Competing in the Private and Control Label Arena
NABCA – March 16, 2015
John Hinman
Hinman & Carmichael LLP
www.beveragelaw.com
1
What is a Control Label?
• Brand that a supplier owns and controls but dedicates to
one specific retail account, either by quality control
agreement or understanding (note: exclusive outlet
agreements violate federal law (27 CFR Part 8))
o Product manufactured to the specifications of the
retailer.
o Supplier is the owner of all of the IP
o Retailer controls the marketing and advertising.
o Margins are controlled through the 3T system
Hinman & Carmichael LLP
www.beveragelaw.com
2
3/16/2015
What is a Private Label?
• Two Kinds:
o Retailer contracts with a manufacturer to put their logo or label
on an existing product (e.g., bulk wine) or has a product
produced to their specifications (e.g., Kirkland in Costco)
o Owner of IP with retailer’s name licenses name may license
brand for broad market products
• Brand is proprietary to IP owner
o IP may be licensed to others for production
• IP owner may contract with different manufacturers for
production of the same product
• Sold in retail location of IP owner or IP licensee (true private
label), or may be sold in broad market through an IP
licensing agreement where royalty revenue is captured by a
3rd party or brand owner.
Hinman & Carmichael LLP
www.beveragelaw.com
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3/16/2015
Does the Difference Matter?
• Distinction is important from an IP and contract
law perspective – IP is often licensed to others for
products that are endorsed by the retailer
• Many state liquor laws and regulations do not
differentiate between private and control labels
o Leads to confusion with industry members and
regulators
o Has resulted in current litigation and rule making
o Ownership of the brand is the key to the difference
Hinman & Carmichael LLP
www.beveragelaw.com
4
3/16/2015
PL/CL Routes to Market
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Typically delivered through wholesalers and importers working on
lower delivery margins (15 to 20%) rather than full margins (25 to 40%)
Traditional distributors are not fond of the PL/CL channel because of
lower margins and loss of available shelf slots for broad market
products.
Traditional distributors will, however, ship PL/CL products, often for
fixed per case fees, to fill their trucks and to curry favor with large
retailers
Margins are not regulated and margin points are based on services
provided by distributor (delivery, stocking, ordering, merchandising,
credit, etc.) which is why the channel is profitable to all parties but
less profitable for traditional distributors than broad market.
Many states have laws prohibiting wholesalers from discriminating
among retailers - results in PL/CL products available to broad market
but most often there is no demand outside of originating retailer.
Hinman & Carmichael LLP
www.beveragelaw.com
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3/16/2015
Current Legal Issues
“Thing of Value” Problems
o American Vintage Beverage, Inc. v. Dept. of Alcoholic Beverage Control
• CA ABC Appeals Board held that the existence of a “visual link” between a
product sold by a supplier and the name and identifying characteristics of a
retailer acted as prohibited advertising for the retailer.
• Are private labels now outlawed in CA? Unclear. Ask Mr. Botting
• Creates a slippery slope problem – what isn’t a “thing of value”?
o Mark Anthony Brewing Inc. v. Texas Alcoholic Beverage Commission
• TABC asserts that license agreement with TGIF corporate IP owner (not a TX
licensee) creates a “thing of value” in the form of advertising to TGIF retail
locations. MAB defending based on First Amendment.
• TABC conducting broad-based investigations into practices by retailers and
suppliers into PL/CL practices
Hinman & Carmichael LLP
www.beveragelaw.com
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3/16/2015
Current Legal Issues, Cont’d.
First Amendment – Commercial Free Speech
o
Suppliers are pushing back with constitutional defenses
o
Non-deceptive labels on products are a form of advertising and thus protected
commercial free speech under Central Hudson
o
Central Hudson Test:
o
For commercial speech to be protected, it must:
o concern otherwise lawful activity and not be misleading. If this is met, we
then ask:
• Is the asserted government interest substantial?
• Does the regulation directly advance the asserted governmental
interest to a material degree?
• Is the restriction more extensive than necessary to serve the
government interest?
Hinman & Carmichael LLP
www.beveragelaw.com
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3/16/2015
Where is this going?
• US National retail chain PL/CL volume in wine space
estimated as over 40% of total market volume and in
some markets is approaching 50%
• Beer and spirits space is behind but catching up
• Why is this happening?
• It’s more efficient to manage products from retail
corporate HQ, PL/CL allows for better product planning
and uniformity of offerings, PL/CL is a better value for
consumers and PL/CL allows the retailer to have more
control over his supply chain.
• There will be more PL/CL, count on it. In fact, wholesalers
across the US are commissioning their own PL/CL brands
in order to maintain brand exclusivity and retailer
relationships – everyone is getting in the game!
Hinman & Carmichael LLP
www.beveragelaw.com
8
3/16/2015
Is this the end of the 3 tier
system?
• This is the fear of the wholesale tier.
• PL/CL is seen as a threat not just to margins but to the
distributors historical control of supplier and retailer
relationships. The middleman no longer controls the
communications at the chain HQ level and realistically
cant control the communication channels.
• Almost all states permit some level of winery and
brewery self-distribution and several states (OR and WA,
among others) permit self-distribution across state lines
by permit.
• Almost all product that is self-distributed is PL/CL or truly
small brands with no wholesaler support but retail
account relationships.
• The wholesale tier is adjusting by putting more resources
into product integrity, reporting and account servicing.
Hinman & Carmichael LLP
www.beveragelaw.com
9
3/16/2015
Is this the end of the 3 tier
system? - continued
• Wholesalers are doing very well as a tier (the most
profitable that they have ever been) and many even
have difficultly servicing and managing the brands that
they have because the US alcohol market is the largest
market in the world and SKU’s are proliferating across all
markets.
• For example, some brands that are over demanding of
wholesaler service (excessive account visits, promotional
support and split books of business for example) have
been terminated by their wholesaler (even in franchise
states) as too much trouble to manage.
• PL/CL is not the end of the 3 tier system; rather it’s the
beginning of the integrated delivery model where every
tier has a role and technology is used to drive
innovation.
Hinman & Carmichael LLP
www.beveragelaw.com
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3/16/2015
The conclusion – what’s next for the
regulator to worry about?
• The 3 tier system is evolving as society and
technology are evolving. The basic purpose of the 3
tier system, which is to prevent supplier domination
of the retail tier, remains intact.
• The biggest challenge for today’s regulator is
understanding the business that the licensees being
regulated are conducting between themselves.
• Questions?
Hinman & Carmichael LLP
www.beveragelaw.com
11
3/16/2015