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WHITE PAPER: Cumulative Quantity Discounts

May 3, 2017

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WHITE PAPER: Cumulative Quantity Discounts

May 3, 2017

Below is a white paper from Total Wine & More recommending an important change to Mass alcohol laws: allowing alcohol retailers to pass on discounts from buying in bulk to their consumers. If they get a discount, shouldn't you?

 

 

Re: Cumulative Quantity Discounts

 

Dear Members of the Alcohol Task Force:

 

I am writing on behalf of Total Wine & More regarding the request by the Alcohol Task Force for input into certain laws, regulations and practices concerning the alcohol beverage industry in the Commonwealth of Massachusetts.

 

Total Wine & More is America's largest America’s largest independent retailer of fine wine, beer and spirits with 170+ stores in 20 states by year's end.  A four-time national retailer of the year award winner, the company’s vast selection of products, combined with low everyday  prices and expertly trained wine associates, provides a unique shopping experience for the customer. Since opening its first store in 1991, Total Wine & More has been committed to being the premier wine, beer and spirits retailer in every community that it serves.

 

We are proud to have just opened our fourth location in the Commonwealth of Massachusetts in Danvers on April 25, 2017, following successful locations in Natick (November 2015), Everett (May 2016), and Shrewsbury (February 2016). Total Wine & More currently employs a total of 225 team members at our locations across Massachusetts.

 

GOAL

 

The purpose of this letter is to recommend an amendment to statutory language in 204 CMR § 2.04(1) to clarify how "invoiced cost" is defined and applied, and to allow cumulative quantity discounts to be applied to properly calculate the actual invoice price of alcoholic beverage products offered for sale to consumers in Massachusetts.

 

 

APPLICABLE STATUTORY LANGUAGE

 

No holder of a license issued under M G.l. cl 38, s. 15 shall sell or offer any alcoholic beverages at a price less than invoiced cost. Cost is defined as net cost appearing on the invoice for said alcoholic beverage. The use of any device promotion or scheme which results in the sale of alcoholic beverages at less than invoiced cost is prohibited. 204 CMR 2.04 (l)

 

 

 

ISSUES ARISING FROM THE CURRENT LANGUAGE

 

Under 204 CMR 2.04 (1), alcohol beverage retailers must set their price of alcoholic beverage products above "invoiced cost," which is defined as the "net cost appearing on the invoice for said alcoholic beverage" to the retailer. Current business practices in Massachusetts is for the wholesale distributor to provide an initial invoice for products at the time of delivery, which reflects the retail cost of such goods before the application of quantity discounts offered by the wholesaler  under one or more quantity discount marketing programs. These wholesaler sponsored marketing programs in Massachusetts are no different than the same programs that are routinely used by wholesalers and suppliers in numerous other states -and, indeed, in virtually every retail industry in the United States. Because competition is a fundamental and accepted practice in the United States, quantity discounts are permissible in Massachusetts, and suppliers and wholesalers sell different product brands that compete with one another for market share, wholesalers  n Massachusetts have routinely used quantity discounts to incentivize retailers to purchase particular products to the exclusion of others.

 

The following illustration explains how the quantity discount programs work in Massachusetts. Typically, to receive a cumulative quantity discount, a retailer must purchase a specified quantity of a product. In some instances, the applicable discounts are available to retailers on a one-time purchase basis -for example, if you buy "x" cases of Smirnoff Vodka, the per-case price will be discounted by 5%. In other instances, the discounts can be earned over time, through a series of product purchases resulting in an accumulated quantity discount (or "CQDs"). The programs usually run for a period between one and six months in duration. Some quantity discount programs are offered in tiers, so that the applicable discount for purchasing say 1,000 cases of Smirnoff Vodka is greater than the discount for purchasing only 500 cases of the same product. If a retailer purchases the required amount of the qualifying product(s) within the period of time set by the wholesaler, the retailer is then entitled to a per-case discount for each case of the qualifying product during the promotional period.

 

In Massachusetts, unlike other states where Total Wine does business, wholesalers do not reflect the CQDs that a particular retailer has accumulated and earned over the course of a program on the initial delivery invoice that is generated once the discount has been earned. Rather, credits for CQDs are instead given to the retailer, and reflected on credit invoices issued to the retailer, after the end of the program period for which the discount was earned.

 

 

As noted, current Massachusetts law prohibits the sale of alcoholic beverages at a "price less than invoiced cost" where cost is the "net cost appearing on the invoice" for the alcoholic beverage. But there is no clear rule or guidance on what this means or how it should be applied. However, complaints brought to the Alcoholic Beverage Control Commission regarding this practice have surfaced, questioning when the cumulative quantity discount can be properly applied.

 

We believe once a cumulative quantity discount has been earned, a retailer should be able to apply the discount to the initial invoiced cost to calculate the "net cost" for purposes of pricing the applicable product for retail sale. "Net cost" as used in the regulation means the difference between initial or gross cost, and the net cost to the retailer after any allowed discounts, deductions, or credits. There is no way to determine net cost without taking into consideration the CQDs once they are earned -without regard to when they are received in the form of credits. Others have suggested that the discount should not be applied to determine "net invoiced cost" until the retailer has received a credit invoice reflecting the application of the credit, usually many months after the discounted inventory has been received, paid for, and in some instances sold to consumers. The most extreme position is one adopted by the ABCC very recently when it determined for the first time that "invoiced cost" is whatever "cost" a wholesaler chooses to include on the original invoice at the time of delivery, even if the actual net cost as reflected on a subsequent credit invoice covering the same products is different from what the wholesaler chose to include on the original delivery invoice. This latter interpretation does not permit the retailer to apply any earned CQDs to their retail pricing, causing Massachusetts consumers to pay unnecessarily inflated prices for alcohol beverages.

 

A change to the wording and interpretation of 204 CMR 2.04 (1) serves the public interest in two ways -

 

  1. Makes a clarification to a regulation that is currently in question, giving wholesalers, retailers, and consumers an unambiguous set of pricing rules; and

  2. Provides customers with the most advantageous pricing allowed by the Commonwealth's above-cost pricing law.

 

 

 

CUMULATIVE QUANTITY DISCOUNTS ARE BENEFICIAL TO CONSUMERS

 

Cumulative quantity discounts can be beneficial to the consumer, as they allow retailers to pass savings from earned cumulative quantity discounts to consumers in the form of a lowered product price, while maintaining a price above cost, consistent with 204 CMR 2.04(1). Clarifying the regulation of "invoiced cost" to extend the benefit of cumulative quantity discounts to consumers is in the public interest.

 

Total Wine & More advocates for a change to the regulation to clarify “invoiced cost” interpreted as the total net cost to the retailer after all discounts are applied. This interpretation is more accurate as to the retailer’s cost, and – importantly – enables retailers to pass along their earned cumulative quantity discounts to the consumer.

 

As referenced earlier, come interpretations of 204 CMR 2.03(1) would not allow retailers to apply a cumulative quantity discount at the time the discount is earned, and the applicable product is on the shelf for retail sale. Should retailers be unable to apply cumulative quantity discounts to the product on the shelf, it would result in a potential eventuality that is not in the public interest—

 

  1. Retailers would have to wait for the subsequent credit invoice to arrive before lowering prices, risking that the products being discounted are physically not those that were purchased at a “net cost” discount.

  2. Retailers would not extend the benefits of the cumulative quantity discount to the retail price of product, which may increase margin for the retailer, but does not reduce cost of product for the paying customer.

  3. Retailers would be held to the invoicing practices of the wholesaler – able to price at a discount only at the time a credit invoice is provided by the wholesaler. This places the wholesaler in the middle of the relationship between the retailers and customer – precisely what the three-tier system is structured to avoid.

 

 

CORRECTION TO THE STATURE REPRESENTS A SMART APPROACH TO POLICY

 

 204 CMR 2.04 (1) as currently drafted does not adequately provide unambiguous guidance to industry participants to set the price of product. It is very much in the public interest to give wholesalers, retailers and enforcement bodies a clear set of guidelines to follow when applying the statute.

 

204 CMR 2.04 (1), as currently written does not meet that standard.

 

We encourage the Task Force to recommend a redraft of this statute to allow for the real time application of cumulative quantity discounts, without imposing burdensome requirements that would alter the time-tested practice of invoicing shared among wholesalers and retailers.

 

The recommended language, embedded and offset in the current stature in bold is below—

 

No holder of a license issued under M.G.L. c138, s.15 shall sell or offer any alcoholic beverages at a price less than invoiced cost. Cost is defined as new cost appearing on the invoice for said alcoholic beverage, after all discounts are earned. The use of any device promotion or scheme which results in the sale of alcoholic beverages at less than an invoiced cost is prohibited. 201 CMR 2.04 (1)

 

Thank you for your consideration of this issue. I look forward to your feedback, and to further discussion with the Alcohol Task Force.

 

Sincerely,

 

Edward Cooper

Vice President, Public Affairs & Community Relations

Total Wine & more

(301) 547-0807 (office)

(301) 219-6648 (mobile)

ecooper@totalwine.com

 

 

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