Gerald A. Dinallo, Jr. Senior Managing Director NABCA 16 th Annual Symposium on Alcohol Beverage Law & Regulation “Who’s Tied to the House?” March 9 – 11, 2009

3 NABCA 16 th Annual Symposium “Who’s Tied to the House?” Gerald A. Dinallo, Jr. Jerry R. Jolly William D. O’Donaghue Morton Siegel

4 NABCA 16 th Annual Symposium “Who’s Tied to the House?”

5 NABCA 16 th Annual Symposium “Who’s Tied to the House?” Suppliers : – 387 suppliers of alcohol the top 10 suppliers account for 73% of volume (NABCA) – $7.1 billion in CY 2008 sold through the control states Wholesalers: – 86 spirits distributors/brokers in the US (DISCUS)

6 NABCA 16 th Annual Symposium “Who’s Tied to the House?” Retail licensees: – 82,674 Off Premise Liquor License Outlets – 190,000 On Premise Liquor License Outlets “Big Box” alcohol retailers (50K+ annual cases and chains): – 64 retailers, thousands of outlets; approximately one third of major suppliers’ sales – Approximately 50 million cases of spirits annually

7 NABCA 16 th Annual Symposium “Who’s Tied to the House?” 1984: 3,911 people for every liquor store (as measured by number of off-premise distilled spirits licenses). – 2007 there were 4, % more people served by a single outlet in 2007 – Larger population equals the opportunity to grow and supply a wider variety of services – Fewer stores per person indicates larger stores; therefore, a trend toward larger retail entities

Wholesaler consolidation continues to accelerate –Top wholesalers larger than most suppliers, with multi- state operations A “pull” versus “push” market: retailers large/demanding –Marketplace dynamics have changed since the 1930s –Historical basis for three-tier system: protect retailers from supplier’s monopoly power and exclusive ties (“tied houses”) –“Big box” retailers now have “tied-house” power 8 NABCA 16 th Annual Symposium “Who’s Tied to the House?”

9 Regulators’ Point of View Public policy rationale for tied-house laws: – promote the state’s interest in an orderly market place – to prohibit vertical integration and dominance by a single producer in the market place, commercial bribery and predatory marketing practices – to prevent the intemperate use of alcoholic beverages. To prevent overly aggressive marketing practices, laws were passed to prohibit giving gifts, premiums, or free goods

10 NABCA 16 th Annual Symposium “Who’s Tied to the House?” Regulators’ Point of View Historically the legislature and industry has only allowed narrowly crafted exception to the tied-house laws to address a specific problem such as brew pubs, stadiums, ownership interest in amusement parks etc. Very difficult to make major changes in law because of competing interest. Despite the states inability to make changes in a global market place it has achieved many of its public policy goals. In general the market for alcoholic beverages is orderly and disciplined and licensees are committed in good faith to comply with the law.

11 NABCA 16 th Annual Symposium “Who’s Tied to the House?” Regulators’ Point of View Consumers have a broad array of convenient choices in both available beverages and in outlets with a wide and diverse option of amenities. Suppliers and retailers have been able to promote their businesses and products in creative ways and in a wide variety of media. The legislature and industry has been successful in passing exceptions to the tied-house laws to continue business development in the hospitality and tourist industries.

12 NABCA 16 th Annual Symposium “Who’s Tied to the House?” The Illinois Experience 1.TIED HOUSE EXAMPLES Traditional- Untouchables Modern- Retailer 2. ILLINOIS PROBLEM Retailer Domination 3. ENFORCEMENT ACTION 4. RESULTS AND IMPACT Greater Competition Consumer Benefits Industry Benefits 5. ENFORCEMENT IS GOOD & NECESSARY!

13 NABCA 16 th Annual Symposium “Who’s Tied to the House?” Legal/Industry Point of View Application of historical principles of the past to the present – industry business practices Identify the historical principle underlying regulatory structure – a control analysis Today’s inquiries on industry business practices The industry today – business model Maximum efficiency vs. regulated industry Enforcement vs. Change

14 NABCA 16 th Annual Symposium “Who’s Tied to the House?” QUESTIONS? THANK YOU!