In Michigan_ beer distribution is family affair - Mackinac Center

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DETROIT FREE PRESS | WWW.FREEP.COM                                                        UNDER THE INFLUENCE                                                                                                                                  THURSDAY, FEB. 10, 2005   7A


In Michigan, beer distribution is family affair
Firms handed                                                                                                                                                                                                   “People are
                                                                                                                                                                                                               very much
                                                                                                                                                                                                               committed to
                                                                                                                                                                                                                                        tafson, are among them. Until her
                                                                                                                                                                                                                                        death in March 2003, Shotwell
                                                                                                                                                                                                                                        Gustafson was the chief executive
down through                                                                                                                                                                                                   seeing these
                                                                                                                                                                                                               businesses …
                                                                                                                                                                                                                                        at Hubert Distributors, an Anheus-
                                                                                                                                                                                                                                        er-Busch distributor in Pontiac.

generations                                                                                                                                                                                                    stay in the
                                                                                                                                                                                                               family,” says
                                                                                                                                                                                                               Karen Wilson,
                                                                                                                                                                                                                                        Her husband succeeded her.
                                                                                                                                                                                                                                           Shotwell Gustafson was one of
                                                                                                                                                                                                                                        Oakland University’s most gener-
       By JENNIFER DIXON                                                                                                                                                                                       Central Distri-          ous contributors.
       FREE PRESS STAFF WRITER                                                                                                                                                                                                             She financed the renovations of
                                                                                                                                                                                                               butors’ CEO.
                                                                                                                                                                                                                                        an indoor equestrian arena into a
   To understand the business of                                                                                                                                                        the family is involved in the busi-             22,000-square-foot banquet and
distributing beer in Michigan, step                                                                                                                                                     ness.                                           exhibit hall named the Shotwell
inside a cavernous warehouse just                                                                                                                                                          Herman Cox founded his com-                  Gustafson Pavilion.
east of Metro Airport.                                                                                                                                                                  pany, H. Cox & Son Inc., in 1933 in a              Because of the couple’s many
   This is the home of Central Dis-                                                                                                                                                     small garage in Traverse City. To-              contributions over the years, they
tributors of Beer in Romulus. Cas-                                                                                                                                                      day, members of the fifth genera-               are listed as members of the Mead-
es of Budweiser and Michelob Ul-                                                                                                                                                        tion are working at H. Cox, which               ow Brook Society, open only to
tra and Kirin Light are stacked on                                                                                                                                                      distributes wine, Anheuser-Busch                those who give $500,000 or more
pallets, almost to the ceiling. Kegs                                                                                                                                                    beers and other lines in seven                  to the university.
are kept in a separate room, where                                                                                                                                                      northwest Michigan counties.                       The Gustafsons are also bene-
the temperature is always set at                                                                                                                                                           In all, there are about 135 whole-           factors to St. Joseph Mercy/Oak-
frosty.                                                                                                                                                                                 salers in Michigan. That number,                land; the hospital in Pontiac has a
   Central’s drivers truck that                                                                                                                                                         however, includes companies with                wing housing an emergency center
beer to 1,700 customers in 38 com-                                                                                                                                                      multiple licenses because they are              named in his honor and an ambula-
munities, from Downriver through                                                                                                                                                        distributing in several locations, as           tory surgical center named for her.
Plymouth to a sliver of Oakland                                                                                                                                                         well as small specialty operations.                And in November, Robert Gus-
County.                                                                                                                                              HUGH GRANNUM/Detroit Free Press       A better count may be the mem-               tafson gave a Sabreliner 60 corpo-
   They have 44 routes — and the         At Central Distributors of Beer, employees Brian Shufeldt of Taylor and Corey Kowalski of                                                      bership in the Michigan Beer &                  rate jet to his alma mater, Western
road all to themselves.                  Brownstown Township fill orders late last month. The Romulus company delivered more than 5 million                                             Wine Wholesalers Association,                   Michigan University.
   Because of state law, no other        cases in 2004. The company says it is one of the largest Anheuser-Busch distributors in the country.                                           with 75 family-owned companies                     Wilson of Central Distributors
Anheuser-Busch distributors can                                                                                                                                                         that distribute more than 90 per-               donated $2 million to the Cleveland
serve bars and restaurants, gro-            Today, his granddaughter, Ka-         ness going. People are very much                   The business is spread across                      cent of the beer and wine sold in               Clinic Brain Tumor Institute last
ceries and party stores in Central’s     ren Wilson, is the company’s chief       committed to seeing these busi-                    200,000 square feet of warehouse,                  Michigan.                                       year. And Fabiano Brothers Inc., a
territory.                               executive. Her son-in-law began          nesses continue to stay in the fami-               garage and office space.                              Some Lansing insiders call the               beer, wine and liquor distributor in
   Central decides the price for         taking over the day-to-day respon-       ly. Each generation feels that com-                   Frank Petipren and his two                      association the Millionaires Club.              Mt. Pleasant, has contributed more
that beer — and every retailer pays      sibilities in January.                   mitment.”                                          sons, Stan and Fran, delivered beer                   “A lot of these people, on paper,            than $1 million to Central Michigan
the same amount.                            Their building covers 191,726                                                            in wooden cases from the backseat                  are millionaires,” said the group’s             University.
   Central’s markup varies. Some-        square feet — big enough to hold         Success stories                                    of the family car when he started                  chief lobbyist, Pat Laughlin.                      Mike Lashbrook, president of
times, it charges retailers about $5     650,000 cases and 40,000 kegs.              Other distributors tell similar                 Petipren Inc. in 1933 out of a six-car                But no one outside the industry              the wholesalers association, said
a case more than it paid Anheuser-       Central’s drivers delivered more         stories of success.                                garage in Macomb County. Today,                    knows exactly how much the                      the group’s members work hard at
Busch. Sometimes, the markup is          than 5 million cases in 2004, and           Thomas Ryan used a borrowed                     the Anheuser-Busch distributor                     wholesalers are worth. Their com-               being business leaders in their
closer to $4, according to Liquor        the company says that makes it one       truck to make his deliveries in Flint              delivers beer to more than 1,350 re-               panies are private and rarely sold              communities and are important
Control Commission records ob-           of the largest Anheuser-Busch dis-       when he started Tom Ryan Distrib-                  tailers in the county and Ham-                     on the open market.                             employers in the state. He added
tained under the state Freedom of        tributors in the country.                uting Co. in 1946. Today, his son J.               tramck. In 1998, the most recent                                                                   that he would not “apologize for the
Information Act.                            “We are very active in our com-       Michael Ryan owns and runs the                     year for which figures were avail-                 Good works                                      fact that they are successful busi-
   Jack Gorsuch founded the busi-        munities, in supporting our chari-       company, the sole Anheuser-Busch                   able, the company had record sales                   Through their success, some                   nesspeople.”
ness in 1933 with two trucks and a       ties,” Wilson said. “We’re a very        distributor in Genesee and Lapeer                  of more than 4.8 million cases of                  have become philanthropists.
1,400 square-foot building in De-        good corporate citizen. We have a        counties. Its 32 trucks deliver 4 mil-             beer. It has grown from one vehicle                  The late Alice Shotwell Gustaf-               Contact JENNIFER DIXON at 313-
troit.                                   huge investment to keep this busi-       lion cases of beer and wine a year.                to 175, and the fourth generation of               son and her husband, Robert Gus-                223-4410 or

THREE-TIER SYSTEM                                                                                                                                                                                                                         BUSINESS, PLEASURE
                                                                                      HOW MICHIGAN’S PRICES STACK UP

State law is at root                                                                    So how does Michigan compare
                                                                                      with neighboring states on beer
                                                                                      and wine prices?
                                                                                                                                          Critics of Michigan’s distribution
                                                                                                                                       system for beer and wine say an
                                                                                                                                                                                       also were at fault — even though
                                                                                                                                                                                       the survey subtracted excise
                                                                                        The Free Press compared prices                 absence of competition at the                     He said there is competition in
                                                                                                                                                                                                                                          an agenda
of wholesale power
                                                                                      of several well-known brands at                  wholesale level is to blame for                 the state — between brands such
                                                                                      Meijer stores in Michigan, Ohio,                 higher prices.                                  as Miller and Budweiser. Beer

Distributors bank on territory, price rules
                                                                                      Indiana and Illinois and found that
                                                                                      consumers paid more overall for
                                                                                      beer in Michigan than in the other
                                                                                      three states — up to $4 more for a
                                                                                                                                          “When you’ve got a protected
                                                                                                                                       market and protected monopo-
                                                                                                                                       lies, you’ve got the license to
                                                                                                                                       gouge,” said state Rep. Leon
                                                                                                                                                                                       makers are the ones who set
                                                                                                                                                                                       prices, he said. Wholesalers and
                                                                                                                                                                                       retailers simply add markups.
                                                                                                                                                                                         Michigan Liquor Control Com-
                                                                                                                                                                                                                                          along for
                                         tion. Like Michigan, most states
                                                                                      cart full of seven items.
                                                                                        Wine prices tended to be
                                                                                      cheaper in Indiana and Illinois
                                                                                                                                       Drolet, R-Clinton Township.
                                                                                                                                          But Pat Laughlin, chief lobbyist
                                                                                                                                       for the Michigan Beer & Wine
                                                                                                                                                                                       missioner Jim Storey said he
                                                                                                                                                                                       thinks one reason prices are high-
                                                                                                                                                                                       er in Michigan is that retailers
                                                                                                                                                                                                                                          the hunt
                                         have exclusive territories and               than in Michigan, but higher in                  Wholesalers Association, said                   cannot sell alcohol below whole-                       In late November 2002, four
    It’s called the three-tier system.   franchise rules for beer distribu-           Ohio.                                            wholesalers aren’t the reason for               sale cost to entice shoppers into                  lawmakers piled their guns,
But to the Michigan Beer & Wine          tors. State laws, however, vary in             For the survey, the newspaper                  price differences. He said Michi-               stores.                                            camouflage jackets and a gold-
Wholesalers Association, it’s the        how strongly they protect whole-             subtracted each state’s excise, or               gan’s bottle-deposit law is partly                “I don’t think anyone is dying of                en retriever named Maverick
gospel. The system dictates how          salers’ interests.                           sin, taxes — so pretax prices were               to blame and insisted excise taxes              thirst in the state,” he said.                     into a couple of SUVs for a trip
alcohol is sold in Michigan.                                                                                                                                                                                                              to New York with Mike Lash-
    The Legislature created the          Exclusive turf                                                                                                            Royal Oak,          Toledo,   South Bend, Bolingbrook,                 brook, president of the Michi-
framework with Public Act 8 of              Michigan gives beer wholesal-            BEER                                                                              Mich.              Ohio          Ind.           Ill.               gan Beer & Wine Wholesalers
1933, the year Prohibition was re-       ers competition-free turfs, pro-            Miller Lite, 12 pack, 12-ounce cans                                              $8.75             $8.79         $8.16        $8.08                  Association.
pealed.                                  tected by law. Their customers              Miller Genuine Draft, 12 pack, 12-ounce bottles                                    9.06             8.79          8.26         8.08                      The trip was an opportunity
    The act established the Liquor       must buy only from them.                    Miller Genuine Draft, six pack, 12-ounce bottles                                   4.88             4.69          4.73         4.69                  to mix business with pleasure.
Control Commission and a three-             In 1976, the year Michigan vot-          Heineken, six pack, 12-ounce bottles                                               7.88             7.69          7.43         7.49                      Lashbrook’s      companions
tier system for the production, dis-     ers approved refundable deposits            Heineken, 12 pack, 12-ounce bottles                                              13.76             11.79         12.36        14.78                  were John Cherry Jr., then a
tribution and sale of alcohol. The       on bottles and cans, the Legisla-           Bud Light, 12 pack, 12-ounce cans                                                  8.66             7.79          8.16         7.88                  Democrat in the state Senate
tiers consist of manufacturers           ture required beer makers to grant          Budweiser, 12 pack, 12-ounce cans                                                  8.66             7.79          8.16         7.88                  and the lieutenant governor-
(such as brewers and wineries),          each wholesaler an exclusive terri-         BEER SUBTOTAL                                                                    $61.65           $57.33         $57.26       $58.88                 elect; Rep. Randy Richardville,
distributors (also known as whole-       tory — typically a county or sever-                                                                                                                                                              a Republican from Monroe who
salers) and retailers, such as gro-      al counties.                                WINE                                                                                                                                                 was poised to rise to floor lead-
ceries, party stores and bars. A            Likewise, distributors have the                                                                                                                                                               er; Rep. Charles LaSata, a St.
                                                                                     Black Swan Chardonnay                                                              $6.09           $6.93         $5.90           $7.15
person or business in one tier can-      right to sell their brands in their                                                                                                                                                              Joseph Republican who had
                                                                                     Glen Ellen Cabernet                                                                 4.39            9.93          4.90            6.25
not own an interest in another.          territories. No competitor can sell                                                                                                                                                              been elected to his third and fi-
                                                                                     Kendall-Jackson Cabernet Sauvignon                                                 13.89           17.93         16.90           15.35
    The result, with a few excep-        the same brands.                                                                                                                                                                                 nal term, and Rep. Ray Basham,
tions, is this: Beer or wine makers         Retailers have no choice but to          Stone Cellars Merlot by Beringer                                                    7.89            7.93          6.90            6.65               a Taylor Democrat who had just
must sell to licensed distributors,      buy from local wholesalers. They            Sutter Home Cabernet Sauvignon                                                      6.69           10.93          4.41            4.85               won a state Senate seat.
who in turn sell to licensed retail-     can’t shop around for a distributor.        Vendange Cabernet Sauvignon                                                         4.89            5.93          3.90            3.65                   They drove along Lake Erie
ers. Essentially, the wholesalers’          “A retailer can complain to us,          Turning Leaf Cabernet Sauvignon                                                     8.69            7.93          5.90            6.85               through a snowstorm and
role as middlemen was written into       but there’s nothing we can do               Turning Leaf Merlot                                                                 8.69            7.93          5.90            6.85               checked into a Holiday Inn in
law.                                     about it,” said Rick Perkins, direc-        Turning Leaf Chardonnay                                                             8.69            7.93          5.90            6.85               Waterloo, N.Y. Then for three
    In the case of spirits, the state    tor of enforcement for the Liquor           WINE SUBTOTAL                                                                      $69.91          $83.37        $60.61          $64.45              days and two nights, Lashbrook
buys from distilleries and hires pri-    Control Commission. “We don’t                Sources: Research by JENNIFER DIXON and VICTORIA TURK/Detroit Free Press                                                                            squired them around the scenic
vate firms to distribute the prod-       have the authority to say, ‘Go to an-                                                                                                                                                            Finger Lakes region.
ucts.                                    other wholesaler.’ ”                                                                                                                                                      Detroit Free Press         They hunted ducks from a
    The Michigan Beer & Wine                Unlike beer suppliers, wine sup-                                                                                                                                                              blind at the edge of a small pond
Wholesalers Association, which           pliers are allowed to use more than      them protection by approving                       dent of the wholesalers associa-                       The practical effect of price                 as snow fell and gusts of wind
represents 75 family-owned dis-          one distributor in a territory, a sys-   franchise laws for beer and wine                   tion, said the group sought the                    postings is that wholesalers cannot               lashed their faces. They went on
tributors, describes its members         tem known as dualing. But Perkins        distributors.                                      franchise laws because it wanted                   be drawn into a price war, especial-              a winery tour. They ate togeth-
as the vital link in the equation. The   said large wineries tend to give            Vintners and brewers cannot                     its distributors protected “from                   ly for beer, industry experts say.                er. And they talked business.
group says the state benefits from       wholesalers exclusive territories.       ask to see a wholesaler’s books as a               overnight terminations.”                               The wholesalers say the price                     Lashbrook discussed his
the system because wholesalers              The wholesalers say territories       condition of renewing an agree-                       Ghosh, the U-M marketing pro-                   postings protect small merchants                  concerns about a federal law-
help assure the collection of all tax-   are good for consumers because           ment and cannot set a wholesaler’s                 fessor, said of the wholesalers:                   by allowing them to buy beer and                  suit filed by a handful of wine
es due from brewers and wineries.        merchants are assured of being           prices or force a wholesaler to con-               “Unless and until you really do bad                wine for the same price as big na-                connoisseurs seeking the right
    Wholesalers must inform the li-      able to buy all brands carried by        tribute to any local or national ad-               things, you’re basically assured                   tional chains do. Volume discounts                to buy wines directly from out-
quor commission of all the beer          their wholesalers, regardless of         vertising fund controlled by the                   you are going to get the business in               on wine and beer are not allowed.                 of-state wineries, Richardville
and wine they buy for resale. Beer       their size or location.                  manufacturer.                                      perpetuity.”                                           Critics say the price rules are               said. If the suit succeeded, con-
and wine makers also must report            Mrinal Ghosh, assistant profes-          The law, in effect, also makes it                                                                  more about protecting the whole-                  sumers could bypass Michi-
all shipments to wholesalers. The        sor of marketing at the Stephen M.       nearly impossible for a brewer or                  Price protection                                   salers’ bottom line than creating a               gan’s wholesalers and retail
various records allow the commis-        Ross School of Business at the Uni-      winery to fire a wholesaler, unless                   Michigan’s beer and wine dis-                   level playing field. And even                     outlets and buy directly from
sion to verify that excise, or com-      versity of Michigan, said exclusive      a wholesaler commits fraud in its                  tributors are insulated from price                 though small retailers may be                     wineries in California and else-
modity, taxes are paid, the whole-       territories have value.                  dealings with a supplier, fails to                 wars and can’t give volume dis-                    helped, the critics say, anticompet-              where.
salers say. The taxes amount to             One benefit is that manufactur-       comply with its agreement with its                 counts to large customers, such as                 itive controls harm consumers.                        “That could do damage to the
about $50 million a year.                ers deal with only one distributor       supplier, sells outside designated                 Costco, Meijer or Farmer Jack.                         “In every other facet of U.S. in-             wholesalers in Michigan,” Rich-
    Critics, though, say the whole-      in each territory, giving them some      territories or loses its state license.               Under state rules known as                      dustry, quantity discounts are a                  ardville said.
salers mainly are interested in pro-     control over the freshness of the           It’s rare for a wholesaler to lose              price postings, beer wholesalers                   fact of life,” said John Taylor, asso-                The case landed before the
tecting their monopoly. The trade        beer. They can dictate storage           its license. Perkins said the state                must tell the Liquor Control Com-                  ciate professor of marketing and                  U.S. Supreme Court, where the
group’s members control the dis-         temperatures in the wholesalers’         has not revoked a wholesaler’s li-                 mission how much they charge re-                   logistics at Grand Valley State                   State of Michigan defended the
tribution of 98 percent of the beer      warehouses and buyback policies          cense in his 27 years with the agen-               tailers for every product. If a                    University and a scholar with the                 laws at taxpayer expense. A de-
sold in Michigan and more than 90        for outdated beer on store shelves.      cy.                                                wholesaler lowers a product price,                 Mackinac Center for Public Policy,                cision is pending.
percent of the wine. The rest is ei-        “Exclusivity helps you maintain          The franchise law also allows                   the company must tell the state                    a think tank in Midland.                              Basham said the trip was
ther distributed by small, specialty     that brand integrity,” he said. “The     the owners of these businesses to                  and keep the price the same for at                     “There’s almost no sector of in-              simply a hunting outing with
wholesalers or sold directly to con-     distributor is responsible for the       pass ownership of the company to                   least 180 days.                                    dustry where we require that small                friends.
sumers by in-state wineries and          freshness of the beer.”                  family members when they die or                       Wine wholesalers must file a                    buyers be allowed to buy at the                       Lashbrook said the legisla-
small brewers.                                                                    retire, and the breweries and win-                 quarterly schedule of prices                       same price as bigger buyers.                      tors reimbursed him for their
    Harry Schuhmacher, editor of         Lifetime guarantees                      eries cannot stop those transfers.                 charged to their retailers and can-                There’s no economic logic to that                 rooms. Disclosure statements
Beer Business Daily, a daily news-          Michigan’s wholesalers have           The family-owned businesses tend                   not change those prices without                    whatsoever.”                                      show he spent $82.35 on food
letter for industry executives, said     made it tough for brewers or win-        to be passed from one generation                   commission        approval.   Price                                                                  and beverages for each lawmak-
every state has a system for regu-       eries to fire them.                      to the next.                                       changes on wine must remain for                    Contact JENNIFER DIXON at 313-                    er.
lating alcohol sales and distribu-          In 1984, the Legislature granted         Dennis Hybarger, vice presi-                    at least 14 days.                                  223-4410 or                      Richardville said the trip was
                                                                                                                                                                                                                                          low-key — and cold more than
                                                                                                                                                                                                                                          anything else. “It was not all
                     In Michigan, 2.35 gallons, or 11.90 bottles, of wine are consumed per adult per year.                                                                                                                                that extravagant,” he said. “It
                                                                                                                                                                                                                                          wasn’t swanky.”
                     Sources: Michigan Liquor Control Commission and Wayne State University
                                                                                                                                                                                                                                          By Jennifer Dixon

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