Supplier Advertising with Third Parties

Hospitality, Alcohol & Leisure Blog Oct 10, 2023 New York, NY

By: Louis J. Terminello, Esq. and Jaci P. Flug, Esq.

According to the Dutch banking and financial service company, Rabobank:

The size of e-commerce teams at beverage alcohol companies has grown 117% since 2019… E-commerce will be the number-one driver of industry growth over the next decade and a critical component of brand-building, awareness, and trial, both online and in-store.[1]

Over 10 years ago when the industry and regulators started grappling with the role of third-party providers, regulators paid little attention to the issue of supplier advertising. Rather, their focus was on controlling the sale, control of funds, and safe and responsible delivery of beverage alcohol. If questions were asked about advertising, they were limited to banner ads as regulators had no idea what tech was capable of. From 2020 to 2022 the country saw a law large number of states, especially in the South, pass legislation legalizing alcohol delivery via third parties. Virtually all established rules or standards for safe responsible delivery but not one addressed the issue of supplier advertising with third-party platforms. There may have been an assumption that tied-house laws applied but no one spelled it out.

Supplier e-commerce teams are rapidly growing, legalization of delivery is growing as well as customer use of delivery apps. So where does that leave tied-house laws that never contemplated the internet?

Your view on this matter may depend on where you sit across the three tiers:

Suppliers who have money to spend are thrilled to use their money to engage with customers while they shop via e-commerce. Suppliers without money to spend call it a tide-house violation.

Wholesalers (who should desire a level playing field) may be worried about virtual pay-to-play shelf space, not dissimilar to real-world “pay-to-play” at the brick-and-mortar store.

Retailers who are tech savvy are trying to cash in on it while most retailers have no idea how third parties may be making money selling their e-commerce shelf space.

What, if anything, have regulators said regarding this ever-growing market?

In 2021, the Texas ABC (“TABC”) issued a draft Advisory essentially stating that they would apply brick-and-mortar rules to supplier advertising in e-commerce. If a webpage, app, or platform constitutes the equivalent of a retailer’s brick-and-mortar store then paid supplier advertising should not be permitted on that webpage, app, or platform. TABC acknowledged that no two forms of beverage alcohol e-commerce are the same and that each model required its own analysis. However, Texas has yet to adopt or finalize the advisory and it remains in draft form with no official statement from the TABC on its future.

In 2022, the General Counsel of the California ABC (“CABC”) announced that his office had sent letters to suppliers asking for copies of their contracts with third party providers, presumably to review advertising practices. Yet, since then, the CABC has been silent on the issue.

More recently, the Alcohol Tax and Trade Bureau (“TTB”) issued their Advance Notice of Proposed Rulemaking and posed the following question about e-commerce and the digital marketplace:

How might TTB update the trade practice regulations to take into account current marketplace realities, especially in light of the rise of digital marketing strategies (e.g., digital coupons, instant rebate coupons, and virtual retail shelf space in digital retail storefronts where products may be purchased online)?

Hundreds of comments were submitted to the TTB. The largest industry voices seemed to answer the question by not mentioning digital coupons or rebates but rather discussing the virtual shelf space question– supplier advertising in e-commerce. The majority wrote in favor of a brick-and-mortar analysis with few getting granular on what that actually looks like. Surprisingly, one association of grocers who hold retailer licenses advocated for the same or equal abilities to engage with suppliers as third-party platforms.[2]

Will the TTB issue a proposed rule on the topic? Will Texas formalize its advisory? Will other states issue guidance or more boldly take enforcement action on the issue? Who knows, but with beverage alcohol e-commerce growing and supplier e-commerce teams and budgets growing those in the space should act thoughtfully and with due diligence.

[1] Radobank plus 2022 Alcohol E-Commerce Playbook: The Size of the Prize

[2] See Comments Submitted by The Food Industry Association stating: If competition is not harmed by third-party online marketplace trade practices, those same practices should be permitted for retailer online platforms.

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