Published in Economic Development

State fines liquor distribution agent $3 million over violations that led to booze shortages

BY Wednesday, July 08, 2020 04:29pm

Republic National Distributing Co. has agreed to pay $3 million to settle a dispute with the state over dozens of violations that led to widespread liquor shortages in November and December of 2019. 

As part of the settlement announced today by Michigan Attorney General Dana Nessel and the Michigan Liquor Control Commission, RNDC will also submit its operations to a third-party audit and file monthly reports with the state. The company also was placed on probation for one year. 

RNDC is one of only three authorized distribution agents that warehouse and deliver spirits for the MLCC, which controls all liquor sales. 

In late November, the Michigan Attorney General’s office issued an 88-count complaint against RNDC for missed deliveries. 

In a statement about the “significant settlement,” Nessel said the case “should serve as a strong reminder of accountability in the state’s liquor inventory and delivery system. The State will not tolerate vendor mismanagement that results in financial hardship which impacts the livelihood of liquor retailers across Michigan.”

The problems arose after RNDC invested $90 million in a consolidated liquor warehousing and distribution facility in Livonia and the company ran into glitches with an automated and computer-aided bottle and case selection system. The company said the processes were necessary to follow state laws that require distribution agents to split cases of liquor to any Michigan liquor retailer. 

“Unfortunately, as part of the upgrade process, performance was not to MLCC nor RNDC standards” Joe Gigliotti, RNDC’s regional president of control states, said in a statement. “We are glad to have this matter behind us. We have apologized for the short-term difficulties that startup problems caused our customers and the state.”

Gigliotti said the company has been hitting its performance targets since January.

For Michigan’s small distillers, the RNDC situation proves that the state’s distribution system failed and does not offer them the flexibility they need to compete with larger brands, as MiBiz previously reported

“The state of Michigan is both the wholesaler and regulator and they privatized the delivery and (the delivery company) failed. This further demonstrates the need for additional options for small businesses, and small distillers in particular. We have just three options,” said Jon O’Connor, co-founder of Grand Rapids-based Long Road Distillers LLC and president of the Michigan Craft Distillers Association.

“As we all look to get product to market, it’s tough to gain traction. We need all the avenues we can get to try to be competitive in a monopolized market,” he said. 

The association backed legislation introduced in early March that would amend state law to allow small distilleries to sell up to 13,500 liters of spirits per year directly to Michigan retailers or customers. While the state Legislature recently passed and Gov. Gretchen Whitmer signed into law a package of bills that expanded the ability for microbreweries to self-distribute beer and eliminated other barriers such as the need to register a beer sold at a brewer’s taproom, the spirits self-distribution bills have yet to move past committee. 

Even so, O’Connor said he’s had “substantive conversations with both sides of the aisle,” the distributors and the MLCC with regard to the legislation. 

“There’s a willingness from our initial conversations to do this in some capacity, it’s just figuring out how to make it all work,” he said.

While acknowledging that beer and wine are franchised on a county-by-county basis and that replicating that system in its entirety is not an option for small distillers, giving his members the ability to self-distribute and ship spirits would provide flexibility they need to gain their footing and grow in the market. 

“A brewery can brew a beer, put it in a keg and sell it in a couple of weeks, but if I want to sell anything, there’s a three- to six-month lead time by the time you get federal label approval and state label approval and get it in the (price) book on one of its quarterly updates,” O’Connor said. “That inhibits creativity when you’re trying to get product to the market to see what works.

“One of our arguments is that the wholesale distributors want to deliver proven brands. If we can prove our brand through distribution or hustling on the street and getting them into bars and retailers, that gives certainty to the market and the distributors know you’re not just going to clog up the shelves in a warehouse or at a store. They want to know that they can be profitable with it.”

EDITOR’S NOTE: This story has been updated with comment from the Michigan Craft Distillers Association. 

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