It was to great excitement in February of 2022 that I read the Treasury’s report on competition in the alcohol industry. Finally, a high up government agency that identified flaws and could become an agent for change.

The report focused on important topics such as the threats posed by wholesaler consolidation and the inability of small producers to access the marketplace. Further, they discussed a concept that I believe is economically detrimental to developing a competitive marketplace, state alcohol franchise laws.

Under franchise laws, a supplier can only utilize one wholesaler in a specific territory. In some states there are exceptions if the wholesaler consents to deviations. What this means is if you are a small brand, and you sign an agreement with a wholesaler, you are stuck in a Hotel California situation where you can never leave, unless of course you are willing to pay a ransom to the wholesaler.

Small brands may unknowingly sign up with a wholesaler not knowing the wholesaler carries a large national brand in the same class as the small brand. While the wholesaler’s efforts are focused on the large national brand, the small brand suffers.

I have been involved in cases where the supplier cancels the distribution agreement because the service is abysmal and the wholesaler objects and the lawsuit begins. The supplier usually pays a king’s ransom to get out of these agreements, and it is rewarded with little to no marketplace share to show for it, while the wholesaler gets paid for not delivering quality.

The Treasury report noted that direct shipping is a plausible alternative to a three-tier system and that “By its nature, direct-to-consumer offers distinct opportunities for small producers, opportunities for innovation, and the possibility of serving small niches.”[1]  Further the report noted that putting up barriers to DTC shipping insulated local retailers and distributors from competition.

Remarkably, a major federal government report concluded that the three-tier system does not fairly serve the marketplace and competition is stifled when DTC shipping is not permitted.

Problematically that is about as good as it got. Treasury wrote its words and never followed up with any action. No hearings were held on this, and there was no meeting with industry officials to discuss a path forward.

Treasury’s recommendations will go into the dustbin of history. The Biden administration will finish soon, and no one knows whether he is competent or has the stamina to make change in an industry that is not a high priority for him.

The dragon to slay

Nobody will ever confuse Joe Biden with St. George when it comes to slaying dragons, and based on the actions of the Biden administration, unlike St. George who slew an evil dragon, President Biden slew the wrong dragon!

The goal of Executive Order 14036, “Promoting Competition in the American Economy” was to reduce consolidation, increase competition, deliver benefits for the American consumer, worker, and small business.

The report was written in consultation with the Attorney General and the Chair of the FTC. What has resulted from this collaboration? There has been nothing done about ways to reform liquor markets to enhance opportunities for consumer choice and the ability of small producers to enjoy greater market access. This presents a missed opportunity to bring needed reform to the marketplace.

Instead, the FTC has taken the lead and is aggressively investigating Southern Glazer’s Wine and Spirits (Southern) for alleged violations of the Robinson-Patman Act.  The Robinson-Patman Act is a long dormant law not used in about 40 years, which attempts to regulate pricing in the marketplace, so large retailers can’t utilize their size to obtain better pricing than small retailers.

The FTC’s Neo-Brandeis obsession has taken over the traditional antitrust concerns on consumer impact.

The point is instead of focusing on opening up markets and enhancing avenues for competition, the Biden Administration has focused on equalizing the marketplace.

They have done this at the expense of focusing on what the liquor industry needs, which is more free and open markets.

In the end, focusing their reform on going after Southern, won’t cure what ills the marketplace. The dragon of bad policies and closed markets still exist, I hope, but I am not very optimistic that the Biden Administration will wake up and slay the right dragon before the end.

 

[1] https://home.treasury.gov/system/files/136/Competition-Report.pdf, PG 17