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Oklahoma alcohol measure will prove costly, one way or the other

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OPUBCO employee, David Dishman, Wednesday, December 6, 2017. Photo by Doug Hoke, The Oklahoman
OPUBCO employee, David Dishman, Wednesday, December 6, 2017. Photo by Doug Hoke, The Oklahoman

Pens can be mightier than swords, and some are just worth more, too.

Oklahoma Gov. Kevin Stitt must decide whether to partially reverse sweeping and historic changes to the half-a-billion dollar alcohol distribution industry in Oklahoma. His decision on Senate Bill 608 could swing hundreds of millions of dollars between a few businesses.

It all rests on a signature.

Initial distribution changes took effect in October as part of State Question 792, but part of that may be walked back under Senate Bill 608, which calls for the top-25 brands of wine and spirits be sold to each of the 11 wholesalers in the state.

Currently, individual brands can designate a sole wholesaler of product.

SQ 792 is known for its radical changes to the retail side of the industry that enticed voters, many of whom are consumers, to overwhelmingly approve the measure in 2016.

Grocery stores and convenience stores gained the right to sell wine, and beer stronger than 3.2% alcohol by weight. Liquor stores already sold strong beer, but gained the ability to sell it cold.

Consumers hailed the changes as historic, and Oklahoma’s alcohol industry was seen as entering a new era of modernization.

But the retail changes were only one part of SQ 792.

The distribution model was tweaked, seemingly in a slight manner, but enough to swing hundreds of millions of dollars in annual sales between a handful of businesses.

Oklahoma operated for decades under a four-tier distribution model. The manufacturers of alcoholic beverages used brokers to sell products to wholesalers that delivered to retailers. SQ 792 changed this to a three-tier system and allowed brokers and wholesalers to merge as long — as the new company was majority-owned by an Oklahoma based business.

A second adjustment made by SQ 792 allowed manufacturers the ability to designate a sole wholesaler for their product. Before October, every manufacturer had to make their products available to every distributor.

This distribution change is virtually unrecognizable from a consumer’s standpoint. But for the wholesalers occupying the middle tier, of which there are few, the ability to merge with national brokers and gain exclusive rights to the most popular brands of wine and spirits turned some local distributors into kings, while others are barely hanging on as cupbearers.

Those in the industry estimate the distribution market exceeds $500 million in annual sales. As of April, only 11 businesses in the state hold wine and spirits wholesaler licenses.

This market is not expected to grow significantly, despite the increased availability of strong beer and wine as the demand for alcohol among Oklahomans is relatively inelastic.

Tax collections on alcoholic products through the first six months after October support this hypothesis. Some growth occurred, but far from historic increases.

Quite simply, we’re drinking nearly the same amount now that we can buy it with our groceries or gasoline as we did before. But slices of the $500 million pie are far from equal among the 11 wholesalers.

Oklahoma-based Central Liquor Co. and Jarboe Sales Co. were two long-operating wholesalers that secured partnerships with large, out-of-state distributors that operated as brokers in Oklahoma before the passage of SQ 792.

Republic National Distribution Co. merged with Central to form RNDC-Oklahoma, and Southern Glazer’s Wine and Spirits merged with Jarboe to form Southern Glazer’s Oklahoma.

Armed with the resources of the national distributors and the new ability to obtain exclusive rights to wine and spirits brands, these two companies distanced themselves from the other wholesalers and secured an estimated 80% of the market.

By law, Central and Jarboe maintain majority ownership of the new partnerships as part of the Oklahoma-based stipulation.

Not every distributor made out quite so well.

Tulsa-based Boardwalk Distribution did not merge with a national distributor and failed to secure the rights to distribute any of the top-100 brands. That's had a crippling effect on the company, with owner Bryan Hendershot estimating Boardwalk will lose $100 million in sales in its first year following the October changes.

Hendershot subsequently pushed the drafting of SB 608. He claims the bill supports small businesses hurt by the near duopoly created by RNDC-Oklahoma and Southern Glazer’s Oklahoma. If Stitt signs the bill, Hendershot stands to gain some of the lost business back.

In an interview with The Oklahoman he claimed to have the support of hundreds of small businesses, but declined to disclose the names of any supporters.

Liquor stores are the most talked-about businesses suffering under the new system. Single distributors of brands means fewer deliveries. Fewer deliveries can lead to shortages, especially in rural parts of the state. SB 608 would require the top brands sell to every wholesaler in the state and would increase deliveries to these stores.

What the bill doesn’t do is address the struggle these liquor store owners face with increased competition. Before October, liquor stores were the only place to purchase strong beer, wine and liquor. Now, they compete with grocery stores and convenience stores for strong beer and wine — wine being particularly devastating for liquor stores as it traditionally held the highest profit margins of the three products.

Liquor store owners have called for the passage of SB 608 for a partial return to the old standard for deliveries.

Politicians, including bill author Kim David, R-Porter, have called for the passage of the bill to protect small businesses from further harm.

A couple of the eight remaining wholesalers in the state — businesses that feel comfortable operating under the new normal despite the two large wholesalers — signed a joint statement against SB 608.

In a state with plenty of valuable autographs, the signature on this bill — or lack thereof — could be worth the most.

David Dishman

Business Writer David Dishman has worked as a journalist in Oklahoma since 2014 covering business, education, local government, healthcare and more. He worked as a reporter in southeast Oklahoma before joining the business team at The Oklahoman in... Read more ›

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