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Oklahoma's tiered alcohol retail system and pricing methods benefit Okies


Greg Horton March 11th, 2010

Mike Weeks, an Oklahoma City land man, was surprised to find the $90 bottle of wine he purchased for his business partner's 2009 Christmas present online for $50 two weeks later. "Why is the price so ...

Mike Weeks, an Oklahoma City land man, was surprised to find the $90 bottle of wine he purchased for his business partner's 2009 Christmas present online for $50 two weeks later.

"Why is the price so different in California than here?" Weeks said. "We're getting screwed, obviously. Someone is making money off of us."

Tier in my beer
Pricing products
Oklahoma's three-tier system

Weeks' response is understandable, but his experience with higher prices is not necessarily the norm in Oklahoma. A random comparison of prices in Oklahoma versus prices available online shows that wine costs in the state are either the same or only slightly higher than in other states. The difference is more remarkable when liquor and beer prices are compared to surrounding states: Oklahomans pay substantially less for those products than our neighbors.

The reason for this, according to Randy Malone, an Oklahoma City attorney specializing in the liquor business, is Oklahoma's price-posting system. Malone was the legal counsel for the state's Alcohol Beverage Laws Enforcement (ABLE) Commission for 13 years.

"The consumer is the beneficiary of the price-posting system," Malone said. "It guarantees competition between the wholesalers, so that consumers are guaranteed a better price."

Tier in my beer
Before explaining the price-posting system, it's best to understand how Oklahoma's admittedly labyrinthine system actually works. Many of the laws were put in place after the state repealed its prohibition in 1959, and although they have been modified frequently over the years, the three-tiered system has been kept in place. While it is often problematic and misunderstood, it does seem to benefit the consumer ... at least publicly. Critics acknowledged internal problems with the current system, but were not willing to go on the record to mention names or specifics.

Oklahoma's laws are codified in Title 37 of the Oklahoma statutes. The section is titled Intoxicating Liquors, and because 3.2 beer has never been designated an intoxicating beverage, the laws do not govern low-point beer. Title 37 lists all the categories of liquor licenses and the attendant requirements and privileges under each license.

At the top of the three-tiered system are the nonresident sellers, often referred to as brokers or representatives. Out-of-state wineries, breweries and distilleries are required to contract with an agent in the state of Oklahoma to represent and sell their product to the wholesalers in the state. These brokers are typically residents of the state, although their companies may be located out of state. The two biggest nonresident sellers in the state are Glazer's and Republic National Distributing, both of which are headquartered out of state. Glazer's also has a relationship with Diageo, and Republic with Constellation, two of the largest alcoholic beverage companies in the world, to sell their products in Oklahoma.

The nonresident sellers sell their products to the second tier in the system, the wholesalers. Nonresident sellers can apply for and receive licensing that allows them to store their own products, but the vast majority of the storage and all of the transportation in the state are the responsibility of the wholesalers.

Currently, there are five large wholesalers in the state, in addition to a few small ones, and it is this group that is required to post their percentage markup every other month. This is the so-called price-posting system. As of press time, the wine markup is 16.75 percent, down from 22 percent since the last posting period. The liquor markup is 8.5 percent for the majority.
The markup is posted 15 days in advance, which means it is filed with the ABLE Commission and sent to retailers around the state. Each wholesaler has 10 days to exercise an option to match the markup of the lowest submission. Most do.

The retailers, the third tier of the system, purchase products from the wholesalers at the posted price. The price must remain constant for 60 days. The occasional fluctuation in prices at the store for your favorite product is often a result of changes in price posting, a number over which retailers have no control.

John A. Maisch, general counsel for the ABLE Commission, commented on what some industry players call a "fourth tier."

"In some circles, these brokers have been referred to as the 'fourth tier,'" Maisch said. "But I believe most state liquor regulators, including our office, would probably insist that there are really only three tiers. The broker, if retained, simply acts as the agent for the manufacturer within the state."

The 10-day grace period to change the rate is the genius of the system, according to Chad Alexander, a spokesperson for Central Liquor Company, an Oklahoma wholesaler.

"The immediate benefit is that wholesalers compete for business, which means consumers pay less." According to Alexander, Oklahoma is one of the few states with this system.

"Surrounding states have different systems," he said. "Sometimes it's divided geographically; sometimes it's a franchise system. That just means that the prices are fixed, and there is no competition."

Pricing products
J.P. Richard, president of the Retail Liquor Association of Oklahoma, said two Oklahoma laws also contribute to the lower prices in-state.

"Two laws in particular govern the whole system," Richard said. "Any beverage that comes into the state must be offered to all wholesalers equally. No discrimination is allowed, so each wholesaler has the same access to products, and no wholesaler can control the price of an in-demand product. We also have a policy of affirmation. If a product is sold to the surrounding states at different prices, Oklahoma is guaranteed to receive the product at a price that matches the lowest price offered to a neighboring state."

The second law that governs the system is that wholesalers cannot discriminate in their sales to retailers. The products must be offered equally to all retailers, including restaurants. This prevents larger stores from cornering the market on a particular product.

The retailers do have some control over what customers pay for products in their stores, and it is often this variation in pricing that is most frustrating to consumers. A bottle of wine at one store may cost substantially more or less at another.

Calls to five liquor stores in the metro area to compare prices on a single bottle of wine, Bogle Petite Sirah, yielded a variation in prices. The wine wholesales for $8.73. The prices in the five stories varied from a low of $11.20 to a high of $12.25. That's a range of 22 percent to 28 percent in retail markup. A 750-mL bottle of Crown Royal ranged from $19.99 to $24.99. Some of that variation can be explained by a recent price change at the manufacturer. Retailers who purchased the product prior to the price change will have it at a different price than those who purchased after the change.

Richard said retailers use different markups based on their own systems, and no law regulates how much they can charge for an item.

"For the top 100 spirits in the largest format (1.75 liter), you can see a markup from 8 to 22 percent," he said. "Beer might range from 15 to 35 percent, but the top 50 will be in the 15 to 20 percent range."

The markup is, of course, the price of doing business. No one expects business owners to make zero money on their products. Consumers can save money by finding the stores with the lowest markup, and they can buy by the case " a move that usually nets a 10-percent discount on wine from retailers.

In addition to the lower prices customers pay, Oklahomans also have a wider selection than surrounding states. The lack of certain beers or wines in the state is a source of ongoing frustration, but the competition does guarantee that nonresident sellers try their best to get more and better products into Oklahoma. The market can only withstand so many brands, and nonresident sellers try to discern which brands will move.

Richard said that average grocery stores in Texas carry, at most, 400 different wines.

"Go to Byron's, the Cellar (Wine & Spirits) or Poncho's (Liquortown) in Oklahoma City, and your choices are from 3,000 to 4,000," he said.

The system guarantees price and selection, according to Richard.

"Go to the grocery store in Texas, and while you're there, check on the price of a 1.75 liter of Crown Royal," he said. "It's $38-$40 in Oklahoma City, and $56-$60 in that store in Texas."

Oklahoma's three-tier system:
1. Manufacturers, wineries & breweries (suppliers)
2. Wholesalers (distributors)
3. Restaurants, bars & liquor stores (retailers)
Source: ABLE Commission

photo
Lobbyist Chad Alexander stands outside the state Capitol. photo/Marianne Pickens
 
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02.12.2013 at 08:37 Reply

One comment I noticed was, "average grocery stores in Texas carry, at most, 400 different wines..." That may be true, but go into any LIQUOR STORE in the Dallas metroplex and you will notice far more wine that is available in an Oklahoma liqour store. And I don't know how it wasn't brought out in the article that any "tiered" system is going to cost more than a non-tiered system, due to the fact of the tiers, alone. All of the people in the tiers take a cut. More tiers = more money. Right?

 

 
 
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