The Brewers Association issued a second round of comments to the Department of Treasury laying out the competitive challenges facing craft brewers, focusing on wholesaler consolidation, market access issues and restrictive state laws.
“Our comments aim to elicit more stringent antitrust enforcement by federal competition authorities, enlist federal help in shining a spotlight on unfair and protectionist state laws, and secure more rigorous and effective enforcement of federal trade practice laws,” the BA wrote in a letter to the trade group’s members.
In previous comments to the Treasury sent on August 18 in response to President Joe Biden’s executive order calling for increased competition across several industries, including beer, the BA called for the Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) to enforce trade practice violations and update its regulations.
In the letter issued on Thursday to the Treasury, BA president and CEO Bob Pease offered additional competitive challenges facing the small and independent craft breweries within the trade org’s membership. Those include:
- The highly concentrated nature of the U.S. brewing industry, despite more than 8,764 craft breweries in operation;
- Wholesaler consolidation, which has created a duopoly in “most markets” leading to market access issues for craft breweries as larger wholesalers consolidate in new territories, giving them “unprecedented leverage over small suppliers and retailers” that “if left unchecked will eventually give a few companies virtually total control of beer distribution;”
- And restrictive state laws — including franchise laws, bans or limitations on self-distribution, restrictions on direct-to-consumer sales and more.
“The competitive constraints outlined above make big beer supplier acquisitions of even small brands more competitively relevant because the distribution choke point allows big suppliers to starve competing brands of wholesaler attention,” the BA said.
To bolster marketplace competition, Pease asked the Department of Justice to “rethink its approach towards the review of beer wholesaler acquisitions,” as well as “its approach towards large beer supplier acquisitions of smaller competitors.”
Pease’s second letter to the Treasury detailed how the four largest beer manufacturers (Anheuser-Busch InBev, Molson Coors, Constellation Brands and Mark Anthony Brands) accounted for 75.5% of the market in 2020. Due to this concentration at the top, the smallest 77% of brewers account for 1% of overall beer production, he added.
Small producers have achieved growth in recent years through the “ability to bypass conventional channels of distribution,” Pease wrote.
“In effect, the barriers to access primary routes to market have channeled consumer demand towards the very small businesses able to survive outside conventional distribution channels by selling at their own premises,” he wrote.
In most geographic markets, the middle tier consists of only two wholesalers who are “capable of reaching most retail accounts in the market,” leaving brewers and retailers with a “duopoly.” Pease pointed to California as a particularly problematic market due to the Reyes Beer Division’s control of about 160 million of the state’s roughly 300 million cases. Reyes’ overall volume is 3.5 times greater than the combined production volume of California’s 958 craft breweries, Pease wrote.
Middle tier consolidation is propped up by state laws that “serve to protect the market power of existing businesses, particularly existing wholesalers.”
“These structures explain why almost no new beer wholesaler businesses have established themselves as effective competitors to existing wholesaler businesses in the past fifty years. Instead, beer wholesaling is a closed industry, with existing businesses protected from many competitive forces.”
Of these state laws, franchise laws are “the most anti-competitive” and “make it all-but-impossible for a brewery to terminate a wholesaler.”
“Enacted in the 1970s through 1990s, beer franchise laws responded to a market in which large, national brewers appeared to have overwhelming bargaining power advantages over their wholesalers,” Pease wrote. “At the time, most beer wholesalers were small operations distributing in limited territories and most depended primarily on one or a handful of brands for their entire business. Those days are long gone.”
Even in states where brewer-to-retailer sales are permitted, three-tier mandates may constrain sales in several ways, including “a cap on the total volume a brewer can sell to retailers, a restriction on brewers distributing the beers of other brewers and therefore placing a severe limit on the scale of such operations, or a limitation on self-distribution rights to only in-state breweries,” Pease wrote.
Combined, these laws can create a “distribution bottleneck” that large brewers can use “to their advantage by squeezing out competition in emerging categories, such as craft beer,” particularly in the event of mergers and acquisitions, he continued.
“When an expanding wholesaler purchases a wholesaler or its brand distribution rights in another territory, it already possesses substantial leverage over the suppliers it carries in its existing territories,” he wrote. “By holding franchise law-protected rights to existing brands, the wholesaler can exert pressure – explicitly or implicitly – on a supplier to approve the acquisition of the same supplier’s distribution rights in another territory.”
As wholesalers consolidate and many markets are served by effective duopolies, larger breweries — which account for the majority of those wholesalers’ volume — can use the limited route to market “to blunt competitive threats by acquisition.”
“These suppliers leverage their position as the key partners to their wholesaler distribution networks to ensure that their brands in every category – established or emerging – receive outsized wholesaler sales and distribution efforts,” Pease wrote. “As a result, the current distribution bottleneck at the wholesaler tier helps dominant suppliers protect their market shares.”
Last, Pease argued that the regulatory environment surrounding beer and its distribution does “not advance legitimate public health or safety objectives,” such as “minimum purchase age laws, laws against intoxicated drivers, restrictions on retailers selling alcohol to minors or intoxicated persons.”
“Regulating the relationship between brewers and wholesalers has no bearing on important alcohol policy goals and, indeed, post-Prohibition regulation of alcohol in the U.S. proved successful for many years prior to the arrival of the first franchise laws in the 1970s,” Pease wrote.
The BA’s latest comments to the Treasury were accompanied by an additional letter, signed by 48 guilds that represent 46 states and Washington, D.C., in support of the trade group’s two submissions.
Biden’s executive order requires the Treasury to publish a report by November 3, and the agency must consider regulatory changes by March 3, 2022.