How to Provide Samples without Providing Samples

One of the best ways to get people familiar with your brand is to give away samples. Providing your distribution channel and customers with samples of your product allows them to try new products, and, ultimately, boosts your revenue. Unfortunately, alcohol manufacturers and wholesalers cannot easily give away samples to bars and retail shops, or consumers.

Why? Well, if you give free stuff to a bar, you might be inducing them to purchase from you. Isn’t that the point though? As the government sees it, this kind of inducement is bribery. It creates out of control drinking and organized crime in the alcohol industry. At least that’s what the laws purport to prevent.

The trade practice provisions of the Federal Alcohol Administration Act prohibit manufacturers and wholesalers from giving anything of value to a trade buyer so that trade buyer will purchase specific products. This also means that a manufacture cannot give anything of value to a wholesale buyer either. The key to this prohibition is that the action has to be to the exclusion of a competitor’s products.

But, in practice, there are certain things that are simply illegal - the presumption is that it will cause the trade buyer to buy a brand to the exclusion of a competing brand. Giving samples away is one of these illegal actions.

There is an exception: you can give a trade buyer, who has not purchased that brand from you in the previous year, 3 liters of wine or spirits, or 3 gallons of beer. That is a very limited exception. So, the question is, how do you get wholesalers or retailers to know and promote your product without being able to give them samples?

You can offer education seminars to the wholesaler’s or retailer’s employees. They can sample your brands, and learn about them from you directly. Ideally this would result in more visibility for your product and more sales.

You can also offer tastings for consumers at the retailer’s or wholesaler’s establishment. This not only allows the trade buyer to sample and learn about your brand, but its customers as well. It allows the customer to try something new, instead of purchasing their standard favorites. Of course, some states only allow retailers to provide tastings, and do not allow the manufacturer or wholesaler to provide any product free of charge to the retailer for these tastings.

Drink at the Co-Op: Issues to Consider

The co-op brewery idea has been popping up more frequently. Some start-ups are considering it, while Black Star Co-Op Brewery & Pub is the first to be doing it. There are also sseveral co-op wineries in the United States, although they are structured more as agricultural co-ops with farmer members, rather than patron members.

It’s a great idea to raise capital for an operation, as well as to get the community involved with the business. There are however additional issues with an alcoholic beverage co-op that other co-ops, such as groceries, do not have to deal with. One of those are the regulations pertaining to the owners of the company.

What is a cooperative business?

A co-op is a business owned and controlled by its members, or shareholders, like any other business. It is a state chartered business entity owned and controlled democratically by the people who use its services.

Management is controlled by a board of directors elected by the members. All members have voting rights, usually one vote for selecting the directors, regardless of the amount of equity the member has in the co-op.

Equity comes from the members, rather than outside investors. Members make direct contribution through membership fees or sale of stock. If the co-op fails, the liability of any given member is limited to the amount invested. Earnings, or losses, on the co-op’s business are allocated to members usually on the basis of the use they made of the co-op, rather than on the basis of equity held.

Issues to Consider

One of the requirements of obtaining a license for an alcoholic beverage business is to disclose certain information about stockholders or members and the board of directors, or anyone with control over the business. Usually, only those stockholders or members holding more than 10% ownership in the company and the board of directors or managing members need to fill out the information forms. This can be relatively easy to get around if the members all hold less than 10% ownership in the company, then only the board would need to submit the required information.

But, some states require all ownership interests to be disclosed. This would get harder and harder to manage as new members buy into the co-op, but not necessarily impossible. Some states also preclude anyone with felony convictions from owning any interest in an alcoholic beverage business at all. So, as a condition to membership, the prospective member would have to represent that he or she does not have any felony convictions. Another condition to membership should also be that all members are 21 years or older.

It’s not impossible to structure a brewery, winery, or distillery as a co-op. It is not, however, as simple as setting up an LLC or S-corp. It will become very important to enlist the help of an attorney that works with co-ops as well as understands the intricacies of the alcoholic beverage laws.

TTB and USDA Joint Label Regulation

As we’ve mentioned before, there are often several layers of regulation when it comes to alcoholic beverages, and determining which government agency is responsible can be a minefield - they all want to have a hand in the pot.

The USDA regulates the use of the term organic in product labeling and advertising. Certification by the USDA is required to even use the term “organic” on your product. For years the TTB simply deferred to the USDA for organic claims, and did not analyze them in alcoholic beverage labeling or advertising.

Until now...

TTB and USDA Memorandum of Understanding

The TTB and USDA have recently entered into a memorandum of understanding regarding the use of “organic” on alcoholic beverage labels. The TTB will now review all claims of “100% organic,” “organic,” and “made with organic ingredients” to see if the claims meet USDA National Organic Program guidelines.

Those labels for wine, beer and spirit labels that contain organic claims will now be approved by the TTB as “approved subject to compliance with the Organic Foods Production Act of 1990 and the National Organic Program regulations[.]” If a label does not comply with USDA organic labeling guidelines, the label will be rejected and the TTB will provide the applicant with a list of required changes to make the label compliant. An applicant may only appeal this rejection with the USDA's Agricultural Marketing Service.

What does this mean?

Any “organic” claims and certifications have always had to go through the USDA, this is nothing new. The USDA guidelines do not allow a product to be labeled or advertised as organic unless it meets the guideline requirements.

What is new, however, is that the TTB now will determine a label’s compliance with the USDA guidelines. Previously, the TTB treated organic claims as optional label information. These labels will take longer to evaluate, as the TTB is now required to know the USDA labeling guidelines and consult, if necessary, with the USDA on label compliance.

Appeals will also take longer. If the TTB rejects the label, the applicant appeals with the USDA, and the label is found to comply, it will have to re-submit the label for approval by the TTB.

Marijuana and the Feds

Fourteen states have legalized medical marijuana (Alaska, California, Colorado, Hawaii, Maine, Michigan, Montana, Nevada, New Jersey, New Mexico, Oregon, Rhode Island, Vermont and Washington). California and Colorado are even contemplating generally legalizing marijuana, not just for medical purposes. Voters in California, as early as November, will see a ballot initiative to legalize, regulate, and tax marijuana.

The California medical marijuana industry is already a multi-billion dollar industry, and one of the state’s largest industries. If the ballot measure is passed, it is estimated to contribute several more billion dollars in state tax revenues.

There has been a marked increase in the number of registered users and dispensaries since a memo from the United States Department of Justice directed law enforcement personnel to refrain from enforcing federal law against people in “clear and unambiguous compliance with existing state laws concerning medical marijuana.”

But, marijuana in any form is still illegal federally. Possession convictions come with a minimum five year sentence. The memo made clear that “significant traffickers” will still be prosecuted and that stopping “commercial enterprises that unlawfully market and sell marijuana for profit” will continue to be a priority for the department. Cancer patients and their caregivers are not to be prosecuted, but businesses selling for profits, or otherwise violating state law, are to be prosecuted. What is a "significant trafficker?"

And, what does “clear and unambiguous compliance” state laws mean? What if there are no state laws, for example, dealing with infused products? Will a medical marijuana bakery be raided and prosecuted? It could be.

DEA Special Agent Jeffery Sweetin’s interpretation of the memo, as quoted in the Denver Post, is: “[t]echnically, every dispensary in the state [of Colorado] is in blatant violation of federal law. The time is coming when we go into a dispensary, we find out what their profit is, we seize the building and we arrest everybody. They’re violating federal law; they’re at risk of arrest and imprisonment.” It’s as simple as the memo being ignored.

Businesses are relying on a memo, which is not actual policy. It can be swiftly withdrawn. It can easily be ignored. The memo also states that “clear and unambiguous compliance with state law… [does not] create a legal defense to a violation of the Controlled Substances Act.” So, if law enforcement is encouraged not to prosecute those in compliance with state laws, but they do anyway, compliance with state law will not be a defense. Huh? What is the point of the memo anyway?

The risk is not only for medical marijuana business owners or growers, but their landlords, as well as anyone funding the operation. It wouldn’t even take a change in administration to subject several layers of business owners to the risk of hard jail time.

The bigger questions will come when states vote to legalize all marijuana - to tax it and profit from the regulation as they do from the regulation of alcoholic beverages. States cannot authorize violations of federal laws, nor will compliance with state law be a defense in federal prosecution. This is something that medical marijuana businesses need to keep in mind now, and that other marijuana based businesses may also need to keep in mind.

Opening a Medical Marijuana Dispensary

It’s easier to open a dispensary in Colorado than a brewery.

Not only is there no federal licensing or regulation (other than it being illegal, of course), there are no state license or regulations for legal production and sales of medical marijuana. Many local governments have not created rules to deal with dispensaries, much less a licensing process. In some counties it is as easy as leasing a space and beginning operations. Others require a neighborhood notice period, and city approval. Either way, it’s certainly not the 14 government agencies we have to deal with as a start-up brewery.

Some of that will change as of today. There is a one year moratorium on all medical marijuana businesses in Colorado, including dispensaries, infused product manufacturers (bakeries and similar operations), and grow operations. In addition, new regulations and a state licensing process for medical marijuana businesses will now govern all existing and new businesses.

Colorado voters passed an amendment to the state constitution in 1999 legalizing medical marijuana. The last couple of years saw a dramatic increase in the number of patients registering as users, as well as an increase in dispensaries and grow operations. The increase was the result of a memo from the United States Department of Justice directing law enforcement personnel to refrain from enforcing federal law against people in “clear and unambiguous compliance with existing state laws concerning medical marijuana.”

Colorado's new state law tries to spell out what dispensaries and other medical marijuana businesses can and cannot do, the steps they need to take in order to open, and who is allowed to own and operate such a business (not surprisingly anyone with a felony may not own, operate, or even be employed by a medical marijuana business). The new legislation was, however, thrown together hastily, and there continue to be a lot of holes. For example, dispensaries will now have to grow 70% of their own marijuana, but will infused products manufacturers also have to meet the same requirement? It’s not clear.

The department of revenue will be responsible for promulgating regulations to deal with medical marijuana, as they do for alcohol, and for setting up a licensing system, by the end of next month. The new state law also allows cities and counties to come up with their own regulations or to outright ban any medical marijuana business.

While medical marijuana is not a legal libation, many of the forth coming regulations and requirements will be based on rules for alcoholic beverage businesses. This is an extremely interesting area of developing law. Are the state’s alcohol codes an adequate basis for new codes related to medical marijuana? One is a legal substance for anyone over the age of 21, the other requires a medical condition and doctor prescriptions.

State and local governments are being faced with new issues, and it will be interesting to see how they deal with them. Will the waters become as muddy as they are for alcoholic beverage businesses? Or, will the regulations be more clear given the hindsight of dealing with other legislation?

Keep in mind that this is still very much illegal federally, another issue which we’ll discuss next week.

The State of Craft Beer in Ireland

The usual lineup in Irish pubs

How may people does it take to support craft brewing?

I found the beer situation in Ireland a bit depressing for a country with such a long history of brewing. True, my tastes have changed since I was there ten years ago, but, the choices in most pubs now are sadly limiting. While pubs may have five to ten taps, they are mostly duplicates of the same five beers: Guinness, Carlsberg, Heineken, Budweiser, and Bulmers (cider). Some pubs have Smithwicks, Coors Light, Harp, or Kilkenny on tap in addition to the standard lineup (I saw more Coors Light than Harp or any of the others). In some pubs you might even find some Czech or German lagers or wheat bottled beers. The best find of the trip was a bar in Limerick that had several Belgian beers in bottles. I was in a very small area of Ireland, and the situation in bigger cities (at least for bottled beer) is likely different.

A pub owner told us that a few years ago Budweiser outsold Guinness in Ireland. I haven’t confirmed the statement, but it’s almost believable given what I saw. Most pubs also go through a lot of sugary pre-mixed drinks - hipper versions of 90’s wine coolers. There are only a small handful of craft breweries in all of Ireland.

While many of the people we met wanted better selections, and thought microbreweries were a good idea, they all sited the small Irish population as a reason craft brewing could not prosper in Ireland. “You have to remember, there are only 4.5 million people in the entire country; we’re just too small to support something like that.” It got me thinking about Fort Collins, a town of about 130,000 people that supports five breweries, with more in the works. Sure, several of those breweries distribute out of the area, but, we are 3% of Ireland’s population.

How big does a population need to be to support good beer? In the upper peninsula of Michigan (“da U.P.”), there are eight craft breweries, supported by a total population of a little over 300,000 people. Vermont, with a population of a little over 600,000 supports 21 craft breweries (and most of them do not distribute out of the area). I don’t think population is necessarily the problem.

The UK has seen growth in the craft beer industry, not only in the number of microbreweries opening, but in sales growth for the market. While craft beer is still a small percentage of the UK beer market, it is gaining wider appeal among drinkers unsatisfied with the standard selections. Most of the craft breweries in the UK, like many in the US, started out as brewpubs that grew to distribute nationally.

Ireland could be ripe for such a change as well. Distribution would be hard at first, nearly impossible since many of the pubs are subsidized or outright owned by the bigger breweries. Like craft brewing in the US and UK, it can start small and local with a brewpub. Something that many towns and villages in Ireland could certainly support.

Sláinte: Drinking in Ireland

When the bar tender threatens to kick you out for grabbing your pint before she’s set it down, pay attention: there are rules of drinking in Ireland.

We’ve been walking the Kerry Way, exploring Limerick and Killarney, drinking and eating at various Irish pubs for the past two weeks. We are currently somewhere above the Atlantic. Funkwerks is licensed, the test batches are nearly done, and we’re celebrating ten years of marriage.

The pub (public house) is an ancient tradition in Irish history. It’s less about consumption and more about gathering with friends and neighbors and finding some craic (pronounced like “crack,” meaning good conversation and laughs). The Kerry Way is scattered with traditional pubs, playing traditional Irish music, where we heard more Irish spoken than English.

Guinness dominates, of course; it really does taste different in Ireland than anywhere else in the world. Certainly having more to do with the pasteurization processes, the distance of the brewery to my glass, or the taps, than because I have been walking nearly fifteen miles a day. While I have a hard time finding my favorite Irish whiskey in bars here, Powers is one of the most popular whiskies in Ireland. It is triple distilled, like other Irish whiskies, and has a perfect smooth flavor with hints of vanilla. The pub food is delicious as well, not just because of all the walking; it's simple, local, and fresh.

Many pubs and bars in Ireland are still “tied houses,” meaning that the breweries own or control the pub. In Cork, where Beamish and Murphy’s are located, this creates a captive market for the brands, in a country that is dominated by Guinness. Beamish and Murphy’s are both now owned by the Heineken International group.

Some Irish alcohol laws, while recently codified, are still based on centuries old laws. For example, finding an after-hours drink is nearly impossible unless you know someone who knows the secret knock. Irish bar owners are required to stop selling alcohol at 11:30 pm during the week, and 12:30 am on Friday and Saturday nights, with a half hour “drinking up” time. Some pubs, especially in the rural areas, stay open longer. If you’re in, you’re in. Happy hour is illegal (licensed premises cannot sell alcohol for reduced prices during certain hours of the day), as is drinking in public areas (no Guinness picnics in the park).

Here are a few things to remember about drinking in an Irish pub: don’t wait to be seated; but, wait for the bar tender to give you your pint, pouring Guinness is a two step process, you don’t want to grab your drink before it’s properly poured; take off your hat; talk, but don’t shout; be merry, but not drunk, it is not a badge of honor to get drunk; and don’t be an idiot and order an Irish car bomb.