No Sympathy for the Devil

Industry Reaction to the Raid on Southern-Glazers

Everyone agrees it’s not a good thing when Internal Revenue Service (IRS) agents arrive at your door with representatives of the Alcohol and Tobacco Tax and Trade Bureau (TTB) in tow. They aren’t there to congratulate you on a job well done. This simple fact explains why the appearance of agents of the IRS and TTB at the doors of the Northern California hub of the largest wine and spirits wholesaler in America last Friday spurred a good deal of discussion over what Southern-Glazers had done wrong.

Besides an answer to that question, what’s also needed is an explanation of the poorly disguised sense of glee that accompanied reports and discussions of the unusual raid. I don’t have an answer to that first question, but I do have an answer to the question of glee.

If you asked 100 people in the wine and spirits industry their opinion of Southern-Glazers, the one person who expressed sympathy and support would be the person who is paid by them. If the combined authorities of the IRS and TTB impose sanctions and fines for wrongdoing upon the wholesaling behemoth that is Southern-Glazers, there would be multiple expressions of surprise given the company’s power in the industry. However, there would be an equal if not larger number of expressions of joy and glee since this company is near-universally disliked and distrusted for its regular imposition of control over the industry—and almost always in the service of Southern-Glazer’s bottom line.

The source of the dislike of Southern-Glazers is the fact that they (along with Republic-National) have such control of the wine and spirits distribution marketplace in so many states that they effectively control the fate of retailers. Retailers that want the top wine and spirit brands on their shelves that most consumers want and that pay the retailers’ bills MUST deal with Southern-Glazers and Republic.

Consider that according to a lawsuit filed against Southern-Glazers and Republic by distribution marketplace Provi earlier this year, Southern-Glazers and Republic together control more than 80% of the spirits distribution market in ten states. In 10 more states, they together control more than 50% of the spirits distribution marketplace. As for wine, together Southern-Glazers and Republic control 50% or more of the distribution market in 18 states, including California and Florida. Moreover, in 8 of those states, these giant wholesalers control 80% or more of the wholesale wine marketplace.

Due to the market control exerted over retailers and on-premise licensees by Southern-Glazers, what you get is the functional equivalent of a “Tied House” whereby a licensee must do business with Southern-Glazers or see its business fail. Consider the power this situation confers upon Southern-Glazers. Under such circumstances, Southern-Glazers could quite easily use its market power to intimidate and coerce the retailers and on-premise licensees that are tied to the wholesaler by dint of their market power.

In fact, back in 2017 one San Jose on-premise joint actually filed suit against Southern-Glazers that eventually became a class action complaint. In the suit all manner of illegal and coercive actions were alleged against Southern-Glazers. Consider the list of allegations leveled in that case:

a, Adding so-called authorized purchasers on Representative Plaintiff’s and class members’ Direct Warehouse Sales Authorization to Purchase Forms, without their knowledge or consent;

b. Leading Representative Plaintiff and members of both classes to misreport their tax obligations to state and/or federal taxing authorities;

c. Compelling Representative Plaintiff and members of both classes to re-state their tax obligations for prior tax cycles to state and/or federal taxing authorities, and to incur time and expense in retaining legal and financial professionals therefor;

d. Selling liquor to bars/restaurants/clubs that do not possess liquor licenses using Representative Plaintiff’s and class members’ liquor license numbers and/or their Southern account numbers;

e. Singling out customers who pay C.O.D. and/or are known to maintain poor accounting practices (e.g., for “ghost shipping” practices);

f. Selling liquor to third-parties on Representative Plaintiff’s and class members’ accounts at lower prices than to legitimate/licensed purchasers;

g. Selling liquor to different parties at different prices, in violation of federal alcohol regulations and state and/or federal law;

h. Permitting its officers, managers, agents and/or other employees to purchase liquor on Representative Plaintiff’s and class members’ licenses/accounts, using cash and/or charging class members for the liquor, then storing (i.e., not delivering it) in order to meet quotas (and in violation of 4 CCR §76);

i. Permitting its officers, managers, agents and/or other employees to give away liquor, by pricing such at $.01;

j. Permitting its officers, managers, agents and/or other employees to give away liquor by printing sample labels for full regular-sized bottles;

k. Permitting its officers, managers, agents and/or other employees to purchase liquor using class members’ liquor license numbers and/or their Southern account numbers, temporarily store the liquor (in violation of 4 CCR §76), then returning the liquor later, in order to meet quotas, oftentimes without refunding the money;

l. Using so-called “A Forms” (which lack bar codes and invoice numbers and are, thus, nearly impossible to locate) to facilitate liquor transactions, in violation of 4 CCR §17;

m. Not providing annual invoices, unless requested, in order to conceal the practices cited herein;

n. Permitting its officers, managers, agents and/or other employees to purchase liquor “off-invoice”;

o. Permitting its officers, managers, agents and/or other employees to sell “off-invoice” liquor to retailers without licenses, or to retailers who will then resell the liquor to other retailers, in violation of state and/or federal law;

p. Permitting its officers, managers, agents and/or other employees to sell “off-invoice” liquor to private individuals, in violation of state and/or federal law;

q. Threatening to cut off supplies to customers who do not buy a sufficient quantity of liquor, or liquor of select varieties;

r. Refusing to sell products to class members without them purchasing “tie- ins” (other types of liquor than those the customer wishes to purchase);

s. Giving kickbacks, free samples and other unlawful incentives to restaurants/retailers (in violation of, inter alia, 4 CCR §106), in order to keep them from reporting the violations specified above;

t. Working and/or conspiring with third-parties to allow for the unfair/unlawful practices above and below;

u. Ignoring complaints from sales representatives and/or retailers about the unfair and unlawful business practices detailed herein

A federal judge dismissed this case for lack of specific evidence of the alleged violations of law. However, the list of allegations made against Southern-Glazers was oddly specific and wide-ranging. Moreover, they are precisely the kind of actions that one would expect to see invulnerable, coercive, and market-controlling entities undertake.

These sorts of violations of the law would also implicate federal taxes.

Don’t get me wrong. I have no idea why the IRS and TTB arrived at the doors of Southern-Glazers (we are about to find out how good the investigative arm of the American wine media is). I don’t know if there are concerns about tax evasion, about anti-competitive behavior or about tied house violations that implicate taxes. I do understand, however, why there are lots of smirks going around the industry and why I’ve not heard a whisper of sympathy for Southern-Glazers.