Super-cheap booze at Total Wine fuels pricing fight

 

Source: Boston Globe

By Dan Adams

FEBRUARY 02, 2017

 

It’s not illegal for a business to sell a product below cost – unless, of course, it’s a bottle of booze.

 

As more big chains expand in the Massachusetts alcohol market, state regulators are cracking down on their aggressively low prices, enforcing a longstanding rule that bans retailers from selling alcohol for less than what they paid.

 

Now, the country’s largest alcohol retailer, Total Wine & More , is fighting back, suing the state Alcoholic Beverages Control Commission over sanctions the agency issued to its two Massachusetts stores for allegedly selling bottles of brand-name vodka, rum, and other liquors several dollars below cost.

 

The lawsuit to overturn the sanctions, filed Monday in Suffolk Superior Court, opens a new front in the chain’s long-running war against minimum pricing regulations, which are on the books in many states.

 

The ABCC in January suspended the licenses of Total Wine stores in Everett and Natick for several days after investigators determined the stores were selling Smirnoff vodka, Bacardi rum, and other liquors for $1 to $6 below their wholesale costs. And in October, the ABCC warned Shaw’s Supermarket for charging $19.99 for 30-packs of beer that cost it $20.60 at wholesale.

 

Regulators argue that banning ultra-low prices helps curb excessive drinking. They also say the requirement protects mom-and-pop package stores from predatory pricing by chains such as Total Wine that get discounts on large volumes of alcohol.

 

But Total Wine has said state pricing restrictions shelter small retailers from competition while driving up prices for consumers.

 

The rule increases “profits for every retailer in the state, and consumers pay for those profits,” said David Trone, Total Wine’s founder and co-owner. “It’s collusive and it’s wrong.”

 

In its lawsuit, Total Wine noted that the anonymous complaints that prompted the ABCC investigation likely came from competing package stores. Massachusetts alcohol regulators also believe the complaints came from package stores.

 

“Total Wine’s competitors would rather keep the savings they realize from [volume discounts] for themselves as opposed to passing those savings on to their customers,” the company said in its lawsuit. “Total Wine’s pricing practices threaten to upend the status quo, causing its competitors to resort to the [ABCC] to protect their profit margin.”

 

The debate over pricing rules comes as Massachusetts has allowed more supermarkets and discount retailers to sell alcohol in the state. A 2011 law upped the number of alcohol licenses that a supermarket or big box chains could hold, to seven locations in 2016 and to nine stores in 2020.

 

Total Wine, which is based in Maryland and operates about 150 stores in 20 states, first moved into Massachusetts in 2015. The company plans to open two more stores here, in Shrewsbury and Danvers, this year.

 

Facing increased competition from larger retailers, owners of small package stores in Massachusetts are pressing state regulators to enforce the minimum-pricing regulation.

 

“The gorilla has come into the state and decided the rule doesn’t apply to him,” said Frank Anzalotti, the executive director of the Massachusetts Package Store Association, referring to Total Wine. Without minimum prices, “it would be virtually impossible for most of the liquor stores in the state to compete,” he added.

 

The package-store group said it will press a task force reviewing state alcohol regulations to preserve the minimum-pricing rule, in part to discourage chronic heavy drinking.

 

“There’s a reason alcohol is not sold the way eggs and milk and butter are,” Anzalotti said.

 

In its lawsuit, Total Wine questioned the ABCC’s application of the pricing rule. The company said that it initially paid its distributors higher prices for the liquors, but later received volume discounts that brought its costs to below what it charged consumers. The investigators only looked at the initial invoices, Total Wine complained, ignoring the actual, final cost.

 

Other states, Trone said, allow Total Wine to price its products based on expected discounts.

 

“We’ve never seen an interpretation like this in any of the states we operate in,” Trone said. “Cost is cost. It is real and easily calculable.”

 

But Massachusetts officials said the minimum pricing rule clearly defines cost as the price listed on the most recent invoice. Otherwise, investigators would have no way to enforce the regulation, since retailers could always claim they were expecting to receive discounts later, they argued. The officials said Total Wine should have dropped its prices only after receiving the discounts.

 

In its lawsuit, Total Wine revealed that Massachusetts regulators are conducting additional investigations of pricing practices by the retailer that could result in longer suspensions of its licenses.

 

In Connecticut, Total Wine has sued the state in federal court over its pricing rule, calling it a form of “price-fixing” that violates US antitrust rules. Connecticut Governor Dannel P. Malloy has supported the company’s call to repeal the minimum pricing rule, but state legislators there have blocked such efforts.