In New York, alcohol must be wrapped up when it is sold; in North Carolina, booze can only be bought from licensed liquor stores with blacked out windows.
Now Diageo, the maker of Johnnie Walker whisky and Smirnoff Vodka, is battling to do away with another one of its last vestiges.
The British alcohol giant is lobbying to overturn prohibition-era laws in a dozen states, which oblige alcohol producers to use certain wholesalers. The legislation was designed to make it easier for the states to collect taxes, and to prevent gangsters from taking control of the alcohol supply as they did during Prohibition.
These days, Diageo argues it just makes it difficult for producers to switch wholesalers and has become a barrier to consolidation. The incumbent wholesalers are able to run mini-monopolies and drive up alcohol prices. In what has been dubbed the “Missouri Liquor Wars”, it has set its sights on the Missouri Franchise Act, which has made it difficult for the drinks company to extricate itself from its longstanding partnership with its principal Missouri distributor, Major Brands.
Diageo, together with the Distilled Spirits Council of the US (DISCUS), has lined up lawmakers to support its position, which is a battle that will dictate the future of the alcohol distribution landscape across America.
If Diageo wins, it will use the legislation to help it fight similar laws in the other 11 states, paving the way to major consolidation and allowing it to boost profitability by negotiating harder on terms. If it loses, supporters of the Missouri Franchise Act say the rest of America could adopt similar legislation.
“They want to 'Missouri’ the rest of the country,” US senator Claire McCaskill, a supporter of the wholesaler, told The Wall Street Journal.
With so much at stake, the wholesalers are not going down without a fight. Last November, a group of major players started drawing up legislation to help clad Missouri’s franchise laws in cast iron. In spring, Jefferson City, the state capital, played host to an unprecedented lobbying machine, with reported threats and accusations of double-dealing.
The issue came to a head in March, when Diageo wrote to Major Brands giving it notice that it would be ending their contract this week. It signed rival Glazer’s as its principal distributor in the state instead. Major Brands, which relies on Diageo for nearly a quarter of its revenues, responded by suing Diageo for breach of contract.
Both companies had pinned their hopes to a court ruling on Diageo’s battle with Major Brands, but the decision, when it came, simply set the stage for a much larger war. Last Tuesday, circuit court judge Robert Dierker upheld the Missouri Franchise Act and said Diageo had broken their contract, but he did not force Diageo to keep doing business with Major Brands.
Diageo’s sudden exit would be “severe and possibly catastrophic” to Major Brands, a family run firm, but Judge Dierker said, but he was not prepared to enforce an “uneasy alliance” and set the court up for an ongoing supervisory role.
Both sides claimed victory. “Diageo is pleased that with this decision of the court, we can now move all our spirit and wine brands to Glazer’s in Missouri,” said a spokesman for the drinks giant. Major Brands said it expected to recover “significant” damages from Diageo.
Both sides have also called in back-up for the ongoing battle.
