

      The disadvantages of this approach include the following;

      • Provides an exception for on-premise, but not off-premise licensees.
      • Allows brokers, vendors and wholesalers to provide significant items of value to selected retailers (including advertising, product, promotional nights, etc.) and could give a competitive advantage to the selected retailers/ accounts.
      
      

   3. Limited Deregulation of Cooperative Marketing for On-Premise Licensees. This course of action would expand current law/rule to allow more industry leeway in promotions without giving up as much control as the previous option.

   4. This approach would require a clear identification of those exceptions to the current cooperative marketing rules and regulations. Specific categories that would need to be addressed are outlined below;

      Non-Profit Groups: A revision to RSA 179:31 III could state that "brokers or vendors may provide beverage, liquor and or wine to non-profit organizations holding a one day license or other limited license, for promotional purposes.

      Trade Tastings: A law or rule would be required to allow trade tastings to take place on a licensed premise and for the sponsor of the event to be able to provide the legally obtained samples.

      Paid Promotional Events: Law or rule changes would be required to allow up to 2 cases of product to be provided for cooperative promotional events. Prior Commission approval would be required to allow additional product for non -profit events held on a licensed premise.

      Limited Cooperative Advertising: Law changes would be required as proposed below;

      179:12-a Limited Co-operative Marketing. Liquor and wine manufacturers, vendors, representatives, salespersons and/or the New Hampshire Liquor Commission may enter into agreements with on premise retailers for the promotion of wine s and liquors.

      1. Such agreements include:

         1. Co-operative or vendor/ broker paid advertising for joint events on a retail licensed premise.
         2. Allocation of products, with prior approval from the Liquor Commission.
         3. Co-operative events promoting wines or liquors;
         4. Providing up to 2 cases of wines and/or liquors for such events at no cost to the retailer;
         5. Providing speakers, other personnel, and promotional material, subject to the US Bureau of Alcohol, Tobacco and Firearms limitations;
         6. No actions specifically permitted under this section shall be deemed a violation of RSA179:11 II.

      The advantages of this approach include the following;

      • Commission maintains control.
      • Allows for limited cooperative practices for on premise licensees
      • Potential for increased revenues, from sales within the state and from increased national promotion of events in NH by alcohol industry members.
      • Easier promotion by brokers and on-premise licensees.

      The disadvantages of this approach include the following;

      • Provides an exception for on premise licensees, but not for off premise licensees.
      • Allows brokers, vendors and wholesalers to provide significant items of value to selected retailers (including advertising, product, promotional nights, etc.) and could give a competitive advantage to the selected retailers/ accounts.
      • More difficulty on the part of the SLC in terms of trying to clearly define and enforce the amended rules and regulations.

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   In addition to the comments presented on the previous pages, the group recommends that the Commission examine Commission sponsored promotional events in light of whatever actions from this report are recommended.

   As a group we acknowledge the rapid changes taking place in the industry, and as a result believe that any of the above mentioned approaches are preferable to the existing practices and current situation.

   _______________________________

   George P. Tsiopras

   _______________________________

   James Beck

   _______________________________

   Ivan Bass

   _______________________________

   Alan Cox