MSA

Spirits Revenue Legislation Proposals

1. Make legal the use of Off-Premise (Retail store) tasting of spirits. Each “sampler” will have extensive training and education on proper pouring as well as training on the checking of ID’s.

Spirits producers will only sample premium spirits. It has been shown in other markets that sampling events can sell up to $5000.00 per event in incremental impulse sales. With the state making a 65% markup plus sales tax the state can make up to $3250.00 per event in incremental revenue.

Each event held will need a single use sampling license to be attained with approval by the state of Michigan at a per event cost of $50.00. It is estimated that on an annual basis 1200 individual sampling events could be executed with an estimated state revenue of $3,900,000 in additional sales. The fee for the use license will also net $60,000.

New Revenue to Michigan: $3,960,000

2. Value added packaging is a marketing tool that allows a spirits producer to sell a bottle of a spirit to a consumer at the same price point with an added value to the consumer. For example, martini glasses, cocktail shaker, flask, etc. Currently Michigan does not allow these packages to include a free gift of a non-alcoholic carbonated beverage (Cola, tonic, soda, etc.) If Michigan would allow these packs then they would see an incremental increase in sales instantly. It is estimated that as many as 50,000 cases of spirits would be gained as consumers would purchase more product as a result. If the average case of profit sold by the state is $50.00 per case then this would yield a revenue increase of $2,500,000.

In addition, there is the increased revenue that can’t be easily quantified by allowing spirits producers to make boxed packs that allowed specific drink recipe ingredients. This approach, in the long term, can switch more consumers to spirits from beer or wine. Michigan would benefit, because the state makes 50 times the revenue on spirits than beer and wine.

New Estimated Revenue to Michigan: $10,000,000 annually.

3. Michigan current Authorized Distribution Agent (ADA) structure is a model that is in dire need of an update. The two spirits distributing partners currently are operating at a loss as current revenue models are not providing a sufficient rate of per case delivery to allow them to operate effectively. Under the existing ADA Act, each ADA is paid a fee of $8.32 per case to deliver the product. This rate has not increased since 2006.

The main reason for the loss is due to split cases. In almost all markets nationally, when an account orders product in less than a full case a “split case fee” is imposed on that bottle. Rates nationally vary between $4.80 a case to $19.60 a case. (At $4.80 a case buying one loose bottle of product would cost the account $.40 cents more, a cost that can be passed on in their pricing). There is currently precedent in Michigan with a split case fee used in wine delivery. The average split case fee for wine is $9.80.

Of the 6.23 million cases of spirits sold in Michigan, currently 60% of all volume is sold as a split case - (3.73 million cases). If the ADA was allowed to charge a $7.60 per case split case fee, it would create a $28,340,000. The fee could be split equally between the State and the ADA – both entities would net $14,170,000.00 annually. This amendment should also include a prohibition on suppliers being responsible for future fees.

New Revenue to Michigan: $14,170,000 annually.

4. Michigan’s spirits pricing model is very non-competitive versus the border states of Indiana and Illinois. As a result there are very organized groups who are bootlegging goods from these neighbor states. Bootlegging losses to Michigan account for over 15,000 estimated cases a year. These cases are always higher end as the ability to make profit is better for the bootleggers. A 2008 report from the Michigan Liquor Control Commission summarized, “that illegal importation of alcohol into Michigan strips the State of at least $14 million each year, including product cost, mark-up and specific taxes, but not including sales tax and business income tax.”

Measurers must be taken to stop the bootlegging of liquor into Michigan. Measures must include increasing the penalties to those bootlegging the product. Additionally, enhanced penalties for the on or off premise accounts must be implemented. These penalties could include a 180 suspension of their liquor license for a first offense, followed by a total revocation of the license for a 2nd offense.

MLCC and State Police should also step up enforcement of the border traffic and help to stop this revenue stealing practice. Adding dedicated state troopers to combat the illegal importation of spirits (and cigarettes) could easily self fund itself ten times over.

New Estimated Revenue to Michigan: $7,000,000

5. Michigan’s current policy on couponing or rebating is very antiquated. Rebates are allowed but must be mail-in only. A majority of states allow instant coupons that are redeemed at time of purchase. The current redemption on an aggressively funded mail-in rebate programs of several dollars per bottle may have only a 4% redemption percentage. This is currently not a very valid tool in driving sales of spirits or state revenue. If the state allowed the use of instant rebates (coupons), the spirits producers would aggressively market their goods with this tool. Spirits prices on premium goods would decrease without any impact on state’s margin. The resulting effect is a large increase on premium goods, consumers purchasing more bottles, and dramatically increasing state revenue. Industry experts expect an $8,000,000increase in revenue with the legal use of instant rebates.

New Revenue to Michigan: $8,000,000

If these 5 points are put into effect the state would gain an estimated $43.1 million in annual revenue. The spirits industry for years has been one of the top five sources of income to the state, all while the industry has been forced to operate under antiquated rules that have only held back Michigan’s ability to fully maximize the revenue potential of its monopoly on spirits. Now is time to make these changes.