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Chaldeans Watch Closely as Costco Battles with Distributors
By Crystal Dallo :: Monday, December 31, 2007 :: 30068 Views :: Article Rating :: Business & Finance, Chaldean Caucus

California, USA - Chaldeans have long complained of the unfair practices of distributors.  However, the lack of an organized business voice has left Chaldean store owners with slimmer margins and less service.  “Distributors have long capitalized on the backs of Chaldean community who maintain a market for products in areas where retail giants fear to tread,” says Nick Mansour, owner of Gas and Go in Dearborn, Michigan.  “They pre-price their products, refuse to take damage goods, and treat the businesses with a lack of respect.  How can we compete and give customers a better price when the distributor forces you to charge a certain amount.”

Lobbyist groups like the Anti-Saloon League long convinced U.S. politicians that it was in the country’s best interest to give distributors free market protective status.  They made the case so effectively that, even after Prohibition was lifted in 1933, most states insisted on keeping alcohol manufacturers far away from alcohol sellers. The favored solution: a three-tier distribution system requiring manufacturers to sell to wholesalers, and wholesalers to sell to retailers.

A system Chaldeans have long contested as a state sanctioned monopoly that hurts the consumer.   All that may soon change, when giant warehouse retailer Costco weighs in on what Chaldeans have long said, “Distributors are anti-competitive.”   

“That three-tier structure is still in place in most states today,” says Rena Jadan, a Chaldean Caucus committee chair for business law and policy.  “We are closely watching a federal court case filed in Seattle which is now challenging the three-tier regime as outdated and anticompetitive.”

In 2006 Costco Wholesale won an antitrust lawsuit challenging its home state's three-level arrangement. The state then appealed, arguing that the 21st Amendment ending Prohibition gave states the authority over alcohol regulation.

The Ninth Circuit Court of Appeals is expected to rule on the case soon.  “Chaldeans are rightful concerned over the decision,” says Jadan.  “The courts ruling would have widespread ramifications for every store owner and beer and wine industry.” 

Depending on how the court rules brewers and wineries nationwide could eventually gain the right to sell their products directly to retailers.  Distributors and their lobbyist are opposing the effort alleging that state tax collectors could lose substantial revenues. The Costco case could "radically change the rules of the game," says Jadan.

Costco, like Chaldeans have long wanted, is the right to buy beer and wine just as it does soap or soup cans—bypassing middlemen and negotiating big discounts from manufacturers. While warehouse clubs could house thousands of cases of liquor, beer, and wine, Chaldean store owners see the benefit of having multiple distributors instead of state protected or exclusive distribution agreements. 

“In Michigan, companies like Powers Distribution in Oakland County Michigan or Great Lakes in Wayne County, leave the Chaldean store owner at the mercy of the distributor.  They have the exclusive rights to sell their product at any price.  The only thing keeping them in check is competition from another product.  Chaldean store owners want competition within the same product line,” says Jadan.  "I would love to have a business where everyone had to buy from me."

At the time Costco sued, in 2004, retailers were paying as much as 8% more for Washington-made wine and beer in-state than it was for the same product shipped to California.  The same could be said about the prices in Michigan. 

Distributors have already seen their onetime monopoly eroded in states where wineries, for example, can sell directly to customers on location, or indirectly over the Internet. But the Costco case represents the most serious threat yet to the distributors' bottom line. Huge chains, such as Costco, tend to be their biggest and most profitable customers, selling 40% of the $90 billion in beer gulped down each year and 38% of the $27 billion in wine.

Which side should Chaldeans root for? Like always, the same side that is best for consumers.  Experts agree that the free market is always best.  Wholesalers and distributors add a markup of about 25%, on average—which flows right up to the price customers pay.  The exclusive agreements are anti-competitive and restrict competition.