“Those who attempt to level, never equalize.” The great Irish philosopher Edmund Burke.
Many in the industry may be delighted by Southern Glazer’s Wine and Spirts (Southern) becoming the target of a FTC investigation, but before drawing your conclusion, one should think about what the implications of the FTC’s action are and not just the party targeted.
The FTC recently opened an investigation into Southern for possible violations of the Robinson-Patman Act, which prohibits a supplier from offering better prices to retailers at the expense of smaller competitors.
The Robinson-Patman Act has laid dormant for over 20 years until FTC Chair Lina Khan and her cohorts have decided to resurrect this doctrine. Ms. Khan is a believer in the Neo-Brandeis movement, which adheres to the believe that centralized private power is a danger to a democracy’s social and economic conditions.
Khan’s agency recently undertook a preliminary investigation into Pepsi and Coca-Cola’s practices for pricing in retail channels.
Khan and her gang seem hell bent on dusting off old laws rarely used to attack the biggest players in the industry and causing upheaval in the business world. But we must ponder the question, how is investigating Southern and forcing a change to their negotiations with retailers going to fix the alcohol beverage world?
State law implications of the FTC’s potential actions
As someone who drafted the Illinois “Of Value”/”Tied House” regulations, Khan’s investigation seems perplexing. Under Illinois’ “of value” regulation, a producer or distributor is allowed to provide a quantity discount to a retailer. The regulations requires that the quantity discount be offered to “all similarly situated retailers in the same geographic area.”
Similarly situated is understood to mean that there are different channels of retailers. There are mom and pop retailers and there are chain stores in Illinois like Binny’s and big grocers like Kroger and Walmart. The regulation recognizes that the big chains will order more product and hence get a deeper discount. What the regulation prohibits is if two stores are in the same channel, for example, Walmart and Kroger, and you provide Walmart a discount but do not provide Kroger a discount, then there is a violation of the “of value” regulation.
What the regulation permits is for a big retailer to receive an advantage based on economies of scale, where there is a price decrease based on the purchasing power of the retailer.
Illinois is not alone in how it handles alcohol purchases, as many states maintain the practice of channel pricing. Many states similar to Illinois, deem fair pricing to occur based on the channel where it is sold. So again, Stan’s Independent and Joe’s Independent must be offered similar discounts and pricing.
In a nod to small retailers, Illinois recently passed a law that allows small retailers to band together to negotiate better pricing.
If a state chooses to ban channel pricing in its state, the law allows them to take this step. However, many states recognizing market realities, either expressly or implicitly, and permit different pricing structure based on a retailer’s size. Additionally, the liquor industry is not alone in offering quantity discounts, as it is a common business practice.
But the FTC seems to attempt to come over the top of state laws by dusting off old legal doctrines rarely used to impose its will on the liquor industry.
Impact on consumers
As the goal should be to provide optimal prices for the consumer, Khan’s FTC seems to be employing a method that will do the exact opposite.
We as consumers know that liquor prices are generally more attractive in larger stores than smaller stores. Some of this is due to chains like Total Wine having greater resources to absorb lower prices and also because Total through economies of scale can offer lower prices than competitors.
If Khan’s FTC is successful and goes after Southern for offering lower prices to larger retailers based on economies of scale, then there could be a leveling of prices across the board.
But as the great Milton Freidman stated “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”
What could result is the quantity discount offered to large retailers will disappear and the cost will be passed onto the consumer. In the age of inflation, FTC’s actions could lead us down the road to higher prices.
This will not fix the alcohol industry
Channel pricing or quantity discounts are not the problem with the liquor industry. The problem with the liquor industry is the lack of economic freedom in the industry. And the lack of choice for consumers that are forced to participate in isolated markets.
The liquor market needs reforms, sadly the FTC’s alleged investigation into Southern misses the boat. It attempts to take down what Khan and the cohorts have identified as the Levithan without any regard for greater consequences.
Picking on Southern offering Walmart greater discounts is not going to solve the ills of the liquor industry. It may make Khan feel good in that she attacked what she deems the big centralized power, but the results leave us in the same place, and I would argue in a worse place. Essentially, they treat the wrong disease with the wrong cure.
Without changes to state franchise laws and allowing DTC shipping for all alcohol types, and reforming laws to bring more free market principles to liquor, we are stuck in the same place, regardless of Khan’s grand scheme.
There are those that don’t like Southern in the marketplace, and I understand their position, but taking the knife to Southern is not going to make the industry better. In fact, in this situation, taking the knife to Southern may end up hurting the liquor industry.
So, although there is some cheering when Southern got mentioned, we need to take Southern out of this equation and look at it from the perspective of how it impacts the whole liquor industry. In my view Khan and the FTC are imposing themselves into unintended consequences that negate state laws and lead to consumers paying higher prices.