Diageo Takes Tennessee Conflict to Courts

FILED MARCH 31, 2014

Dear Client:

It seems Diageo is not as happy with the Tennessee legislature's decision to table the whiskey bill as they initially purported to be (see WSD 03-25-2014 ). On Friday, Diageo filed a lawsuit against the Tennessee Alcoholic Beverage Commission (TABC), specifically director Keith Bell. In the complaint, the company revealed that its biggest problem with Tennessee laws is that the state prohibits all spirits manufacturers from storing their spirits anywhere besides the Tennessee county in which they were made or an adjacent county. Diageo argues that law violates the Commerce Clause.

The Storage Statute, as its called, was enacted in 1937. However, Diageo claims the TABC has never actually cited anyone for violating it. That is, until March 20, when the the George A. Dickel & Co. got a note from the agency. Although Diageo does store "some" of the spirits made at the Dickel Distillery in Kentucky warehouses, none of the George Dickel product is aged there. But they add that "Dickel may in the future want to store Distilled Spirits manufactured at its George Dickel Distillery... in out out-of-state facilities owned by Dickel."

Moreover, Diageo claims, in order for it to fully comply with the Storage Statute, they would have to move the distilled spirits currently being stored in Kentucky back to Tennessee. In addition, if they had to use only the storage facilities in Tennessee they might have to contract additional storage capacity, reduced their output or move production to out-of-state distilleries.

Thus, Diageo believes "enforcement of the Storage Statute by [the TABC] against Dickel would constitute a deprivation of the rights, privileges and immunities secured to Dickel by the United States Constitution."

In a statement to WSD, Diageo says: "Based on discussions between both parties late Friday we are hopeful that we can come to a mutually agreeable solution on this matter in short order."

IS PREMIUMIZATION SLOWING ON-PREMISE?

Pre-recession consumers were ordering alcohol at 60% of their on-premise visits. As you might expect, that number dropped drastically in the recession to around 30%. That number is steadily building back up, but has not hit pre-recession levels yet. In 2013, only 44% of on-premise visits included a call for alcohol. This data indicates consumers are drinking alcohol less often than before the recession, but according to Technomic data, consumers are drinking more per visit, which is a trend unique to the pre-recession market, said Technomic's senior director Donna Hood Crecca said at the VIBE conference.

What are they drinking more of? Tequila, rum merlot, and beer according to Technomic. The percentage of consumers who say they drink three or more tequila or rum mixed drinks per occasion gained 10 and 11 share points in 2013,while consumers who say they drink 3 or more glasses of merlot per occasion gained 5 points.

Donna says we've seen similar trends before. In the late '90s and early 2000s the consumers were all about "drinking less, but drinking better." So Technomic wanted to see if current trends were an echo of that time period.

However, when they looked into it, they found a different trend happening. In 2011 and 2012, dollar growth significantly outperformed volume growth, which is generally a sign of premiumization trends. While dollar sales grew nearly 5% in 2011 and 3.5% in 2012, they slowed down a bit in 2013 to 1.6%. "That's an indication that premiumization may be slowing and that could really impact your dollar sales in the year ahead."

WSD BRIEFS:

SAZERAC'S A. SMITH BOWMAN DISTILLERY HAS RELEASED ITS FIRST extension to the Abraham Bowman collection for 2014: Abraham Bowman Limited Edition Double Barrel Bourbon. The new 100 proof product is available now for a suggested retail price of $70.

GLAZER'S HAS MADE SEVERAL EXECUTIVE CHANGES in its Diageo/Moet Hennessy division for Texas and Missouri. David Ballew will assume the role of svp sales execution for the division, Steve Cohen is moving to the new position of svp marketing and performance for the division, Gary Sanders has bee promoted to svp, Texas - DMH Division, and Jon Hobbs has been promoted to the role of svp, Missouri - DMH Division.

Until tomorrow, Emily

"Insomnia is a glamorous term for thoughts you forgot to have in the day."
- Alain de Botton

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We are happy to announce that our Wine & Spirits Daily Summit is taking place in Denver, Co at the Four Seasons Hotel on June 5, 2014. Come join executives across the industry, in addition to Wall Street analysts, advertising executives, consultants and more.

So far our speakers include Kevin George, svp, global cmo for Beam Inc.; David King , president and coo of Anchor Distilling Company; Mike Lakusta, ceo, EthniFacts speaking on multicultural consumer trends; Danny Brager , svp, Nielsen; John Beaudette, ceo, MHW Ltd.; Donna Hood Crecca, senior director, Technomic; a craft distiller panel with Sam Seiller, evp & managing director for Angel's Envy, and Melkon Khosrovian, co-founder of Greenbar Distillery; and an on-premise retailer panel with Mac Gregory, director of food and beverage, North American division for Starwood Hotels & Resorts Worldwide.

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