The MHW Mark Podcast
Welcome to the MHW podcast, bringing you conversations with experts and leaders in the alcoholic beverage industry. Covering topics ranging from selling alcohol online, creating a new brand from scratch, and what you need to know when you start doing business internationally. Hosted by Jimmy Moreland and a rotating cast of cohosts from the folks at MHW.
The MHW Mark Podcast
Control State Deep Dive - with Kristen Cafferata and Maridel Altmann
We're getting deep into the weeds with this discussion on control state issues. Brigid McCabe and Cassidy Poe join host Jimmy Moreland for a chat with MHW's Control State Team Manager Kristen Cafferata and Director of Product Compliance Maridel Altmann. We dig deep and get specific on this one - if you want some extra reading material on the subject, see MHW's excellent writeup on control states vs. open states.
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Welcome to the MHW Mark podcast, where we take deep dives into various aspects of the alcohol industry. My name is Jimmy Moreland. Mhw is a US and EU beverage alcohol importer, distributor and service provider Co-hosting with me today I'm pleased to welcome back MHW's Bridget McCabe and Cassidy Poe. Welcome back, y'all.
Speaker 2:Thanks, jimmy Hi Cassidy.
Speaker 3:Hey, Jimmy and Bridget Always happy to be back.
Speaker 1:Good to have y'all back Now. I understand this has been, to say the least, a bit of a busy time for MHW. I know that the events calendar is kicking up. What have we had going on?
Speaker 2:We have the Discus Conference, which is coming up at the end of this month. We have the Discus Conference, which is coming up at the end of this month, quickly approaching, and we're really excited because we imported the Scottish Association brands that will be popping up at Discus for exhibitors, so very excited to see a lot of those brands coming over from the UK. As well as our involvement in the board, we have our CEO and Executive Vice President who will be present at those board meetings. We have the public affairs committee that we're involved in. So a lot of exciting things to come at the end of this month.
Speaker 1:Looking away from the calendar and looking at today's conversation, today we've got a good one. It's probably as deep into the weeds we like to pride ourselves on this podcast that we get into the weeds. We're not shy about getting into nitty gritty details and talking brass tacks when it comes to finance, marketing, compliance, all of that kind of stuff. Today we really really get into it. It is crunchy, crunchy, crunchy stuff on today's episode, fear not, we've got some links in the show notes that people can check out, maybe refer to, follow along if you will, and we've got a couple of guests who are going to be our Sherpas, our guides, through the valley of the shadow of death. That is the control state discussion. Bridget and Cassidy, I'm the layperson. I don't have the industry experience like y'all do, but for y'all who have been in the industry, what is it like tackling some of the issues surrounding questions that clients may have about control states versus open states, versus yada, yada?
Speaker 2:ease the transition when a brand wants to enter into the US market or expand, and really make sure that the brands are well prepared before finalizing their plan of entry. So understanding the true differences between control states and open states is an early and essential part of this process. You know, we have quite a unique three-tier system developed from prohibition, and so each state in the US has their own laws controlling how brands can sell their alcohol. The states that are controlled by the government are control states, and so Meridel and Kristen are going to really get into what exactly that means in terms of overseeing the wholesaling or the retailing of alcohol products, and what exactly brands need to do to get registered in these states.
Speaker 3:I would say the great thing about this episode as well is that it's such a great example of the wealth of knowledge that we have here at MHW. Kristen and Miranel basically know everything you need to know about control states and personally, I think for Bridget as well, it's been very interesting to learn from them and our whole compliance team about these things, and all of us are still kind of learning every day, as they're very complicated. So I think it'll be a great episode for everyone to kind of get a taste of that.
Speaker 1:Well, I definitely learned a lot in this discussion, so I invite listeners to learn along with me. So let's jump into the discussion. Our guests today. First we have MHW Control State Team Manager, Kristen Cafarata. Welcome, Kristen.
Speaker 5:Happy, happy. Hello, how are you guys?
Speaker 1:Very good. It's great to have you on here. We also have the Director of Product Compliance for MHW, Maridel Altman.
Speaker 4:Hi Jimmy, hi everybody.
Speaker 1:Great to have you on the podcast. We appreciate y'all making the time. Now. Before we jump into the meat of our conversation, I'd like for our listeners to know a little bit more about each of you. So, kristen, can you start by telling us just a little bit about yourself, how you came to be at MHW and on this podcast?
Speaker 5:Magic. I got here by magic, no. So I've been with MHW for a little over 10 years now. I started back in 2014,. Can't do math, and I kind of just continue to grow. I love it. I love what I do. I recently transitioned from what I originally got hired for, which was price posting, to now the control state management team, and it's a lot of fun. It's always something new, something just about me. I am magical, apparently. I've been eating my lucky charms.
Speaker 1:And Maridel, how about you?
Speaker 4:So I've been with MHW for about 13 years. I started in operations. I started as a specialist, entering orders and such, and worked my way up to leading a team and then at some point established our training team for new hires. And then a few years ago, I shifted my focus on restructuring our control state team, which is now being led by our fabulous Chris Scafrada.
Speaker 1:Very good. Now we keep hearing this term control state. Can you tell us what control state means in the context of BevAlc?
Speaker 5:So control states literally just mean that these states maintain control of the beverage alcohol. So each state has a different set of regulations. There are open states, there are price posting states and there are control states. Regulations there are open states, there are price posting states and there are control states. So an open state is very simply an open state. The state allows you to sell alcohol with very limited oversight and regulation. A price posting state is similar in that you are able to sell at your discretion but requires some T's to be crossed and I's to be dotted with registration and specifically posting a price that you plan to sell for, the intention being to maintain an equal playing field. To say, if I'm selling to retailer A at $100, I'm selling to retailer B at 100, and there's no discriminatory practices. A control state means that the state is dictating the sale of the beverage alcohol by being the in-state customer that is purchasing and selling the product. So they literally take it, they maintain who gets it at what price and then they give it out to consumers.
Speaker 1:What does that mean for, I guess, the layperson, consumer? Does it impact me in any real way that I can feel if I live in Texas and then I move to Maine? I know that they are different. I'm not sure which one they are Maybe off the top of your head you know but is there something that I can feel as a real difference when I cross state borders from one to another?
Speaker 5:Yes, I know In that in Texas, which would be an open state with a registration, like a brand label registration requirement, you as the consumer wouldn't necessarily feel that because the product would be available to you In a control state, because the customer that's purchasing from the supplier is the state. There's no guarantee that they're willing to take on the product or facilitate sales. So it's very possible that you might want a particular brand that's not currently in Maine that you can then petition to a local retailer who can then petition to the state and then they can see if they can get the product. But there's no guarantee you'll actually get it. So the options are likely more limited not guaranteed, but likely more limited just because the state only wants what they want to sell.
Speaker 2:Is there additional stipulations from some states? For example, I grew up in Pennsylvania, so, as I understand and this could have changed because it's been many years since I've been there but we couldn't purchase even wine or spirits in our local grocery stores. We had to go to our state distributors for that. So is that something that really differs state to state, or is that all control states?
Speaker 5:It does vary. So there are certain states where the state is the wholesaler, purchasing from the supplier, and also the in-state retailer, like Pennsylvania, where you have to go into a Pennsylvania store to purchase the product versus. There might be other states that the state purchases the product from the supplier and then the retailers are all privately owned, so you could find it on the shelf easily as opposed to having to go to a state entity to purchase it.
Speaker 1:And this may be an obvious question, maybe a little bit of a history lesson for our listeners who don't already know but why is it like this? Why do we have 50 different systems in 50 different states?
Speaker 5:Prohibition. Most of this started with prohibition. You know, the government wanted to regulate everything. They wanted complete visibility of what was going out, and then each state kind of got their own rights to do what they wanted to, and the control states adhered more to the prohibition days, price Posting decided. You know, they wanted to kind of be somewhere in the middle and Open States just said, eh, it's a free-for-all, do what you need to do, we want you to sell.
Speaker 4:It did originate from prohibition, like Kristen said. After prohibition, the 17 control states and the one county in Montgomery County decided that they were going to remain in control of the distribution of product within their state. And so, and then you know there are somewhat standards across control. States, meaning they all require you know a state code. States, meaning they all require you know a state code, they all require for us to provide UPC codes, scc codes, you know, as part of submissions. And so those are the things that we ask for as part of our service and, yeah, we guide clients through that and those are just the fun things that we talk to clients about on a daily basis.
Speaker 1:That gets to. What I wanted to ask is what does the day-to-day work of what your team does? What does that look like? Are you just answering questions for clients, or what's the scope of work look like?
Speaker 5:It really varies by client, supplier, need day. For the most part, everything sort of starts in the same place. It starts with the question of I want to go into X state. We then go over the specific requirements based on the beverage type, since control states only require, depending on the state, for either wine and beer and spirits or, most predominantly, just spirits. It's less common that beer and wine are controlled.
Speaker 5:So we go over you know, your beverage type, which state you want to go into, what that specific state requires, and then, once we get sort of all those T's crossed and we're ready to kind of move forward, we get the required information, like Merida was saying the UPC, which is the barcode on the physical product. The SCC, which is the barcode on the physical product. The SCC, which is the barcode on the outer shipping case, literally a shipping container code. It's like a barcode on the outer case that the state requires to literally scan to their warehouse pallet dimensions, pricing, which is obvious, if they're planning on using a broker, if they're planning on offering any discounts, sort of like a lot of nuanced, state-specific details that come up based on an individual conversation with what a brand is looking to achieve.
Speaker 2:Do you recommend a broker for most brands that are seeking to get into control states?
Speaker 5:It's always recommended, simply because a broker will operate on the supplier's sort of behest at their best interest. They can offer a lot of in-state direction that MHW doesn't necessarily have, since we're not in the state conducting the sales and the tastings and seeing market trends. There are a lot of things that we just don't have visibility to being the sort of out-of-state shipper. So having a broker is always ideal if possible. Some states require it, depending on their listing type, but for the most part it's not required. It's just ideal to kind of help move the brand along in a state, because if you don't have that in-state representation there's likely not as much demand. So it kind of plays into how successful the brand is in a particular state.
Speaker 3:So I want to get into some of these specifics about control states here, and there's a few couple key terms that I don't think the average person would know what they are and how they come into play. So do you want to talk about special promotional allowances and depletion allowances?
Speaker 5:Sure, just to take a step back, just sort of, because I think I mentioned, you know, listed special order. There are a lot of terms that if you're not in these states could sound a little bit like a foreign language. So a special order is a state purchasing product based on in-state demand. Meaning I walk into a store in Maine I say I want Kristen's vodka. They reach out to the supplier and for a special order for a specific retail interest. They purchase product to facilitate a consumer request.
Speaker 5:A listed item is slightly different and usually a longer process. The states typically require the item starts as a special order to indicate how much volume the state can actually anticipate and if it's worth their time, because a listed item typically appears in like a state issued sort of like ordering guide as a SKU that they suggest purchasing. I was almost like literally order one of these 10 items, which is always great for a brand if they can get listed because it's on like an ordering sheet for people to know it exists. So special order is a lot more common for newer brands. So they get in, they get some retail interest and then, once there's enough interest built up, they can then petition to be listed and the state will then say, yeah, you've been doing great, we're happy to take your brand on. They can then sell in higher volumes, which is obviously always the ideal to make more money.
Speaker 5:And all that ties into how you work with your broker, if possible to help dictate in-state market trends to see if you want to do a SPA special promotional allowance or a DA depletion allowance.
Speaker 5:Both are more or less interchangeable. Ultimately what they are is, depending on the state they have a different term. But ultimately what they do is they offer a temporary price change to offer an incentive for the state or consumers to want to purchase the product on a promotional basis. So, depending on the state, it'll either be a discount off of what the wholesaler, the state is paying, or it could be a discount off of what the wholesaler, the state is paying, or it could be a discount off of what the retailer is paying to incentivize retailers to buy or hire volume to again move more product. So it's a marketing tool to try to help push more volume, make the brand look more enticing, more competitive in the market, which is where that broker comes really into play to say, hey, your brand could do really well if you lower the price. Let's see what happens if you lower it by a dollar a bottle and kind of use that to see like how you're faring in the market compared to other similar brands.
Speaker 1:It sounds like a lot of negotiation, a lot of probably very relationship heavy interactions going on.
Speaker 5:Absolutely so. We, mhw is the vendor or, like the outof-state shipper, works closely with the brokers who operate on behalf of the supplier in the state and in some states it's the only point of contact the state has. Like in New Hampshire, where MHW is the vendor, the state doesn't care who we are, they only care about the in-state broker that is going to solicit that brand and make that brand move. So they don't care who we are, they care that we work with the broker they know and the broker that they trust.
Speaker 2:That's a great explanation, and I guess one of the things for our listeners that would be really helpful is how can a brand best prepare for their control state listing? What is like the dream scenario when a client comes to you and they're ready to open up a control state.
Speaker 4:Oh my goodness.
Speaker 4:So we always say preparation is key because a lot of what we require and what states need ultimately are things that the client skews or the brand skew details need.
Speaker 4:So you know being able to identify or have readily available the UPC codes and the CC codes. You know being able to identify or have readily available the UPC codes and SCC codes. You know the spec sheet. Basically, as Kristen indicated earlier, are one of the key components of being ready to enter the control state markets, and so you know what we tell clients normally is you know if you're planning to get into a control state, get in touch with us one to two months prior to when you want to be in the market and at the very least, we can start talking to you about. You know how your pricing should look like, or you know what the NABCA codes, or you know submitting a NABCA codes on your behalf could be one of those prep items that we could help you know, guide you through. So preparation is always best, is always great, and we really push our clients to give us information and just be prepared when they want to be in control states. Does it matter?
Speaker 1:where you're coming from, or is it only like where the alcohol is going to? So if I'm based in Illinois versus Texas or Florida or somewhere, does that matter as much as I'm wanting to go into New York?
Speaker 5:It's more important where you're planning to sell to, depending on the state. If you are domestic, it might change how we need to submit the product. Ie, pennsylvania has a specific accommodation for Pennsylvania produced goods going into Pennsylvania, so they offer a lot more guidance, a lot more leniency, a lot more options because it's within the same state. If it's domestically produced and you're still going through someone like an MHW as your service provider, we're still acting as like an out-of-state shipper. So it's almost irrelevant what state it's coming from versus being an international product. It might just change how you price the product if it's domestic, just because your freight, your taxes, all that stuff is going to play into what your base FOB or base price is going to look like.
Speaker 3:Merida, you brought up NABCA briefly there, so I wasn't sure if you wanted to explain what NABCA is and how they come into play in all of this.
Speaker 4:Good question, cassidy. Nabca is the National Alcohol Beverage Control Association. Basically, they are the entity that represents the alcohol beverage industry and they strive, I will say, to standardize requirements within the control states. So all 17 control states are registered within the NABCA agency. However, not all states, not all control states, I should say, require for brands to have NABCA codes, and so there are states where the NABCA codes will be the standard state code and there are other states where they dictate their own state code. So we like to always ensure that clients have the NABCA codes when they want to go into a control state, only because once they have that about 50% of the control states, they'd already have a state code connected to that.
Speaker 2:SKU. And then from a trade participation perspective, Cassidy, I'm actually going to tap you to chat about what we do with the NABCA conference and how our clients can get involved.
Speaker 3:So this year it is in May.
Speaker 3:Nabca has an annual conference every year that NABCA members are invited to attend and basically, through MHW's relationship with NAVCA, any of MHW's clients can exhibit within our booth at the trade show portion of the conference.
Speaker 3:So basically, mhw has a bar every year within their booth and a couple of our clients will join us and we have a bartender that will serve cocktails with each of the client products in it. We have a bartender that will serve cocktails with each of the client products in it and also a representative from each of the brands can pour samples in the booth as well. So it's been a really great opportunity for our clients to kind of get their products in front of some of the control state important decision makers. We've gotten some great feedback from clients in the past, and I mean from an MHW standpoint. It's always great to go to the conference and meet a ton of people who are very well-educated and involved in the control state fields, including Kristen, who will be joining me at the conference this year. So we're very excited. If any MHW clients are interested in participating, you can reach out to us about that as well.
Speaker 1:And that conference again is May 19th through 22nd and it's in Kissimmee Florida.
Speaker 2:And your Disney trip. Yes, Do all of the control states pick up from? I imagine they're accustomed to picking up from Western and our other warehouses, or are there any where we have to facilitate the logistics?
Speaker 5:It's actually a good question. It actually comes up pretty frequently. So most of the states are prepaid, meaning that the supplier is responsible for shipping the product at their cost to the state. There are a number of states that, depending on, obviously, the state, they build the freight into their cost because they intend to consolidate the shipments with other suppliers for sort of their speed and cost effectiveness. But for the most part, especially since most of the products start a special order, they tend to start as smaller orders that are either FedEx, ups or ship like, on just a smaller scale, that the client pays directly to ship to the state to again build up that volume so that they can then start to ship in larger quantities and get the volume that the state could then potentially consolidate and, you know, be cheaper in the long run.
Speaker 1:Is there any special consideration for DTC applications, applications? You know, once I've got my website and all my drop shipping or whatever it is, once I've got that set up, is it different if someone is trying to order a product to their door, whether they're in Maine or Texas? How much of a difficulty is that? Or do you need to have like a 50-state strategy if you're trying to do DTC correctly?
Speaker 5:It really is going to depend on the state. We don't cover too too much on DTC. The couple of times that it has come up it typically is sort of MHW selling to another quote unquote in-state wholesaler as opposed to the state board, and it kind of goes around the control state system because the entity that's doing the DTC tends to have a specific type of license and permit to allow them to do so. So it doesn't typically facilitate the same way a control state sale would. If they could find a DTC entity that's able to and licensed to do it, that's great. But it's not always the most cost effective way to do sales because the DTC entity might end up having a much higher margin for how they mark up the price or the profit they take before they actually sell to consumers. So it's definitely a numbers game if it even makes sense for a particular supplier. But in theory, yes, DTC is an option if you find the right entity to do it. Mhw could not be a DTC entity for a supplier, though we're not licensed to do so.
Speaker 2:So to kind of piggyback from an e-commerce perspective, which is slightly different than DTC.
Speaker 2:There are states that have like intra-commerce agreements with other states and it really you kind of have to research each individual state in terms of what retailers can sell to consumers and ship across lines. But there are e-commerce networks where, say, if a brand is, you know, selling in New York or Florida, for example, there's agreements with certain states to be able those consumers to be able to receive I believe it's 38 different states that can receive shipments from retailers inside of those states, for example. So there could be, if you sign up for, say, like a BevStack and that's, you know, integrated into the brand's website. They're sort of the back office that goes through a retailer network that can then compliantly ship to consumers ordering from a retailer in a different state. But it really, you know it varies from state to state what these agreements are and you know what can ship and even things down to like the type and the category of the beverage. Alcohol matters, because wines have a little bit more flexibility, for example, than spirits.
Speaker 1:If I'm a brand and I'm just spinning up getting things going, what's the first steps? To make sure that all of my T's are crossed and I's dotted Is the easiest thing just to generally enter the MHW ecosystem and from there I get referred to the people I need to get referred to in order to legally enter the markets I want to enter, or what does that step look like?
Speaker 2:So I think that each strategy for every brand is going to be slightly different in terms of market entry points, expansion points that are already in the US, and so the best way to kind of go about this is to work with the MHW business development team to have custom brand economics, to talk about target demographics and markets.
Speaker 2:Ultimately, mhw is really about allowing the brand to control their marketing message and really operationalize their sales destiny. So that's something that our clients really enjoy is that, you know, we don't kind of take their brand and that's the last they see of it and they hope that it sells in the market. They really are the driving force behind it. So our business development team will really help in that process to understand like margins and to customize a proposal. But it's really up to the brand in terms of what markets they want to be in and from there we would just go through the onboarding process. Again, they might need a broker to solicit that interest from the control states if they're interested in being purchased there. So that is something that our team can help advise on. But ultimately, you know, we leave a lot of that up to the client to determine what markets are best for them.
Speaker 1:On to our final question, our fun question that we always like to ask our guests what is your favorite? We'll say adult beverage and Maridel, if you want to go first.
Speaker 4:These days I've really enjoyed ranch water.
Speaker 1:Is there a particular flavor, a particular?
Speaker 4:No, it could be. It's a cocktail that could be made with I think it's Topo Chico and tequila, and it's just really refreshing.
Speaker 1:A ranch water, straightforward and you can get it just about everywhere. Very popular in Houston. Up here in Maine not so much. Kristen, how about you?
Speaker 5:I would have to say I'm a big fan of a good Moscow Mule. The ginger beer does sometimes, you know, give me a little heartburn, but I'm a big fan of just sort of how crisp and kind of refreshing it ends up being. It always seems to be pretty light, so I would say that that's a fan favorite right now. It used to be vanilla vodka and Sprite. That's my usual wedding drink, because then if I spill it on myself.
Speaker 1:I'm good A Moscow mule and it's always good to have an excuse to use those copper cups that you got in your cupboard.
Speaker 5:Always Keep it nice and cold.
Speaker 1:I want to say a huge thanks to our guests today, kristen Cafferata and Maridel Altman, for joining us.
Speaker 5:Thank you everybody, thank you, thank you. It's been a lot of fun.
Speaker 1:Now, we covered a lot of information in this episode and if there were some terms or topics that our listeners would like to better understand, we'll have links in the show notes with more resources if folks have questions or want to follow up. So thank you, listeners, for joining us on the MHW Mark podcast, and thanks again to Bridget McCabe and Cassidy Poe for joining me in hosting.
Speaker 2:Thank you, Jimmy, Thanks Jimmy.
Speaker 1:This podcast is produced by me, jimmy Moreland, with booking and planning support by Cassidy Poe and Bridget McCabe. It's presented by MHW. Find out more at mhwltdcom or connect with MHW on LinkedIn. Lend us a hand by subscribing, rating and reviewing this podcast wherever you listen. We'll be back in your feed in two weeks. We'll see you then, cheers.