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WHITE PAPER: Cumulative Quantity Discounts

May 3, 2017

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FACT SHEET: What is a Cumulative Quantity Discount?

June 29, 2017

 

 

Issue: Massachusetts liquor laws state that retailers must set the price of alcohol beverages above the “invoiced cost”, which they define as the “net cost appearing on the invoice.” This can be thought of as the “sell-above-cost” rule. Essentially this means that liquor stores may not sell any alcohol below the cost they paid for it. This ensures that large discounts or other promotions that would reduce prices considerably for alcoholic beverages are illegal in Massachusetts.

 

In theory, there is no issue with this rule, but in practice a problem arises. Because of the way wholesalers create their invoices to retailers in Massachusetts, retail liquor stores cannot pass any discounts they receive when purchasing alcohol on to the consumer, forcing the consumer to pay an arbitrarily inflated price.

 

To begin, we must understand a few key terms and ideas that are central to this issue:

 

 

First, what is invoiced cost?

 

Massachusetts has a “three tier system” regulating the sale and distribution of alcohol.  Tier one, alcohol producers or manufacturers (breweries, wineries and distilleries), sells its products to Tier two, the wholesalers and distributors, who then sell it to the retailers.

 

Retail stores (stores that sell items to consumers, like your local package store, bar or tavern, for instance) buy their goods from a wholesaler (a company or distributor that sells large quantities of items to places like retail stores) in sufficient amounts to service their customers. When a retail store runs out of something they call their wholesale distributor and ask for a new shipment of that item. This could happen monthly, weekly, or even daily. Each time a wholesaler delivers a new shipment of goods, they give the retail store a bill.

 

 

This bill is called an invoice, and it lists what items were purchased, and for how much. So, the invoiced cost of an item is the amount the retailer paid the wholesaler for it, according to the invoice for that shipment.

 

The wholesaler-retailer relationship is very important for both parties. Because of this, wholesalers often want to make sure that retailers continue to buy from them, and don’t switch to a different wholesaler who sells the same product. To do this they offer financial incentives to the retail stores, such as discounts. For example, if you are to buy “x” cases of product it may receive a discount of “y”. Another kind of discount many wholesalers use is called a cumulative quantity discount.

 

 

What is a cumulative quantity discount (CQD)?

 

A CQD is a discount based on the amount of a good purchased over a set amount of time. This discount applies to any shipments made within the timeframe.

 

 

For example, a wholesaler may offer a CQD of 5% if more than 5,000 units are purchased in a month. Each week your store purchases 2,500 units. Although none of your orders individually total 5,000 units, at the end of the month you have ordered 10,000 units, and are eligible for the CQD. In its most basic form, a CQD can be thought of as a simple bulk discount. The more units you buy, the more money you save. This type of discount promotes loyalty between a retailer and their wholesale distributor. It also gives retailers the incentive to buy a lot of goods from their wholesalers, so they can become eligible for the discount.

 

 

 

To sum up what we have so far: retail stores purchase their goods from a wholesale distributor. When the goods arrive the wholesaler gives the retailer an invoice, or bill. Sometimes, to make sure the retailer continues to buy from them, wholesalers will offer discounts. A common discount offered is CQD, which comes into effect when a retailer buys a certain amount of goods from the wholesaler.

 

 

So what's the problem?

 

In Massachusetts, standard billing procedure is for the wholesaler to give the retailer an invoice as each shipment is delivered. If the retailer receives a shipment on one day, it receives an invoice at the time of delivery.  This invoice may not reflect any discounts (especially CQDs) even if the discount has been earned by the retailer. This invoice is called the initial invoice, because it represents what the initial costs of the goods are. Even if the retail store earns a substantial CQD from the wholesaler, it will not appear on this initial invoice.

 

If a retailer qualifies for a CQD, they receive a different invoice, called a credit invoice, once the promotional period (the time in which the retailer could qualify for a CQD) is over. So, retailers who qualified for a CQD do not get the benefits of it right away. If a retailer got a CQD for buying 10,000 units in the month of May, they would not see the benefits until June. This credit invoice contains the amount saved by the retailer through the CQD.

 

So now, the retailer has two invoices: one that gives the original cost paid by the retailer, and one that gives the retailer credit for the discount they earned. In many other states wholesalers simply give retailers one invoice, which applies discounts earned to the initial price. 

 

The problem arises because the Massachusetts statue concerning the sell-above-cost rule, 204 CMR § 2.04(1), does not clarify how invoiced cost is defined, calculated, and applied. All the statute says is “Cost is defined as the net cost appearing on the invoice…” There is no specification as to which invoice will be used to define cost. Because of this, the law needed clarification.  The Massachusetts Alcoholic Beverages Control Commission (ABCC) recently ruled that the “invoiced cost” is whatever cost the wholesaler outlined at the time of delivery. They say that the initial invoice, which does not take CQD into account, is the definitive invoiced cost mentioned in the regulation. Therefore, retailers must legally price their alcoholic beverages above this initial invoice. Thus, even if the retailer benefits from a CQD given by the wholesaler, it cannot pass those savings on to the consumers, because the original invoice does not reflect those savings.  

 

 

 

Here's how we can fix this, with a 5 word change:

 

Amend the statutory language in 204 CMR § 2.04(1) to clarify how the “invoiced cost” is defined, and allow Cumulative Quantity Discounts to be applied to the “invoiced cost”.

 

 

 

This would allow retailers to properly calculate the true invoiced cost of alcohol beverages in Massachusetts. This solution is in the public interest for two reasons: first, it gives clarification to a vague statute, providing concrete pricing rules to wholesalers, retailers, and consumers; second, it provides Massachusetts consumers with the most competitive pricing allowed under the states above-cost pricing law.

 

In this case, the solution to this sizeable issue is no larger than a five-word dependent clause. The language of 204 CMR § 2.04(1) currently reads: “Cost is defined as the net cost appearing on the invoice for said alcoholic beverage.” Our solution would read as follows, where the bolded language is the solution: “Cost is defined as net cost appearing on the invoice for said alcoholic beverage, after all discounts are earned.

 

 

 

 

 

 

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