By Aaron Reiss
By Angelica Leicht
By Dianna Wray
By Aaron Reiss
By Camilo Smith
By Craig Malisow
By Jeff Balke
By Angelica Leicht
For decades, wholesalers have been allowed to basically write the rules by making generous campaign contributions to state legislators. The result is a near-monopoly on the sale of alcohol at the wholesale level, leaving bars and restaurants with little choice of who they buy from -- or even when and how they pay.
"The current regulatory scheme is not set up to protect the public," says Howard Wolf, a retired Austin lawyer appointed to the Sunset Commission by Lieutenant Governor David Dewhurst. "It's set up to protect monopolies."
Three companies -- Glazer's Wholesale Distributors, Block Distributing and Republic Beverage Company -- distribute more than 90 percent of the wine and distilled spirits in Texas. Buy a Budweiser, Tecate or Miller Light in Houston, and it could have come from only one place after it left the brewery.
"Brewers and distillers are forced to take their product and drive right by the retailer," says Wolf. "Instead, it's taken to a warehouse and brought right back. Who pays? You do."
And when retailers get their shipments, the beer has to be paid for upon delivery. (Liquor and wine distributors can extend a few weeks' credit.)
Rick Donley of The Beer Alliance of Texas, a lobbying group for Houston-area beer wholesalers, explains that beer wholesalers are collecting state taxes in an industry where the average length of a liquor permit in the bar and restaurant business is just two years.
But Shivers argues that wholesalers in any industry take risks when they extend credit, and that decision is best ruled by market forces. He says the state law requiring payment for beer on demand has put the state in the role of a collection agency for private interests.
But beer wholesalers are fighting hard to keep the demand-payment rule on the books, despite criticism in the Sunset report. Not only does the law ensure beer wholesalers get paid, it also provides another revenue source: If the money were allowed to sit a few extra weeks in Wal-Mart's coffers, for example, Wal-Mart would be pocketing the interest.
Should the demand-payment rule be rescinded, millions of dollars each year effectively would be transferred from beer wholesalers to retailers. John Rydman, owner of Spec's liquor stores, says, "Would I like to have beer on credit? Sure. Cash flow is cash flow, and my profits would go up immediately."
Wolf calls the demand-payment requirement "a classic case of the industry writing the rules."
Buy a beer at Brian O'Neill's Restaurant and Irish Pub in Rice Village, and it might cost more than it would at The Ginger Man next door. Profiteering isn't part of it -- the Alcoholic Beverage Code is.
The Ginger Man sells only beer and wine, so it pays the same 8.25 percent tax rate as for most other goods sold in Texas. Places like Brian O'Neill's, which serves up liquor as well, are saddled with a 14 percent tax on all alcoholic drinks. And that tax is on gross receipts, effectively making it about 16 percent.
"If you're going to tax liquor, then tax it," says Alex Brennan, owner of Brennan's of Houston. "It doesn't make sense that just because I serve hard liquor, I pay a higher tax rate on beer and wine. I can get just as drunk either way."
The concerns of small entrepreneurs and establishments don't appear to have had much impact on the TABC and its rules. But the arrival into the debates of corporations such as H-E-B and Wal-Mart could bring significant change, legislative observers say.
Both corporate giants have enormous warehouse and distribution systems. Both would prefer to deal directly with manufacturers. Wal-Mart especially owes its success to buying larger quantities of goods at lower prices than its competitors pay.
Many grocery stores would like to open package stores next to their stores but can't, thanks to a TABC rule from the '40s that bans publicly traded corporations from owning liquor stores. Another archaic rule says that an existing liquor store can "absorb" a liquor-store permit obtained by a spouse, parent or sibling, effectively invalidating a separate rule limiting companies to owning five stores.
The effect has been that liquor stores are basically mom-and-pop operations, with one family-owned company typically dominating a region. In West Texas, Pinkie's liquor stores rule. In Dallas, it's Centennial, and in Houston, Spec's.
With 30 stores in the area, Spec's sells more liquor than any package store chain in Texas. Owner Rydman says there's a good reason for keeping big corporations out of the package store business.
Rydman says that California did away with the three-tier system, and then "a few big stores gobbled up the little ones by lowering prices and squeezing out the competition. Then prices went back up.
"The responsibility of selling alcohol works best when the owner is in the community. Big corporations don't feel a responsibility to the community," says Rydman. "Thousand-dollar fines are nothing to them. To us it's a big deal."
"The Texas wine industry is the little kid on the block," says Gabe Parker, who owns the Homestead Winery near Grapevine. "We get slapped around by almost everybody." Like other Texas wineries, Homestead has a Web page, but it's against the law for him to list stores that sell his wine. Even giving directions to his winery over the phone is an offense under the TABC laws.