On July 9, President Biden issued a broad executive order titled “Promoting Competition in the American Economy.” The order aims at anti-competitive and monopolistic practices in the United States economy. Beer, wine and spirits industries were specifically named in this order.
Through the order, the President instructed,
- The Treasury Department to prepare a report within 120 days (before November 6) that scrutinizes the alcohol industry’s market structures, with a focus on reforming “threats to competition” and/or “barriers to new entrants” posed by industry consolidation; and
- the Alcohol and Tobacco Tax and Trade Bureau (TTB) to, within 240 days (by March 5, 2022), consider updating legal trade practices and “reducing any barriers that impede market access for smaller and independent brewers, winemakers, and distilleries.”
The order has effectively put Big Beer and the alcohol industry in general under federal scrutiny. Depending on what the Treasury Department and the TTB find, it could mean increased regulatory oversight or changes to what constitutes legal and accepted trade practices in the alcohol industry.
Given the Administration’s views on competition and consumer protection, the potential impact on alcohol production, distribution, and retail sales is enormous,” wrote Norton Rose Fulbright Law Firm in an analysis, as per good beer hunting.
Norton Rose Fulbright Law Firm
It has been more than 25 years since the TTB last revised its unfair trade practice regulations.
The U.S. three tier system and power consolidation at distributor level
Currently, the U.S. has a three tier system for alcohol production, distribution and sale. The three tiers are importers or producers; distributors; and retailers. What this means is that producers can sell their products only to wholesale distributors who then sell to retailers, and only retailers may sell to consumers. Producers include brewers, wine makers, distillers and importers.
In the U.S. alcohol industry market consolidation is very apparent at the distributor level. Fewer wholesale distributors are left to sell beer from a massive number of breweries. In some states, such as Arizona, Alaska, and Oregon, one beer distributor controls almost all of the beer made by one large supplier (like MolsonCoors). This forces retailers to buy certain brands from one major wholesale distributor.
The new order by President Biden will specifically scrutinize these major wholesale distributors. The federal government could amend regulations to make it easier for breweries to sell to retailers directly. The powerful wholesalers do not welcome the idea that regulatory changes could ease protections that they currently enjoy.
Power of Big Beer would be challenged
The majority of the U.S. alcohol industry is monopolized by a few Big Alcohol giants. The Treasury report President Biden ordered will answer the question of which businesses within the alcohol industry need protecting, and from whom.
The Treasury Department and the TTB have started soliciting comments from the alcohol industry. For Big Beer this means that smaller breweries will complain that the largest beer companies engage in anti-competitive practices, or that distributors don’t give small breweries enough access to retail shelves.
Previously, Heineken was fined for illegal trade practices. As Movendi International reported,
- the TTB fined Heineken for $2.5 million for giving their BrewLock platform free of charge to bars and reimbursing others through credit card swipes. This was a violation of current federal law prohibiting breweries from giving gifts or free product to retailers.
- Soon after the New York State Liquor Authority finalized a $1.25 million settlement agreement with Heineken USA Incorporated for 42 violations of the state’s Alcoholic Beverage Control Law.
In 2020, AB InBev paid a record $5 million in fines related to illegal dealings with sports and entertainment venues.
In the past, the only Big Alcohol giant to come under federal scrutiny was AB InBev. In 2013, the Department of Justice (DOJ) and the Federal Trade Commission blocked AB InBev’s proposed purchase of rival Grupo Modelo. This forced AB InBev to divest Grupo Modelo’s U.S. business to Constellation Brands. In 2016 the DOJ approved AB InBev’s purchase of SABMiller. In 2020, they approved the purchase of the Craft Brew Alliance under the condition that AB InBev divest itself of certain business interests and submit future acquisitions to the agency’s approval.
Other major brewers or distributors have so far not faced federal scrutiny as long as they stayed below the $94 million threshold set by the Hart Scott Rodino Antitrust Improvements Act of 1976. For example, from 2019-2020 the Reyes Beverage Group acquired 10 distributors in California alone.
In 2020, Alcohol Justice called upon the California Attorney General’s office to open an investigation into wholesaler consolidation. In that state, Reyes Beverage Group controls 43% of all beer sold, and wholesalers aligned with AB InBev control most of the rest.
Large wholesale distributors are expected to be the most scrutinized through the executive order. The reports by the Treasury department and the TTB will answer the question on whether the concentration of power among these distributors is justified, or whether it is the result of anti-competitive practices.