Dear Client:

“Over the past several years, RNDC’s performance as a distributor grew worse and worse. Sazerac has attempted to work with RNDC to come up with ways to improve its performance. None of those efforts have worked.”

So starts the 13-page lawsuit Sazerac filed against its longtime distributor, Republic National Distributing Co. (RNDC), in federal court in Kentucky on Friday, a copy of which was obtained by Wine & Spirits Daily. The suit alleges non-payment for inventory RNDC was shipped, in addition to chronic poor performance and market disruption.

As you’ll recall, Sazerac terminated RNDC late last year in 30 states in favor of mostly beer distributors and a few wine and spirits houses. That termination is effective February 1. Since then, Sazerac claims that as of last week, RNDC has “stopped payment on approximately $38.6 million of wholesale liquor products,” according to the suit. 

“Adding insult to injury,” adds Sazerac, “since the termination, RNDC has bad-mouthed Sazerac in the marketplace, ceased cooperation with Sazerac and otherwise attempted to harm Sazerac by unfairly disrupting future sales and the transition to new distributors.”

PERFORMANCE.  Sazerac makes the claim that it “repeatedly” asked RNDC to make “reasonable efforts” to market their products, including refusing to “invest in its salesforce or to provide sufficient incentive to its employees to promote Sazerac products” as well as acting to “condition the availability” of high-end products (Pappy) “on the purchase of non-Sazerac products.”  (As BBD noted last week, this is referred to as “tie-in” sales and is one of the areas the TTB is taking a closer look at.) 

2021 GLOBAL AGREEMENT. Further, Sazerac says it invested $100 million in creating its own dedicated field marketing team to “achieve what RNDC failed to do”.  To address this, in September of 2021 both parties negotiated a new “global distribution agreement” where RNDC would reportedly take a flat dollar fee for each case of Sazerac products sold, plus a new incentive program where RNDC could earn a per-case fee for specific volume growth goals as well as a “substantial flat payment” for achieving targets on all Sazerac products, as well as RNDC “providing funds” to Sazerac to help fund their field sales force.

So, as Sazerac tells it, “instead of just moving on from RNDC, Sazerac attempted to make things work with RNDC by entering into a new deal that would take into account RNDC’s performance failures and the investments necessary for Sazerac’s MDR program which subsequently launched in all territories.”

PUSHBACK. Along the way, Sazerac says RNDC began pushing back on certain terms of the global agreement, and “demanding that the parties meet to discuss adjustments to the rate per case. In fact, in the months leading up to these demands by RNDC, RNDC began communicating that it had no incentive to sell Sazerac products (despite the incentives provided in the 2021 Global Agreement) and began expressing dissatisfaction with the terms of the global agreement (which RNDC had negotiated just several months before) rather than working to achieve its sales growth incentives,” according to the complaint, resulting in RNDC allegedly withholding funds from Sazerac.

RNDC TERMINATES SAZERAC.  You don’t see this often, but at this point, the suit alleges that in June 2022, RNDC sent Sazerac a letter “terminating the Agreement, effective sixty (60) days from the date of this letter.” 

Indeed, after 60 days the agreement was terminated leaving both parties to operate without a contract. “Sazerac repeatedly attempted to work with RNDC to negotiate and come to terms that took into account Sazerac’s needs and investments,” says the suit. However, “RNDC refused to propose any reasonable terms satisfactory to Sazerac and the parties did not reach a new deal” although they continued to work together, although “RNDC’s performance remained poor”. 

On December 30, Sazerac terminated RNDC effective Feb. 1. 

There it gets interesting. On January 3, Sazerac alleges, RNDC “began to act contrary to any reasonable transition” by raising prices and canceling planned promos and discounts and “making disparaging statements about Sazerac” to retailers. 

INVENTORY PAYMENTS. In early December, Sazerac claims it shipped RNDC $10 million worth of spirits inventory on 30 days credit, but after 30 days came and went, Sazerac says it wasn’t paid and RNDC stopped automatic EFT withdrawals, even after RNDC likely sold most of the product to retail. (If true, that’s quite a markup for RNDC). 

Says the lawsuit: “RNDC stopped all payments and claimed a unilateral right to ‘offset’ the payments to Sazerac with disputed amounts. But, of course, all of the invoiced amounts are past due and RNDC has never handled any balances between them by refusing payment of past due invoices for product”, effectively “holding the receivables hostage” to demand a “reconciliation payment.”  

It’s not a small amount. Sazerac says “The Invoices that became due between January 3, 2023 and January 12, 2023, total approximately $40.7 million, less a depletion credit of approximately $2.1 million.” From Jan. 12 to the termination date, Sazerac estimates it will be owed another $48 million in unpaid invoices.  

Keep in mind, these two companies have a long and storied relationship.  Sazerac owner Bill Goldring’s grandfather was one of the original founders of what is now RNDC, through various mergers and acquisitions over decades. But given this lawsuit, we now get a sense of the mutual animosity that grew between the companies in recent years, which likely was a major consideration for Sazerac’s decision to create a new distribution network. 

Developing……

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Coincidentally, your editors spoke of Sazerac’s move to beer distributors in our most recent podcast episode.  YouTube | Apple

Until tomorrow,

The editorial team

“Know thy self, know thy enemy. A thousand battles, a thousand victories.”  -Sun Tzu

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