Briefing Report: Drink-up! Free Sampling of Alcoholic Beverages at Grocery Stores and Retail Locations in California

Wednesday, May 19, 2010

Setting the Scene

One of the great pleasures of shopping at "big-box" warehouse stores and supermarkets is trying free samples of the many tasty products inside. "Would you like to try our cheese of the day?" "This salsa is made from all natural ingredients." "Try our new double-chocolate chip cookies." "Attention shoppers, special today behind aisle three, come and sample a shot of Jack-D." Wha-what? as the "Scooby ears" shoot skywards. Old No. 7? The Tennessee Sour Mash Whiskey? Free shots at the grocery store? Actually, it is not such a far fetched notion. The push is on to expand the opportunities for retail licensees and distillers to be able to host tastings of alcoholic beverages for "consumer education purposes" at off-sale retail licensed premises.

In recent years, the Legislature has been toying with the concept of expanding opportunities for the alcohol beverage industry to offer free samples of their products in a variety of locations. Of course, nearly everyone knows the joy of wine tastings at wineries. Wine tasting has become an important segment of the tourist industry around California's beautiful wine growing regions. Nearly all forms of legal alcoholic beverage products can be sampled at on-sale licensed premises, such as restaurants and bars. Grocery stores are allowed to obtain special licenses to provide free tastings of wine to consumers. So, it is not a stretch to expand such sampling authorizations to distilled spirits as well. Coming later this session, rumor has it, is an effort to allow distilled spirits tastings at supermarkets and liquor stores. To many, such an expansion raises eyebrows. Some question the propriety of such a move. Others see the principle as no different from that which is already legal.

Freedom or Irresponsibility?

Should it be legal to offer adults a limited number of small alcoholic beverage tastings in supermarkets and liquor stores in order that they may make informed purchasing decisions? Or, is it inappropriate for people to consume alcoholic beverages in these settings? This issue raises both economic and moral questions. Some contend that this is a free-market issue and if distillers and retailers want to give away their products for promotional and educational purposes, then they should have the freedom to so. Furthermore, it is a pro-consumer idea that would benefit adult customers in limited retail settings by allowing them the opportunity to taste a small sample before they pay the cost for new premiu m wines, beer, and distilled spirit products.

Others argue that this is simply an irresponsible means of giving away distilled spirits to as many potential customers as possible, in the hopes they will desire more than just the one free drink. Youth and adult shoppers alike will be exposed to free alcohol tastings at supermarkets, large box stores and their local grocery outlets. Communities are already struggling with the impact of over-concentration of alcohol outlets and outdoor advertising. They fear it could initiate a whole new marketing strategy among alcoholic beverage competitors, staging thousands of these "free sample" events throughout the state on any given day.

Nonetheless, tastings are a traditional means of allowing responsible adult consumers to sample and learn about the wide variety of alcoholic beverage products available in the marketplace. There are more than 4,000 brands of distilled spirits products available and 25 other states permit distilled spirits tastings at off-sales licensees' premises. With the unfortunate job market in California, an effort such as this could help bolster both retail and manufacturing sides of the industries. Either way, these are questions legislators will likely face this year as interests within the industry seek to create a new alcohol beverage license category known as an "on-sale distilled spirits tasting license."

Right Here, Right Now

The 21st Amendment to the United States Constitution provides the states with the authority to regulate the manufacture and distribution of alcoholic beverages within their borders. Existing law establishes the Department of Alcoholic Beverage Control (ABC) and grants it the exclusive authority to administer the provisions of the Alcoholic Beverage Control Act (ABC Act). The ABC Act provides for approximately two dozen different types of liquor licenses and five special event permits. An "On-Sale" license is a license authorizing the sale of all types of alcoholic beverages, namely beer, wine and distilled spirits, for consumption on the premises (such as at a restaurant or bar). An "Off-Sale" license authorizes the sale of all types of alcoholic beverages for consumption off the premises in original, sealed containers. Both "on-sale" and "off-sale" licenses are considered "retail" licenses.

Right now, wine, beer and distilled spirit manufacturers are authorized to provide samples to consumers on the premises where the product is made. Tasting rooms at California's wineries are world-famous. Brewers may provide samples at their breweries, as well. An on-sale retail licensee of wine or distilled spirits may "instruct" retail consumers regarding wine or distilled spirits by furnishing up to three tastings per individual per day. These tastings are limited to one-fourth of one ounce for distilled spirits, six ounces of beer, and one-ounce servings of wine. Licensed off-sale retailers may conduct wine tastings in areas of their premises for which they are issued separate licenses for such activity. An off-sale licensee may be issued an on-sale beer and wine license inside the premises of an off-sale licensee for the purposes of selling tastings of beer and wine to consumers who visit the premises or to provide free tastings of wine to consumers. The on-sale area within the off-sale premises must be delineated by marked boundaries which define the on-sale area.

Tastings and Tied-House

Complicating alcoholic beverage licensing issues are California's "tied-house laws" which created a three-tier system governing the manufacture and sale of alcoholic beverages in California. The tied-house laws, which were instituted after the end of Prohibition in 1933, thwart the vertical integration between manufacturing interests, wholesale interests, and retail interests in the production and sale of alcoholic beverages. They are intended to prevent a single company from dominating a market and avert excessive consumption of alcohol because of overly aggressive marketing. Manufacturers are required to sell to wholesale distributors that, in turn, sell to retailers. Neither manufacturers nor wholesalers are allowed to have an economic interest in, or provide anything of value to, retailers. This is the crux of the "three-tier system" for the manufacture, distribution and sale of alcoholic beverages in this state.

Indeed, this "three-tiered system" is an anathema to many free-market conservatives. However, there is next to no free-market in the alcohol beverage industry. This is an industry that is, in essence, regulated by statute. For purposes of tastings and tied-house at these off-sale premises, the difficulty ensues when trying to determine who is providing what to whom for free. Is the retailer providing something of value to the consumer? Or, is it the manufacturer? Perhaps it is the manufacturer who is providing something of value to the retailer who then gives it to consumers? Will the distributors feel forced to provide products for these tasting. Will a "pay-for-play" system emerge where providing products or paying for products to be used at tastings will become a condition for carrying the brands (which is prohibited by state law but difficult to prove)?

"Stay Thirsty My Friends"

Since 1996, when beer tastings were authorized at on-sale premises, the Legislature has been freeing-up the alcoholic beverage industry to offer free tastings of more products at a greater number of locations. Any new license category for distilled spirits tastings will be subject to the same process, restrictions and reviews to any new on-sales or off-sales general license would be subject by ABC. Local governments and law enforcement will have the opportunity to review, comment and seek limitations on the license from ABC as they would on the application of any on-sales or off-sales general license within their jurisdiction. Therefore, a fairly regulated approach is likely for tastings at off-sale premises. Off-sale licensees will need to acquire a separate on-sale license. As with the current authorization for wine tastings at off-license premises, any new tasting license will require that for a portion of the off-sales premises to be dedicated as a tasting area. Within the boundaries of that designated area, a licensee may serve samples.

A free sample of this fun may be coming to a hearing room near you in June. "Clean-up on aisle five…"


For more information on this report or other Governmental Organization issues, contact Richard Paul, Senate Republican Office of Policy at 916/651-1501.