Federal Government Gets It Wrong with Alcohol Industry Competition Report
As part of a larger, shifting understanding of competition, the federal government recently attempted to examine and diagnose in a little more than six months what it preconceived to be competition problems within the otherwise successful 89-year-old beverage alcohol industry. The result is a wide but ultimately shallow and largely misguided report on a complex, diverse industry that continually meets the needs of consumers.
The report is frustratingly schizophrenic in nature. Vacillating between acceptance of the federal government’s powerlessness to force changes on state alcohol laws, and the evidently irresistible urge to take a “father knows best” approach by foisting a variety of conflicting suggestions onto states, is as dizzying as too many shots of tequila. Its suggestions are weakened with “could,” “might,” “may” and other language of uncertainty.
But it is the report’s “We’re just asking questions,” disingenuity that is most irresponsible and creates a real danger for well-regulated, orderly, safe and competitive alcohol marketplaces. The false narrative the report presents — that the alcohol industry is somehow both competitive and anticompetitive thanks to the system by which it is regulated, demands a level of cognitive dissonance that should make rational people uncomfortable, if not entirely dismissive of the report.
And, in the irony of all ironies, it is this narrative that will soon be used to advance anticompetitive alcohol policy proposals in states. This is despite the report’s sheepish acknowledgement that the vibrant American beverage alcohol marketplace which includes hundreds of thousands of competitors “is somewhat unusual in the contemporary U.S. economy, in which many markets are dominated by a small number of national brands.”
Tim Wu, special assistant to the President on technology and competition policy, recently underscored this point well, noting “while [alcohol markets] are not perfect, they do give us a sign of how the U.S. economy can be. For example, beer brewing has gone from an industry which consolidated all the way down to 89 breweries in the United States, where there’s now over 6,000 breweries operating in the U.S., and they are regional, they’re competitive, they’re innovative.” This is an American success story.
As the report notes, one of the “major industry trends” is “the significant growth in the number of small and “craft” producers of beer, wine, and spirits. There are now over 6,400 operating breweries in the United States…and more than 6,600 operating wineries. There also more than 1,900 operating distilleries.”
Despite this impressive growth and ever-increasing exemptions, loopholes and retail privileges for small producers, the report concludes that these advantages are not enough. Imagine the surprise of craft brand-building bars, taverns and restaurants, which have faced increasingly uneven competition from these producers.
Perhaps the most absurd recommendation from the report suggests that the Alcohol and Tobacco Tax and Trade Bureau (TTB), “should limit…enforcement actions against entities without discernable market power.” To suggest that small producers should essentially be exempt from trade practice laws is ridiculous and adds insult to the COVID-19 injuries suffered by bars, taverns and restaurants including two-years of shutdowns, slowdowns, supply chain disruptions, increased costs of goods and labor shortages. Conversely, small producers have seen their numbers grow, taxes go down and revenues increase. Enough is enough.
Also lost in the report’s focus on boosting small suppliers is an important recognition of the “fact that many retailers appear to have considerable market power today (e.g., national grocery and restaurant chains and large event venues, in contrast to the independent [beverage retailers]).” This growing reality in the age of national corporate retail chains hinders independent beverage alcohol retailers’ ability to compete in state marketplaces.
The report does identify horizontal competition issues within non-retail tiers of the industry but does not address anti-competitive policies advanced under the guise of supporting small suppliers, which can create tilted inter-tier competition for traditional retail market participants. To the contrary, it cheerleads and cherry-picks from a single nearly 20-year-old, small sample sized study to further undercut traditional independent beverage retailers with direct-to-consumer policy prescriptions that effectively function as trapdoors to industry deregulation and threaten the vertical integrity of beverage alcohol markets.
With states operating under various types of three-tier systems, creating markets in which differently licensed alcohol businesses are granted the same or similar privileges, thus giving an advantage to those firms that control the product, and disadvantaging those firms that are required by law to purchase the product, is anticompetitive.
Every year, state legislatures thoroughly examine, debate and modify their alcohol laws to best meet the local needs of public safety, consumers and businesses. More than 2,600 alcohol bills have been passed in state legislatures since 2012, with thousands more having been introduced. This engagement and introspection make the report’s suggestion that “state legislatures might consider if the benefits of the three-tier system outweigh its costs to competition and study markets without a three-tier system” all the more preposterous. Non-three-tier markets around the world do not offer the same level of reliability when it comes to preventing counterfeit, tainted or illegal alcohol products, nor the variety of brands that consumers have come to expect.
In addition to identifying and pushing back on the report’s ridiculous recommendations, those who are interested in a truly competitive alcohol industry should fight to preserve the balance of competition, regulation, innovation, and entrepreneurship that has created a vibrant American beverage ecosystem.
