$3.79 bonded and the $1.92 2-year-old whisky. The law of supply and demand is the important thing there. Ten-year-old whisky is scarce and you don't take the prime cost as the cost to manufacture; you take its replacement cost. You couldn't replace that whisky at any price. You would have to start now and wait for 10 years before you would have it.

Mr. Buck. This was 4-year-old.
Mr. WACHTEL. I am talking about any whisky 10 years old.

Mr. BUCK. You were talking about the chart. That is a 4-yearold whisky.

Mr. WACHTEL. The other thing that was overlooked in the conference yesterday is the fact that when you lay out your cash for State and Federal taxes that is a cash outlay of $10 per case that you don't get back for 60 days, and there aren't many businessmen willing to hazard that kind of investment in cash—not in ingredients—so the span between the cost and consumer price is not out of line. The best evidence of it is that the profits of the whisky business have not been as great as in many other seasoned industries.

The CHAIRMAN. I understood you to testify, in response to Judge Davis' question, that there is a very wide variety in the same type of whisky. You mentioned especially the 4-year-old bottled in bond whisky, running from $1.33 to $3.79. Is that correct?

Mr. WACHTEL. That is right.
The CHAIRMAN. That is the same type of whisky?
Mr. WACHTEL. It is 4 years old, it is 100 proof.

The CHAIRMAN. What accounts for the difference in price between the $1.33 and the $3.79?

Mr. WACHTEL. Ability to make it. It is inconceivable that four men can sit down and blend the same type of whisky, even with the same ingredients and the same formula.

The CHAIRMAN. When you say of the same type, you don't mean of the same type.

Mr. WACHTEL. It is bottled in bond. There might be a justifiable span in that price between the $1.33 and the $3.79.

One other thing ought to be brought out, that while it may seem true that the man with the bottled in bond may have a wider margin, let's understand that that represents 6 or 7 percent of the total consumption of the country. That is a specialty. He would'nt be able to sell the 2-year-old at the low margin of profit if he didn't make the extra margin on the specialty business sold to people who can afford to pay and who are not the masses.

Mr. DAVIS. What is the price range to the consumer of your Calvert blend ?

Mr. WACHTEL. Between the wholesale price and the consumer price?

Mr. Davis. No; the price to the consumer in the States where you fix the price.

Mr. WACHTEL. It depends on the tax. It is $1.20 a pint in New York City. The State tax in New Jersey is the same; it is $1 20 there. The State tax in Massachusetts is less; it is about $1.12 there. The State tax in Colorado is the highest in the Union; it is $1.29 there. We have a $4.80 tax on a case of 3 gallons of whisky, a pretty stiff tax.

Mr. Davis. Will you furnish for the record your different price ranges ?1

Mr. WACHTEL. Gladly.
Mr. Davis. Giving ages and qualities.

Mr. WACHTEL. I can't do it on the difference of age. We improve our whiskies four or five times a year. There is a constant flux in a blended whisky. It does not remain the same.

Mr. Davis. Give the prices as of a certain date within the past year.

The CHAIRMAN. I take it your whisky is constantly improving. Mr. WACHTEL. As ages permit.

The CHAIRMAN. You spoke of three elements that go into the differentiation, skill, brand, good will. Is that correct?

Mr. WACHTEL. Marketing strategy—oh, very important. My competitors have taught me that.

The CHAIRMAN. Probably the most important of all.

Mr. WACHTEL. Without doubt. Of course, you must have something in the bottle. They wouldn't repeat, you know. You can't fool them more than once or twice.

The CHAIRMAN. Which of the four has the greatest weight?

Mr. WACHTEL. Which of the four has the greatest weight? I would say marketing strategy, because that is true in any business. I think that is fundamentally true of any business. Even a good product will not sell if it is improperly marketed. Some times a bad product sells, from my experience, when it is well marketed.

The CHAIRMAN. Skill in salesmanship.
Mr. WACHTEL. Inspiration, enthusiasm, leadership.

The CHAIRMAN. That is the primary factor in accounting for this range between $1.33 and $3.79?

Mr. WACHTEL. Yes.

Mr. PATTERSON. I would like to ask Mr. Wachtel with reference to the volume of whisky business in dollars. I don't ask him to put that on the record now because he answered in the beginning, but I do ask him to consult his colleagues and, if agreeable, submit it for the record.1

Mr. WACHTEL. I shall be very glad to.

Mr. PATTERSON. I understood you to testify that your capacity was 9,000,000 gallons a year.

Mr. WACHTEL. No; our sales (approximately).
Mr. PATTERSON. What is your capacity?

Mr. WACHTEL. Well, that gets into production and also another problem, and that is, that we try to produce most of our whiskies at one plant, but when necessary we may produce at two other plants that do not continuously make a product.

Mr. PATTERSON. You sell no straight whiskies?

Mr. WACHTEL. Just in very small quantities, where a wholesaler asks us to help him out with a straight bourbon or a straight rye. Our main sales are four blends in four price groups.

Mr. PATTERSON. You said the difference between your prime cost and the consumer's cost was relative to the differences of other major commodities, did you not?

Mr. WACHTEL. Some; a good many.
Mr. PATTERSON. I just wanted- ---

Mr. WACHTEL (interposing). Definitely true in the food business, certain types of food business in particular.

Mr. PATTERSON. That is all.

Mr. WACHTEL. May I call attention to one thing, Mr. Buck, which may throw some enlightenment? You had a chart that showed a declining consumption of whisky based on tax withdrawals. The inference there, I think, is erroneous. Actually, in 1937, as near as we can find out, consumption increased. In 1938, the first half showed a slight decline, and I think the second half of 1938 showed a slight gain. The reason the figures do not reflect the true fact is this: There has been a growing tendency toward blends. We figure the blend business represents today 40 percent of the total domestic whisky business of the country.

Mr. Buck. That was amply explained yesterday when the charts were introduced.

Mr. WACHTEL. I thought I had some figures you would like to add into your record.

Mr. BUCK. What are your figures based on?

Mr. WACHTEL. Mostly on the reports from the States themselves as to the stamps. That is pretty accurate.

In short, the figure shows 99,000,000 gallons—99,336,000 gallonsinstead of '70,000,000, aside from the fact that those tax gallons are 100 proof and 80 percent of your business is 90 proof.

Mr. BUCK. You don't question the accuracy of the chart?
Mr. WACHTEL. No; the chart is correct, definitely correct.

PRICE MAINTENANCE TO SUPPORT RETAILERS

Mr. BERGE. May I just ask one question? You said a few moments ago that your resale price was the same in different areas, and the only difference to the consumer would be the tax. You mean by that that on any one of your products, the price you fix for resale is the same all over the country?

Mr. WACHTEL. That is not true; no, sir.
Mr. BERGE. You vary it according to territory?
Mr. WACHTEL. Mark-ups vary. It would have to.
Mr. BERGE. In order to meet competition?

Mr. WACHTEL. Not that alone. Take Los Angeles, for example. You have something like 8,000 retail licensees, probably 4 times more than they have any right to have. It is very difficult for a retailer there to make a living. Competition for him is too great. In New York City we have 1,200 package stores. Competition is less; there is a better opportunity to make money.

In Massachusetts the number of licensees is much too many; competition is very keen among retailers.

Mr. BERGE. In other words, you take into account, or try to take into account, in fixing the price, what you deem to be the retailer's welfare. If you think he can exist on one price, you fix it there, and if you think that he requires a higher price, you fix it there.

Mr. WACHTEL. That is right. Mr. BERGE. If you think a smaller margin of profit is sufficient for him, you would lower the price?

a

Mr. WACHTEL. Yes, sir.

Mr. BERGE. You said a few moments ago that there was competition in the liquor industry. You mean price competition, I take it, because you mentioned the various prices of different brands. But how could there be competition if every company in the business followed your resale price-maintenance policy? I take it that there is competition now because many of them don't follow that policy. If they all followed the policy I can conceive that there might be competition as between distillers to fix the price. That is, you might desire that all of your retailers should undersell the product of a competing distiller; but how could there be any competition between retailers if all of them were operating under retail price maintenance contracts? Would that be possible?

Mr. WACHTEL. Yes; because the distiller markets his product at different prices. They are not all in the same price category. All 2-year-old whiskies don't have the same price. Mr. BERGE. That is a different product?

Mr. WACHTEL. Oh, no. We look upon the consumer as a belly potential, you see.

Mr. BERGE. There are different classifications, of course. What I mean to say is this, that if you have a brand that you have fixed the price on at, say, $1.50, and your retailer has to sell it at that, and every other retailer has to sell at that, there is no opportunity for competition between them on the same product. Of course, they can sell a cheaper product at a cheaper price, but there isn't any opportunity for them to sacrifice some of their profit for the sake of greater sales.

Mr. WACHTEL. We don't want them to.
Mr. BERGE. You don't want them to. But they might want to?

The CHAIRMAN. Did I correctly understand your testimony in response to Mr. Berge that you do not maintain a uniform price throughout the country for the same grade of whisky?

Mr. WACHTEL. I didn't quite follow that. How do you mean? The consumer bottle price.

The CHAIRMAN. No; your price to your wholesaler.

Mr. WACHTEL. Our price to our wholesaler is definitely an f. o. b. distillery price. He is talking about the distiller's price.

Mr. BERGE. I am confused now. I thought you said that for a given product you might have a fixed resale price of one figure in New York and a lower figure in Los Angeles.

Mr. WACHTEL. That is right; the consumer bottle price. That is the span between the wholesaler's cost and the retailer's cost and the consumer's cost. In those States where we are permitted to operate under fair trade, the mark-up in one market might be 33 percent, in another market it might be 38, in another market it might be 40.

Mr. BERGE. You determine what it will be?
Mr. WACHTEL. Definitely, where we have the legal right to do so.
The CHAIRMAN. And who gets it?

Mr. WACHTEL. The retailer gets it. We have nothing to do with it. We only get a fixed price for every case of whisky we sell at the distillery net, and that is the same for every shipment.

The CHAIRMAN. So you make the different mark-ups in the States, not for your own benefit but for the benefit of the retailer with whom you have no direct dealings.

Mr. WACHTEL. Thank you, sir, that is exactly right, and I can't understand why there is so much misinformation on that subject, because a candidate for office in the State of Maryland broadcast over the radio last fall

Mr. BUCK (interposing). Let's not go into politics. Mr. WACHTEL. It isn't politics, it is a question of misunderstanding of who benefits from fair trade. The retailer benefits, not the distiller. You pull the plug out tomorrow on Calvert and our sales would double, but we don't think it would be good over the long pull because the retailer would go broke.

Mr. BERGE. But whether the retailer benefits depends upon the wisdom of your policy in particular cases. He may or may not benefit, depending on whether your judgment is good. The point I am trying to establish, and I believe your testimony establishes it, is that it is your decision rather than his that determines, and that you do exercise the power to discriminate between territories. I withdraw the word “discriminate," but I will say to make a difference between territories as to what the retailer may charge for the same product, and that in doing that you try to weigh these various factors affecting his welfare, that the question of what his welfare is, is decided by you and not by him.

Mr. WACHTEL. Well, if trial and error proves we are wrong, we change.

Mr. PATTERSON. Mr. Chairman, was the question of export trade mentioned? If not, I would like to ask, Do you have an export trade?

Mr. WACHTEL. Very, very little; almost nothing.

Mr. Buck. Mr. Patterson, I might say I have tried to divide this hearing into parts, and bring them on in consecutive order. This particular, phase is relating to distribution and its system and symptoms. Tomorrow morning we take up exports and the system of distribution of exports.

Mr. PATTERSON. But will you, with this witness ?

Mr. BUCK. Not this witness, but someone from his company who represents the export side of his business. Mr. PATTERSON. I am content.

Mr. BUCK. Mr. Wachtel, I was interested in your statement brought out in the questioning of the committee about the investment of money in this business by the distiller for taxes. You say that was a considerable item and involved great risks that many people wouldn't take, or didn't desire to take. As a matter of fact, your mark-up is based on taxes.

Mr. WACHTEL. If we didn't do that, we would go broke.

Mr. BUCK. Exactly; so rather than having the tax as a liability, the tax is a very great asset in your business, it keeps you from going broke.

Mr. WACHTEL. Oh, no; on the contrary.

Mr. BUCK. What do you mean, you would go broke without the tax mark-up?

Mr. WACHTEL. You can't simply base your price on the basis of paying out $10 in taxes and getting $10 back and trying to sell 42 cents worth of whisky for 10 percent mark-up.

Mr. BUCK. When you were in the cracker business you didn't have that mark-up.