The U.S. Department of the Treasury released a 64-page report today on competition in the beer, wine and spirits industries.
The Treasury, in conjunction with the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC), issued the report along with several recommendations that it said would “better level the playing field for small businesses and new marketplace entrants by enforcing existing laws that promote competition and modernizing outdated alcohol regulations.”
The report comes in response to President Joe Biden’s executive order from July 2021 on “Promoting Competition in the American Economy,” including the beverage alcohol industry.
“The report identifies several competitive issues in the beer, wine, and spirits markets, which, if remedied, would allow entrepreneurs, small businesses, and new entrants to compete on a level playing field with larger market participants,” Assistant Secretary for Economic Policy Ben Harris said in a press release.
“American consumers, small business owners, entrepreneurs, and workers should not have to suffer under the thumb of a highly concentrated beer industry,” Assistant Attorney General Jonathan Kanter of the Department of Justice’s Antitrust Division added. “Enforcement and regulatory authorities should have the courage to learn and the fortitude necessary to enforce the law and protect competition.”
The Treasury’s report called out a pair of trends that it said “mark the last several decades.” The first, predictably, was the growth in the number of small craft producers across beer (6,400 breweries in operation), wine (6,600 wineries) and spirits (1,900 distilleries). The second trend is consolidation across the three tiers, “particularly at the distribution and/or retail levels for beer, wine, and spirits and the production level for beer.”
The report notes that two brewers — Anheuser-Busch InBev and Molson Coors — have “dominated the U.S. markets since 2008” and now hold around 65% of the beer market nationwide. According to the Treasury, the Federal Alcohol Administration (FAA) Act aimed at combating monopolies in the alcohol industry is succeeding “in some ways, but not in others.” What’s working, according to the Treasury, is the innovation within the bev-alc industry, which it said could be due to tax policy and state and federal laws prohibiting slotting fees for shelf space or “pay to play” schemes.
Nevertheless, the Treasury offered a lengthy list of concerns.
Treasury Offers List of Concerns
The Treasury offered eight concerns with the existing alcohol industry. Those concerns included:
* The concentration of beer production with the two largest producers, and the geographic expansion of several distributors leading to “concerns from craft brewers.” The Treasury pointed to studies showing “direct links between major brewery mergers and an ability to raise prices in the markets in which they compete.”
* The prevalence of complaints of exclusionary behavior by large producers, distributors and retailers despite the Alcohol and Tobacco Tax and Trade Bureau’s (TTB) “active enforcement of the FAA Act’s competition provisions.”
* The Treasury said some federal and state laws and regulations may also “impose a disproportionate burden on small and medium-sized producers without corresponding justifications based in public health or prevention of anticompetitive behavior.” Among the rules in question: “labeling preapproval requirements, bottle size restrictions, mandatory classification of beverages, and complex application requirements to qualify for a permit to produce alcohol.”
* Some state and federal laws intended to stop “anticompetitive vertical integration where distribution is dominated by a few players” may instead “inhibit the growth and competitiveness of small producers,” while other laws could prevent marketing that would promote competition. Those laws can also have financial consequences for consumers.” And some state laws require distributors to set prices that stifle competition and increase the cost to consumers. “One study estimated that ‘post and hold’ laws restricting price competition could lead beer consumers to ‘spend $147-478 million more than they did previously.’”
* Mandatory allergen, nutrition, and ingredient labeling proposals have not been implemented, the Treasury found.
* The Treasury also said differing federal tax rates among beer, wine and spirits affect competition among the sectors. Additionally, differing rates between domestic and international producers, as well as large and small producers, also affect competition.
* Direct-to-consumer sales models offer distribution opportunities for small producers, the Treasury said. Despite concerns that direct shipments could make alcohol available to under-age drinkers, an FTC study found “no evidence” of abuse in wine shipments and “there is a lack of evidence specific to beer and spirits.”
The Treasury’s Recommendations for Improving Competition
The Treasury recommends that the DOJ and FTC “continue to vigorously enforce the antitrust laws, while continuing to examine their approach to horizontal consolidation and to evaluate the effectiveness of their remedies in the alcohol markets.” The FAA Act’s competition provisions were “originally intended to address overconsumption of alcohol and problems with organized crime” and the Treasury admitted they “may, in a much-changed marketplace, not fully address the exclusionary impact of some business practices,” and may “unnecessarily burden small firms and new entrants.”
On the topic of mergers in particular, the Treasury recommended that the DOJ “consider the effects on distribution stemming from the acquisition of craft brewers by major brewers,” and that both the DOJ and FTC “apply particular skepticism to claims of efficiencies” with regard to proposed mergers. Where appropriate, the Treasury requested the DOJ to consider a retrospective review of the impact major brewers’ acquisitions of craft breweries has had on pricing, innovation and distribution.
In matters of state law, the Treasury recommended that the DOJ and FTC “engage with state actors on state laws impacting competition” and submit letters when asked for technical assistance by state legislators. When revising guidelines for mergers, the Treasury asked the DOJ and FTC to consider adding guidance with regard to “highly concentrated” markets.
The Treasury encouraged the DOJ and FTC to consult the TTB to take a “closer look at vertical mergers or arrangements that may lead to monopolization or exclusion in the alcohol markets, particularly exclusion of small firms or new entrants.”
With regard to trade practices, the Treasury advised the TTB to consider updating certain regulations following “many requests for greater clarity” and “to sharpen and modernize the categories of conduct that are considered intrinsically harmful.” In particular, the Treasury called on the TTB to strengthen existing rules about category management “to improve deterrence.”
The TTB should “address complaints of underenforcement” of trade practice rules, step up enforcement efforts on category management, continue using discretion “to temper enforcement against entities lacking market power,” and collaborate with the DOJ and FTC on “large and complex cases.”
In particular, the Treasury found that category management “may warrant renewed TTB attention,” especially following the submissions of comments that “exclusionary category management practices remain undeterred, and serve large producers and wholesalers while eroding retailer independence.”
“TTB’s current approach, which allows the suggested shelf schematics but bans the provision of additional services is not successfully deterring conduct that is in tension with the goals of the statute,” the Treasury wrote.
The Treasury also recommended that the “TTB should revive or initiate rulemaking proposing ingredient labeling and mandatory information on alcohol content, nutritional content and appropriate serving sizes.”
Among the suggestions on a state level, the Treasury said “legislatures might consider if the benefits of the three-tier system outweigh its costs to competition and study markets without a three-tier system. Similarly, states might explore amending their franchise laws and consider revisiting post-and-hold regulations, which have been struck down in some states as preempted by the Sherman Act. State officials should evaluate the direct-to-consumer distribution model, both in terms of the distribution opportunities it presents for small producers and the comparative risks it may present of making alcohol more readily available to underage drinkers.”
Meanwhile, the Treasury encouraged the TTB to “limit the unintended negative effects on competition of categorical rules, especially on harmless practices, as well as enforcement actions against entities without discernible market power.” This can be achieved in a couple of ways. First by updating regulations “with an eye to giving a green light to practices that are essentially harmless and inherently procompetitive,” citing tastings and “whimsical handles for beer taps” as examples.
“The Bureau should, as a matter of enforcement policy, focus its efforts against large entities presumed to have market power, such as the larger brewers, distributors, and similar actors,” the agency wrote.
Results of Heightened M&A Activity in the Last 20 Years
In its examination of the DOJ’s enforcement in the “increased concentration” in the U.S. beer markets during the last 20 years, the Treasury found that “many arguments from merging parties in support of consolidation do not appear to have been borne out.” The Treasury pointed to the increase in beer prices that followed the 2008 joint venture that tied up SABMiller plc and Molson Coors.
“The higher a brewer’s market share, the greater its incentive to increase the price of its brands, because the brewer loses fewer sales to its rivals as a result of the price increases,” the Treasury wrote.
The country’s largest beer manufacturers “may be capable of tacit coordination” by creating “joint barriers to entry” for smaller producers and by mimicking each other’s price increases.
The Treasury pointed to DOJ’s Antitrust Division’s requirement that A-B divest itself of Grupo Modelo’s U.S. portfolio to Constellation Brands in 2013 following A-B’s acquisition of the remainder of Grupo Modelo as an example where government involvement boosted competition, noting that Constellation said “it has tripled its production capacity since the divestiture.”
Smaller acquisitions – such as the myriad deals A-B and Molson Coors pursued with craft breweries in the middle of the last decade – have allowed large brewers “to extend their market power and to hinder the growth of competitive brands.” These acquisitions have pushed many craft brands into larger wholesalers, which can push out independent brands or disincentivize wholesalers from accepting those brands.
“These competing craft brewers could be forced to use smaller, less efficient distributors that typically receive inferior treatment at retail establishments,” the Treasury wrote. “In addition, if a larger number of craft beer brands were pushed into a smaller distributor, that may increase the complexity and cost of distribution, which could also increase the distributor’s incentive to raise the price of all of its craft beer brands.”
Disparate Tax Rates Affect Competition
The Treasury received several comments pointing out that the different federal excise tax (FET) rates for beer, wine and spirits creates a “competitive disadvantage for distilled spirits-based drinks when compared to beer or wine-based drinks with similar alcohol content.”
FET rates have long provided an advantage to small domestic producers, but the different way these rates apply across segments affect producers in different ways. For example, cider is taxed as a wine, but more frequently competes with beer due to its similar package formats and alcohol content. The same “bubble taxes” applied to sparkling wine are applied to sparkling hard cider, but not beer and hard seltzer.
Beer and wine are taxed by volume, regardless of alcohol content, while distilled spirits are taxed by alcohol content. When reduced to pure alcohol, a 4% ABV beer ($0.10 per ounce) and a 14% ABV wine ($0.06 per ounce) are taxed at lower rates than distilled spirits ($0.21 per ounce), which are subject to $13.50 per proof gallon. These rates play out in different ways in the booming ready-to-drink segment, in which drinks can have malt, wine or spirit bases.
“A neutral malt base used for a hard seltzer base could be brewed at as high as 18% ABV, translating to a federal excise tax of about 2.5 cents per ounce of alcohol, before any CBMA tax breaks,” the Treasury wrote. “Consumers may not distinguish among such flavored beverages derived from wine, spirits, or malt base, but the tax implications could be very different.”
Beer Institute, NBWA Criticize Report; Brewers Association Applauds Report
Leaders of beer industry trade groups weighed in on the Treasury’s report Wednesday morning.
National Beer Wholesalers Association (NBWA) president and CEO Craig Purser issued a statement saying, while the Biden administration’s executive order attempted to offer a thorough review of the alcohol industry, the report “remains incomplete.”
“The American beer industry is intensely competitive and successful, as demonstrated by TTB data showing the growth in the number of permitted breweries from around 2,000 to 13,380 over the last 11 years,” he added. “We look forward to continuing to work with the administration, the states and Congress as a partner and educational resource to maintain balance and competition in the U.S. beer industry.”
In a separate statement, Beer Institute president and CEO Jim McGreevy expressed disappointment with what he called the Biden administration’s “mischaracterization of the thriving American beer industry.” McGreevy said the American beer industry is “one of the most vibrant industries in the country,” contributing more than $331 billion to the U.S. economy and supporting two million jobs. He added that “consumers are benefiting from the growing number of brewers and beer importers, with more choices for beer than at any other time in our nation’s history.”
“Despite being one of the most regulated industries in the United States, the beer industry is experiencing an unprecedented level of healthy competition,” he said. “It will continue to grow and innovate so it can best serve the millions of Americans who make beer America’s favorite beverage alcohol.”
McGreevy also pointed to Bureau of Labor Statistics data showing that beer prices have remained low in the face of inflation and “have trailed price increases for all products since 1985.”
Meanwhile, Brewers Association (BA) president and CEO Bob Pease applauded the recommendations from the Treasury and thanked the White House, Treasury, DOJ and FTC for their work.
“Upon an initial review of the Treasury’s ‘Competition in the Markets for Beer, Wine, and Spirits’ report, we are glad to see that the report recognizes that some laws, even those originally designed for a pro-competitive purpose, have inhibited the growth and competitiveness of craft producers,” Pease said in the statement. “Second, we see much to like in its conclusions and applaud the report’s focus on the Federal Alcohol Administration Act’s trade practice provisions and the continued need to combat practices like slotting fees and discriminatory conduct. Lastly, we appreciate the report’s recognition that some laws have become out-of-date and that new rules may better serve public health and foster competition.
“While there remains significant work to be done at the federal and state level to translate these recommendations into improved market conditions, suggestions such as a re-examination of state franchise laws, greater direct-to-consumer access, updating trade practice regulations with an eye toward exclusionary practices, and considering the effect of small brewer acquisitions on distribution all stand to improve the ability of small firms to enter and effectively compete in beverage alcohol markets. The Brewers Association remains committed to ensuring a level playing field exists for small and independent brewers and looks forward to providing feedback to federal and state lawmakers on these recommendations and how they can be translated into a safe, competitive, and modern beverage alcohol market.”
UPDATE (February 9 at 4:12 p.m. ET): The Distilled Spirits Council of the United States issued this statement commending the Bide administration’s review of alcohol industry regulations:
“We are in full support of a fair, vibrant and competitive marketplace and we commend the Biden Administration for initiating this review of regulations that may impact competition in our industry, many of which date back to the repeal of Prohibition. The spirits producer sector is highly competitive with more than 2,300 distilleries of all sizes. However, there remain a number of laws and regulations that continue to discriminate against spirits producers and our consumers, from taxation to market access, that should be revised to improve competition in our modern economy. We look forward to working with Treasury, FTC and state authorities to modernize regulations and laws that maintain barriers to competition.”