October 10, 2006 Board Room Alcoholic Beverages Division
Members Present:	Gayle Collins Mary Hunter Scott Doll Jim Clayton Rick Hunsaker
Staff Present	Lynn Walding Jim Kuhlman Judy Seib Linda Cox
Guests Present:	Jenny Tyler – Anheuser-Busch Ted Powers – Anheuser-Busch Sheila Douglas – Iowa Wholesalers Beer Distributors Association Jerry Fleagle – Iowa Grocers Industry Association Bob Fahr – Fahr Beverage, Waterloo Lyle Stutzman – Johnson Brothers Dick Stoffer – Hy-Vee Cal Hultman – Miller Brewing Bob Hunt – Coors Brewing Company Mike Brewington – Iowa Beverage Rick Tierney – Iowa Beverage

Call to Order

Chairperson Mary Hunter called the meeting to order at 1:32 PM with a quorum present.

Minutes of Previous Meeting

Financial Report

Jim Kuhlman reported year end sales were very strong for the fiscal year ending June 30th. Sales were up 9.6% in dollars and volume was up about 7% in bottles, gallons and cases. The average sale amount per gallon in FY06 was $43.45 compared to FY05’s total of $42.36 resulting in a 2.6% increase over last year.

In September, sales were up $1.5 million for the month; year-to-date sales through the first quarter were up $3.9 million for the equivalent of 10.7%.

In previous years, the Division and brokers have hosted an annual holiday show in October. In lieu of the show this year, the Division allowed the brokers to take holiday orders directly from the retailers during the month of September. Suppliers offered deep discounts for the month of October anticipating that retailers will take advantage of the discounts for their holiday product.

Kaizen Event Update

The division held a second Kaizen Event September 25 – 29th dissecting the accounting invoice process and the beer wholesalers’ tax collection process. Jim Kuhlman commented that the Kaizen Event is unique in that decisions made during the weeklong process are implemented during the week of the Kaizen or the following week if at all possible. Both Mr. Kuhlman and Mr. Walding explained the process as illustrated on the many notes posted throughout the board room diagramming each step taken in the invoice and tax collection process. Each function was analyzed to see if that particular function could be eliminated or changed to streamline and automate the process. The beer tax collection process was streamlined from 54 steps to 20 steps. Although the invoicing process resulted in fewer step reductions, there were several internal changes made that will assist in the process. According to Mr. Kuhlman, the Kaizen event identified areas where the division can now move forward with IT staff and outside vendors to automate and improve the process. The division has purchased equipment for the drivers to scan returned items in the field resulting in instant credit and improved customer service. In addition, the in-house workload will be reduced.
Mr. Walding added the three key elements are: education, renovation and automation. The process is now set to go forward with the automation which will allow the beer wholesalers to pay their taxes on-line.

Future Kaizen Events will include the Licensing Division as well as possibly revisiting the Order Entry Division to make further improvements.

Warehouse Update

The Division assumed the warehouse duties in May resulting in the Division assuming both the warehouse and trucking operations for the first time since 1991. Lynn Walding reported the following items have been or are being addressed:

1. General Services has issued bids for fork lifts, double pallet jacks, and a scissors lift.
2. A person has been hired to clean full time in the warehouse area.
3. An architect has been consulted regarding the possibility of using an energy savings insulation material that lets light through to replace the existing windows.
4. Negotiations have taken place with a vendor for recyclable materials (cardboard, paper, plastic and glass).
5. The Division no longer allows vendors to ship product on slip sheets. The Division has gone from buying pallets at a cost of about $20,000 a year to selling them for an estimated yearly gain of $60,000.
6. The dock doors will be retrofitted and the warehouse restrooms will be redone.
7. Staff has been visiting other warehouse to glean ideas on the best way to utilize existing space and increase the vertical space in the warehouse to carry more products. The goal is to install racking in the spring without disrupting regular business hours or closing down the operation.
8. The Division is working toward eliminating the Special Order Products and stocking an additional 3,000 to 4,000 items. Slide racking would allow the Division to add significantly more product in a small amount of space.

Proposed Rule for Instant Rebate Coupons

Lynn Walding gave a brief overview explaining the definition of an instant rebate coupon. The commission packet contained a draft Administrative Rule proposal based on the draft rule presented by Anheuser Busch at the June commission meeting. The commissioners were also given copies of two Attorney General Opinions – one written by Lynn Walding in 1994 when he was an Assistant Attorney General and the other written by Assistant Attorney General John Lundquist in 2003. Mr. Walding gave a brief overview of the two A. G. Opinions. He also talked about the Costco Case challenging Washington’s legislation that restricts certain practices. Washington lost that challenge.

In September Mr. Walding met with the liquor distributors regarding the coupon issue. Although the Iowa ABD is required to sell spirits at the same price without regard to quantity purchased or distance of delivery, the law allows suppliers to give discounts provided they sell it at the same price to everyone. The brokers publish their promotions in the monthly ABD News publication so the Division knows what deals are being offered to retailers; however, that is not the case with wine and beer.

Mr. Walding also met with Miller Corporate and Miller wholesale distributors who were concerned about regulating and restricting coupons. A major item of concern was the stipulation that coupons could not be over $1.00. The Miller contingent also suggested that 15 days written notice of the instant rebate coupons promotion gave too much notice to the competition. Following their meeting, Mr. Walding received a letter from Miller Corporate stating that Miller “strongly opposed” the model draft proposal presented by Anheuser Busch. The Miller representatives have not seen the revised draft proposal. The revised draft proposed rule eliminates the stipulation that coupons can not be over $1.00 and requires only two days written notice. The Miller representatives appear to be against the general concept of initiating a rule arguing that two-tier pricing is against the law and the Iowa Alcoholic Beverages Division needs to regulate existing laws.

Administrator Walding also received a brief email from DISCUS stating they also oppose the rule. DISCUS did not understand that they would still be allowed to give coupons. After explaining Iowa’s system to them, DISCUS does not appear to have a problem with the rule.

Mr. Walding suggested the internet would be an easy way to track the coupons. The subpoenas issued last summer revealed that wholesalers are not tracking who receives and redeems coupons. As a result the ABD has no way to verify if the coupons are being supplied to everyone in the wholesaler’s market area. If the Commission proceeds with the proposed rule and it is implemented, the ABD will create an on-line system to monitor the coupons. The supplier or wholesaler will be required to register the offer on-line, state who will receive the offer and the timeline for the offer. This will provide transparency for competitors, retailers and regulators.

Another issue of concern is the coupon tie-in promotion. The example given was the coupon might be good for $3.00 off Kingsford charcoal with the purchase of a particular brand of beer. In the example given, the coupon is paid for by the non-alcohol entity (Kingsford charcoal). The practice is legal according to Assistant Attorney General Lundquist.

Mr. Walding explained the process for adopting an Administrative Rule. If the Commission chooses to adopt the proposed rule or a similar one, the rule is filed with the Administrative Rules Review Committee which begins the process. A public hearing will be held and the rule will come back to the Commission for approval before it takes effect. The legislature may also intervene at some point.

There was a great deal of discussion regarding “market area.” Commissioner Doll explained that the instant rebate coupon is generated from the supplier who determines the dollar amount. Mr. Doll’s distributorship has 11 counties in southwest Iowa where he competes against two Miller wholesalers. One Miller distributor has three of the same counties as Commissioner Doll. The other Miller distributor has 14 counties – some of which are in Commissioner Doll’s territory. The distributors compete against each other within their territory or “market area” – not against the entire state. The coupons are distributed to all retailers within their competitive territory. In Commissioner Doll’s case he could have coupons distributed within his territory that competed with only the Miller distributorship that shared the same 3 counties. Commissioner Doll commented it would be fairly simple to define the wholesale territories which are defined by roads and highways not necessarily by counties.

Commissioner Doll expressed his concern about the proposed two day written notice posting period. He stated it is difficult to notify all retailers of a promotion within two days. He prefers 14 or 15 days written notice. Commissioner Doll pointed out that the ABD News with the spirits promotional material is sent out approximately one month in advance. Mr. Walding stated the intent is to serve as a vehicle for retailers to let them know what discounts are available rather than to make sure other wholesalers know what the competitor is offering.

Commissioner Hunsaker asked how the ABD will enforce the rule and what sanctions the wholesaler will face for noncompliance. Mr. Walding stated typically when a complaint is received the Division calls the wholesaler about the issue. According to Judy Seib the Division can impose a fine up to $1,000 per violation. Also a suspension up to 365 days can be invoked. In the most egregious cases the license can be revoked for a period of 2 years. In addition, there could be retribution from the retailer who was not given the instant rebate coupons.

Commissioner Hunsaker commented there are two things not addressed in the proposed rule: 1) the geographic area is not defined and 2) number 5 in subsection c neglects to set an amount for the handling fee. Mr. Walding stated that the public hearings will provide additional input. Based on that input, geographic area can be defined if needed. According to Ted Powers from Anheuser Busch the handling fee is generally a standardized customary handling fee paid to the clearing house.

The wholesaler who distributes the coupon will be responsible for posting the coupon offers on the website. Mike Brewington from Iowa Beverage asked what happens when the brewery offers a coupon in the state (as happens about 60% of the time) but the wholesaler as an independent business person decides not to offer the coupon. Mr. Walding stated an option is to have the supplier post the statewide or territorial offer.

Mr. Brewington pointed out that the consumers, not the retailers, are the recipients of the coupons. Mr. Walding responded there have been allegations made by industry members that there is two-tier pricing taking place. The retailers are not offering the coupon to the consumer; or they are offering the coupons to select retailers resulting in giving one retailer an unfair advantage over another retailer. Mike Brewington suggested there is no need for a new rule. If wholesalers or brewers are violating the law, the Division needs to enforce the existing laws. A great deal of discussion ensued.

Bob Fahr from Fahr Beverage in Waterloo suggested that the proposed rule include the requirement that the wholesaler document 1) the coupon promotion, 2) how many coupons went to each retailer, and 3) the number of coupons redeemed. He also suggested including scan backs in the proposed rule. Commissioner Doll agreed scan backs should be included. Commissioner Doll gave the following explanation of a scan back: “A brewer tells us one convenience store chain, if you buy Budweiser 12 packs, I’ll give you $1 off on every one you scan. You prove to me that you sold it and I’ll give you $1 back.”

Lyle Stutzman from Johnson Brothers explained the wine industry generally offers coupons in conjunction with the purchase of another product. In many cases the coupon offer is for $1.00 off a non-wine product and is usually paid by the non-entity product. If the consumer does not purchase the correct item in the correct size, the cash register will reject the coupon. Mr. Stutzman also commented that he does not get enough coupons for every store so the coupons are usually distributed to those stores who sell the most of that particular product. The coupon is usually placed on the collar of the bottle or on the display. Mr. Stutzman would be glad to publish his coupons in his monthly price book which is a public record.

Commissioner Hunsaker commented the Commission doesn’t want to write a rule that is not enforceable. He suggested that the Division cares about who is paying for the coupon even if the coupon is paid by the co-product because it could become two-tier pricing. If all coupons became co-product coupons it would render the rule ineffective. There was a great deal of discussion regarding co-product coupons.

Commissioner Clayton worried that a sale might not take place with the instant rebate coupon. Jerry Fleagle from the Iowa Grocers Association reminded the commissioners that it is mail fraud if a retailer accepts coupons for product he doesn’t have. The clearing house tracks the coupons very closely and challenges the retailer in audits to provide proof of purchase. The clearing house has averages for store sizes with ranges of what a store of a certain size will probably redeem. If the retailer gets outside the range, the clearing house usually challenges them.

Commissioner Hunsaker stated that the trade practice rules currently state that coupons have to be offered to everybody and if they are not the wholesaler is in violation. He asked why the Commission needed to create extra rules when there are rules in place.

More regulation is needed in the industry to create a level playing field according to Commissioner Doll. Ms. Seib added that, due to lack of staffing, regulation is reactive rather than proactive. The allegation alluded to earlier is between a retailer and a brewery. The allegation is currently under investigation by the Division. Commissioner Clayton commented that it is a violation of the three-tier system for the brewer to bypass the wholesaler.

Ted Powers from Anheuser Busch stated the new rule does not eliminate coupons. Posting the coupons online makes the coupons more public and provides transparency to the program. Mr. Powers stated he did not know of any issues with redemptions. Anheuser Busch is concerned with the competitive pressure applied when coupons go to one chain or store in a particular city.

Cal Hultman who represents Miller Brewing commented that a rule would not accomplish what the Division wants because it doesn’t get to the point of where the coupons really are. Nor does it clarify where the problem is occurring or who is causing the problem. Mr. Hultman does not see how the areas can be defined unless the state determines the distribution areas for each distributor. He also stated that the legislature was not interested in the issue last year. Mr. Hultman suggested the Division should deal with the problem by enforcing the current law with the penalties provided. Mr. Powers pointed out that the new rule will give the Division the ability to enforce the violations because there will be a tracking mechanism.

Bob Fahr stated that violations are occurring and it is a major issue. He added that the industry has addressed it from a self-policing aspect which hasn’t worked. Regulations on the books are not clear and aren’t being enforced according to Mr. Fahr. He recommends the Commission make concise rules for enforcement and for posting the instant redeemable coupons and scan backs so they are all under the same regulation.

Bob Hunt from Coors Brewing Company asked if the Division has sent a recent circular to industry members restating the current laws and legalities. Mr. Walding responded the Attorney Generals’ Opinions were sent.

Bob Fahr stated the ABD needs field enforcement personnel on the street to enforce the laws and do the audits. When the state had auditors the records were tight and there were no problems.

Judy Seib asked the following questions and received the following responses:

1. Is there any coupon, IRC or any offer made directly to a retailer that the wholesaler is not aware of in your territory?
No – we call on our customers every day so we know what’s going on in the stores.
The brewery tries but they do not control the wholesaler prices, promotions or sales.

2. Are there opportunities where the wholesaler will discount beer or wine without including the manufacturer?
Yes, Wholesalers will discount beer (hot deals) that is close to code to move it out of the warehouse.

3. Does the hot deal go to all retailers or specific retailers with higher turnover rates?
It goes to all; however, some wholesalers do not have the same practice.

4. Is the scan back more subject to abuse than the IRC?
Scan backs are probably more reliable than IRCs.

5. When IRCs are received from the brewery who affixes them to the product?
Coupons are affixed at the retail establishment by the pre-sells who put it on the package. The drivers verify the coupon is on the product at the time of delivery. The coupons are given to every salesman who offers the coupons to accounts who handle the product.

More discussion ensued on why coupons are produced and how wholesalers determine to whom they are going to distribute the coupons.

Mike Heller asked for clarification on the definition of market area. If the definition extends beyond the coupon area, such as quantity discount pricing, that will be a concern to the industry. Mr. Walding replied that the rule applies only to coupons; however, it could set a precedent. Mr. Heller stated that the Iowa Wholesalers Beer Distributors Association has no position regarding the rule. The Association is only concerned that if market area is defined in one area it may have ramifications in another.

Lynn Walding again stated the Commission needs to decide 1) do they want to go forward with a rule or continue with the current practice, and 2) if they do go forward, do they want to pass the rule as defined in the packet or another version. Items to discuss and further explore are set backs, market area and who gets the coupons. Should the list of items on page 2 in section C of the proposed rule be expanded?

Commissioner Collins asked for more information on what and how big the problem is. She stated if only one wholesaler is creating the problem, it isn’t necessary to change the rules. Mr. Walding replied that he has no inside knowledge. Some complaints have been filed and the Division is investigating them; however, few complaints do not necessarily mean that there are few problems. Commissioner Collins stated that she likes the fairness of the rule because the small operator should have the same opportunity for coupons as the larger operators. Discounts by volume are discriminatory according to Commissioner Collins. She wants the retailer and the consumer protected.

Mr. Walding reiterated that coupons are legal. Two-tier pricing is not legal. The question is whether some wholesalers are bypassing the three-tier system with the coupons. The Division currently has no way to coupons. The rule will provide a system with some transparency providing a vehicle for retailers to know what is going on so they can file their complaints and ask their wholesaler for the same discount. A system can be designed that is fairly simple according to Mr. Walding.

Commissioner Clayton stated the Commission should go forward with the process and try to define the geographical market area on a rather specific basis. Commissioner Clayton prefers to deal with the scan back issue separately because it is a more complex issue. He pointed out that under the three-tier system the brewery is not supposed to be dealing directly with the retailer.

Iowa “Native: Wine Public Forums

Lynn Walding explained that a major issue is fermenting in Iowa on Iowa native wine. Iowa native wines enjoy certain benefits such as the exemption from the $1.75 per gallon wine tax when they sell the wine at the winery. They are also exempt from the three-tier system. The winery can ferment, wholesale and retail the product. In addition, 5% of all the wine gallonage tax collected in Iowa from the $1.75 per gallon wine tax goes to the Iowa Wine Development Board. Another benefit is the Class B native wine license is only $25 as opposed to a $300 fee. Most of these benefits are subject to constitutional challenge in light of the Granholm case. The Granholm case was a US Supreme Court Decision that concluded that states have 21st Amendment power to regulate alcohol including wine; however, they have to do it in an even-handed fashion. They can’t discriminate, target or give advantage to the in-state producers over the out-of-state producers.

Mr. Walding briefly described the two native wine business models. Those who are the true native wineries state that business model two cuts into their market share and they cannot compete with them. Business model two argues that the future of wine development in Iowa no longer revolves around the family wine model. Mr. Walding met with the Iowa Wine Growers Association recently to discuss the issue. The Association is somewhat split on the issue.

It was suggested that the Commission hold three public forums at wineries in central, eastern and western Iowa to discuss the issue. The Iowa Wine Growers Association would like to partner with the Commission in holding these forums. The Commission could draft a proposal for the upcoming legislative session or give advice to the legislature on the issue.

Iowa is a reciprocity state which means that other states can ship into Iowa so that portion of the Granholm case does not impact Iowa as much as it does other states; however, out-of-state shippers do not pay the $1.75 per gallon wine tax that Iowa retailers must pay. In addition, the Division has no regulatory control over out-of-state shippers. Several states have adopted the Wine Institute’s legislative language or a variation of the language. Discussion at the forums could include adopting the Wine Institute’s language which would allow the Division to 1) know who is receiving the product; 2) levy the tax on the product; and 3) provide some control over the product if it is sold to minors. In discussions with legislative leaders last session, they indicated openness about creating a regulatory environment for out-of-state shippers into Iowa. Some states have used the Wine Institute’s model or a variation of that model to create restrictions on out-of-state wines from coming into their particular state. A $300 license fee will restrict many from entering the market place. The Iowa Wine Growers Association is concerned that they can no longer ship out-of-state because it cost too much to get into the market.

Another suggestion made at the Iowa Wine Growers Association was to reconsider how benefits are given to the native wineries. Rather than give the 5% from the wine gallonage tax to the Iowa wineries, it was suggested that the Legislature could give an appropriation through economic development or agriculture support.

Mr. Walding is being asked to shut down the practice of wineries bringing in wine for blending under the native wine license; however, there are several operators who will be adversely impacted if he does so. The only way a winery can legitimately bring in wine and sell it is to hold a Class A wholesaler license.

Ms. Seib stated that the native wineries are supposed to file reports of what they ship into their winery for use in the manufacturing or rectifying of wine; however, many are not doing so. In addition, the gallonage tax form requires that the following information be recorded: how much is used, how much is on hand, how much was sold to the retail sector and the amount of tax due the ABD.

Commissioner Clayton asked if there is a way to determine how much wine is a true Iowa native wine. He would like to know how much revenue is lost on wines that are rectified in Iowa or on juice brought in from out-of-state. There are individuals at the ISU Extension who are actively working on producing varietals that will grow in Iowa and they may be able to provide that information according to Mr. Walding.

Commissioner Hunsaker asked if there is a way to evaluate the economic impact (other than taxation) on jobs, property tax and personal wealth that is being built. Mr. Walding answered that the people who advocate for business model two argue that the true developmental growth in the business is business model two; that the family farm wine business is fairly limited. The Iowa native wineries are more about rural economic development and the experience of going to the winery. Mr. Walding stated that if the Commission can draft a legislative proposal with the right language, both business models can co-exist.

Commissioner Clayton suggested looking for a middle ground. He commented that it is not unusual for somebody in an agricultural business producing a native product to supplement if they do not have enough product; however, if the supplemented product makes up the majority of the product (in the case of wine) it probably should not be considered a native wine with the same breaks.

Chuck McGrigg relayed that Bill Nelson, the director of the National Grape Growers Association, can probably answer many of the commissioners questions. Mr. McGrigg stated that the original Farm Winery Acts, now called the Native Winery Act, was truly about manufacturing the product in Iowa and was designed as a result of the Amana Colonies who produced wine with Michigan cherries, etc. He commented that there are ways for the different models to work together.

It was decided that forums would be held in October, November and January. Time and dates will be determined and the commissioners will be notified.

Adjournment

JIM CLAYTON, Secretary