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Wednesday, August 10, 2022

US Treasury Pushes Alcohol Reforms

A just-published report into the US alcohol industry could be good news for consumers – but bad for wholesalers.

© Reuters
| Distributors hold too much power in the alcohol industry, according to a US Treasury report.

Alcohol regulation in the US and Europe is going in startlingly different directions: the US is worried about lowering prices and increasing access while the EU is mulling ways to do the opposite. This became clear from a 63-page report issued Wednesday by the US Treasury Department.

Last July, President Biden issued an executive order “Promoting Competition in the American Economy”. As part of it he asked Treasury to submit a report on the current state of competition in the alcohol industry.

The most striking aspect of the report, to me, is how well Treasury knows what’s really going on. Maybe my expectations were too low for a federal report in a country where the largest barriers to competition are state laws, not federal laws. The people who put the report together for Treasury figured that out. Also, the most damaging consolidation and anti-competitive behavior is from distributors, not producers. Distributors come in for much of the report’s opprobrium.

“The report is, I’m sure, sending shudders throughout the halls of the major wholesalers,” said beverage alcohol attorney John Hinman. “This is a big deal. It provides ammunition to the reformers of the industry. This is a direct message to the states, because the concentration at the producer level and the wholesale level has really stifled competition for wine and spirits.”

The other striking aspect, from a global perspective, is its assumption that access to more types of alcoholic beverages at lower prices is a good thing. Plus, there’s an early observation that if state governments want to lower alcohol consumption for public health reasons through higher prices, “States may be able to achieve these aims through higher taxes and thus benefit the public treasury rather than private intermediaries”, i.e., distributors.

The report takes aim at a number of state practices that the federal government may not actually be able to do anything about, notably the practice in “franchise states” of requiring alcohol producers to stay with one distributor indefinitely unless the winery or distillery can show “good cause” for ending the arrangement. The practical effect in a franchise state like Georgia is that a winery has no real recourse if its distributor decides to push other products; its only path into Georgia wine shops is blocked.

“State franchise laws tend to increase the producers’ costs of obtaining distribution services from distributors, which, in turn, are likely to increase the costs of distribution,” the report says. “These laws have the effect of encouraging opportunism by distributors, thereby increasing the cost of producing and inhibiting the growth of craft producers. Such laws make it easier for the largest producers to defend their dominant positions, likely lead to higher prices for consumers, and reduce the variety of products available to consumers in those states.”

Beer barons

The report has striking statistics on how dominated the beer industry by big producers. Anheuser-Busch InBev sells 42.4 percent of all beer in the US by revenue; Molson Coors is at 22.4 percent. Thus the top two producers sell nearly two-thirds of all beer in a country with 6406 breweries.

Spirits and wine aren’t quite as concentrated. The 14 largest wineries (out of 6668 total) produce 54 percent of all wine produced in the country, while the 15 largest distilleries (out of 1942 total) produce 66 percent of all US spirits. Thus the report spends more time concerned with concentration of beer production than that of wine and spirits.

Sometimes the report gets very specific on how much these laws cost. “Post-and-hold” regulations in states like Connecticut require distributors to post prices and not reduce them for a certain length of time; the intent is to reduce consumption by keeping prices higher. Most of these laws were written in the immediate aftermath of Prohibition when reducing consumption was a primary goal.

“Given that more than $250 billion of alcohol was sold in the United States in 2018, for example, even modest price increases in these states as a result of post-and-hold laws can lead to a substantial transfer of wealth from consumers to distributors and/or producers,” the report says. “According to one estimate, post-and-hold restraints may increase the price of a bottle of wine by $0.39-1.10; the price of a six-pack of beer by $0.93-2.24; and the price of a bottle of spirits by $2.03-6.87. In the beer market alone, that price increase would reduce consumer surplus by $242-581 million, of which $236-567 million would be transferred to producers, while consumers would spend $147-478 million more than they did previously.”

Those of us who have been calling for ingredient labeling on alcohol now have a powerful ally in the Treasury Department. The report says a number of people on the site set up last year for public comment asked for ingredient labeling, and “we agree that ensuring consumers are informed about the nature of alcohol beverages promotes public health goals. It also fosters fair competition.”

What next?

This brings up the big question about the report: What, if anything, will happen because of it?

Treasury is the agency that runs the TTB (Alcohol Tax and Trade Bureau), which creates most federal regulations on alcohol. The TTB is in charge of wine labels so if Treasury wants changes, it can make them happen.

But the federal government has little power to supersede state alcohol laws because the 21st Amendment that repealed Prohibition left considerable power to the states. So it can complain about franchise states and post-and-hold, but it can’t change them.

It also can’t convince a state to dump the three-tier system, in which all sales from producers to retailers are required to go through a profit-taking wholesaler, unlike in most industries where, say, a clothing company can sell shirts directly to retail stores. The report does aim at that distributor-sacred cow, saying this toward the end: “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.”

Beverage alcohol attorney Sean O’Leary, who frequently works on cases involving direct shipping, believes the report can be influential at the state level.

“It gets the debate going,” O’Leary told Wine-Searcher. “Maybe the small craft organizations start going to state legislatures and saying ‘We have a problem’. Maybe this lends credibility to the fact that this is a problem. The stuff they talked about, it needed to be talked about. Small producers complain about this all the time. The franchise rules are not just archaic, they’re terrible. I’ve never seen anything more anti-competitive in a capitalist country. Now that this is out there in a federal report. They’ve lent a lot of credibility to this issue.”

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