Changing Face of California’s Liquor Market : 20 Big Wholesalers Were Competing 10 Years Ago; Today, There Are Only 3
Inscribed on a granite obelisk in the city of Temecula--along with famous names like military scout Kit Carson and Pio Pico, the last Mexican governor of California--is the name “Simon Levi,” a commercial pioneer who founded a general store in the San Diego area in 1873.
The Simon Levi Co. had grown by developing a liquor distributorship as solid as the Temecula memorial when Jay Jacobs, the great grandson of the founder, took the corporate reins 15 years ago. When that distributorship crumbled recently, Jacobs began to close down a business he had hoped to turn over to his son.
“Closing down is a hollow feeling,” said Jacobs, who will continue to manage a company that also owns and sells a line of wines and beer. “I thought we had a successful company. I thought we were doing well with the (liquor) brands.”
The liquidation of the Simon Levi distributorship has prompted people throughout the distributive chain--from distillers to retailers--to begin a new round of debates over the state of the wholesale liquor business and the prospect of price increases. Meanwhile, legal arguments over alleged anti-competitive activities in the state’s liquor distribution business are being developed for impending court cases. The plan to close Carson-based Simon Levi--announced in September--is the latest development in a statewide consolidation that has reshaped the wholesale liquor industry. In contrast with 1978, when there were about 20 major liquor wholesalers in the state, three big distributors of distilled spirits now dominate California’s estimated $2-billion-a-year wine and spirits market.
However, there is sharp disagreement over the causes of the consolidation. A surviving statewide wholesaler, some distillers and some analysts cite declines in liquor consumption and competitive pressures as major factors. However, some former wholesalers and a number of retailers accuse some distillers of trying to control prices by stifling competition in the wholesale industry. Distillers, they say, are ending contracts with regional distributors such as Simon Levi to prevent them from selling their products at a discount to retailers.
Discounting became common early this decade in the wake of deregulation that eliminated price posting--a rule requiring distributors to file prices with the state. Faced with a posting-free environment and the enactment of a state law permitting distributors to sell anywhere in the state, some wholesalers launched price wars to win increasingly large orders from chain stores, according to analysts.
By 1986, about two-thirds of the 20 largest wholesalers had collapsed or sold their operations to other distributors, a winnowing that has continued. Today, the Miami-based Southern Wine & Spirits, Los Angeles-based Young’s Market Co. and the North Hollywood-based Intra-State Marketers--the umbrella company for Bohemian Distributing Co. and Julliard Alpha Liquor Co., two state wholesalers--dominate the state’s liquor wholesale market.
In the wake of consolidation, remaining distributors have become less interested in bargaining, according to some restaurateurs and some retailers. Robert Price, president of the San Diego-based Price Co., a discount chain with 25 outlets in California, said liquor prices may rise.
“Whenever you don’t have competition, there is a tendency for those in the marketplace to not bargain as hard,” he said. “I think the consumer is the one really suffering. Without a range of wholesale suppliers, our ability to represent (consumers) in negotiations is impaired . . . and the wholesaler has a tendency to mark up (prices).”
Consumer Action, a San Francisco-based group, is also concerned about the consolidation, said Ken McEldowney, executive director of the organization.
Fight Isn’t Over
“The more competitive the market is, the more the consumer benefits in terms of prices and services,” McEldowney said. “Any time you end up with a concentration of just a few firms, the consumer is hurt.”
However, Jeffrey Homel, vice president of sales for Bardstown, Ky.-based Heaven Hill Distilleries, said prices would not rise as a direct result of consolidation. Homel, who handles a product line that includes Cluny Scotch and Evan Williams bourbon, said the state’s three remaining major distributors are still in a competitive fight.
“If a brand’s price is raised way up, there’s always another brand out there that can take that business away,” he said.
Homel said Heaven Hill had a contract with Simon Levi, a pact that ended when the distributor announced closing plans. Levi collapsed because two major suppliers--Louisville-based Brown-Forman, which markets Jack Daniels, Early Times and Tennessee Whiskey labels, and Montreal-based Seagram Co.--exercised options to end their contracts. Brown-Forman and Seagram accounted for more than 50% of Levi’s sales, according to Jacobs. Seagram products are distributed by Intra-State. Brown-Forman’s principal distributor is Young’s Market.
A spokesman for Seagram’s U.S. subsidiary, Richard Swigart, would not comment on pricing or the consolidation’s effect on competitiveness in California.
“There are advantages to dealing with larger distributors, but it has more to do with the ability to get the product to our major (retail) accounts,” Swigart said.
A spokesman for Brown-Forman, Jack Smart, would not comment on pricing or the consolidation’s effect on competitiveness, but said wholesalers in parts of the country have lost business when their former supplier was acquired by another distiller. A number of distillers--Heublein and Schenley, among them--have been acquired by other firms since 1986.
“There is consolidation throughout the industry,” he said. “There’s also consolidation at the supplier level. That accounts for some of the change.”
Calls It Conspiracy
Executives at a number of other failed California distributorships have linked their demise to distiller decisions to switch to other distributors. For example, Ron Berbarian, vice president of the Fresno-based Berbarian Bros., said his company was forced to close its California operation after a major distiller ended their business relationship.
“I’m convinced that suppliers at the very top are controlling this network,” he said. “It looks like suppliers are getting together . . . like a cartel.”
Another distributor, Joe Ferrando, president of Redwood City-based Regal Beverages, said a supplier severed their relationship because he did not provide distribution throughout the state. Regal Beverages still operates.
“It’s a conspiracy to put us out of business,” he said.
A suit filed in Superior Court in San Francisco accuses Intra-State Marketers and Canadian-based Hiram Walker-Gooderman & Worts Ltd. of conspiring to eliminate competition among wholesalers to control prices in California.
The suit, brought by Santa Barbara-based wholesaler Jordano’s, alleges that Hiram Walker terminated agreements with other wholesalers and transferred its line to Intra-State’s Julliard Alpha Liquor Co. to eliminate price competition in the Canadian whiskey market. Hiram Walker’s products include Canadian Club and Royal Canadian. Intra-State already handled Seagram, the other major producer of Canadian whiskey.
However, Morton Siegel, a partner in a Chicago law firm that has represented wholesalers and major distillers in many suits, said liquor companies have been consolidating their lines at statewide distributorships to get more accountable service. Siegel, who is representing Intra-State in the Jordano suit, said the consolidation of product lines is a nationwide trend.
“Every supplier that we’ve represented,” said Siegel, “has sat down and made these hard choices, and nothing anti-consumer has come out of these changes. . . . There are complaints, but the complaining people have not been able to prevail in their state (courts), and I don’t anticipate it will be any different in California.”
An earlier suit, filed by Simon Levi and two other California distributors, claimed that a distiller and a state wholesaler conspired to fix prices. However, that suit was dismissed at the request of the plaintiffs when the U.S. Supreme Court, in an unrelated case, issued a ruling that appeared to undercut the legal footing of Levi and its partners in the suit, Jacobs said.
Distillers are also being challenged by Don Beaver, head of the California Grocers Assn., a statewide group representing 7,000 retailers. Beaver also contends that distillers have been severing contracts with wholesalers to eliminate retailers’ buying options.
“The distillers decided to stop them (retailers) from going to different areas to buy,” he said. “There’s no competition out there. It’s a very unhealthy situation.”
Beaver said the grocers association is providing financing for an antitrust suit recently filed by the Los Angeles-based Pioneer Foods and Santa Clara-based H&S; Markets. The suit names Southern Wine & Spirits, Young’s Market and Intra-State’s Julliard as defendants and claims that those distributors discriminated by selling products at unjustifiably low rates to favored customers. The suit, filed in a state appeals court in San Jose, also claims that the distributors impeded the plaintiffs’ attempts to form buying pools that could buy at high-volume discount levels.
Route Not Exhausted
“This whole liquor distribution business has been a real sham for several years,” Beaver said. “While they (distillers) can control distribution, they can control the price.”
An attorney for Young’s Market, John Enscoe, noted that Superior Court in Santa Clara had recently ruled that the plaintiffs had not exhausted the regulatory route--the state Alcohol Beverage Control Board. John Peirce, staff counsel for the board, said the plaintiffs had appealed the case because the state attorney general--not his agency--has responsibility for antitrust matters.
Said Robert Chartek, an attorney for Julliard: “We don’t have any information that would make us think they’re engaged in any antitrust activity. . . . I’ve asked my clients to address this and they say it has no merit. . . . There is no evidence of discriminatory pricing.”
The pricing demands of large chain retailers have been a major cause of attrition in the wholesale liquor industry, according to Max Kerstein, publisher of Beverage Bulletin, an independent trade newspaper based in Beverly Hills. The highly competitive retail sector in California--also consolidating as large firms acquire smaller companies--developed more leverage over distributors in recent years, Kerstein said.
“Today, chains do about 60% of the spirits business in the state of California,” Kerstein said. “Chains . . . have further restricted the profitability of wholesale operations because of the need . . . to be competitive on pricing.”
Kerstein eschewed the notion that major distillers were dropping regional distillers in favor of statewide operators as part of an attempt to fix prices. He said major distillers have opted for larger wholesalers because they have larger sales forces and staffs with the clout or rapport to get high-visibility shelf space from the chains. Also, rising business costs and shrinking profit margins are factors in the wholesaler attrition rate, according to Kerstein.
“A lot of people . . . don’t realize that it’s highly complex, highly costly business,” he said.
Beside rising wages and higher insurance costs, the president of Southern Wine & Spirits, Harvey Chaplin, also cited business costs as a major factor in the wholesaler shakeout. Some wholesalers have also been hurt by declines in alcohol consumption in recent years, he said.
Says It’s Not So
Chaplin said the remaining major wholesalers in the state compete to get their brands prime retail space. Chaplin said failed wholesalers are largely responsible for rumors and charges of price-fixing and monopolistic practices.
“It’s not so. . . . It’s not true,” he said. “I think that (antitrust claim) is the pipe dream of someone who bit the dust or someone who was not competitive enough or wise enough to see what was happening.”
However, Jacobs believes that Simon Levi’s distributorship failed despite a good performance record.
“When you’re a child, your parents tell you hard work is rewarded,” Jacobs said. “We worked hard. I thought we did well. Our sales were basically good . . . and it didn’t mean anything.”
