We have been a little boozy here at DisCo. A couple of years ago myself and my colleague Matt Schruers had a mini blog symposium of sorts where we used alcoholic anecdotes to illustrate larger policy points about the nature of competition and innovation. Last week, fellow DisCo writer Ryan Heath used a Belgian beer example to illustrate the success of crowd funding. In this post, I turn to U.S. beer regulation and market structure as an illustrative example of a phenomenon that has plagued the tech world: out-dated regulation that artificially props up legacy middlemen and harms innovative competitors.
Against that backdrop, let’s turn our attention to a fight brewing in Florida between craft brewers and beer distributors (and the major beer brands) in the state legislature. At the end of last week, a Florida Senate Committee approved a bill that would allow craft brewers to sell 64oz growlers to their consumers. Presumably, the bill will soon be voted on by the full Senate. Similar legislation is also winding its way through the Florida House. According to the Sarasota Herald-Tribune, the bills “could make it easier for grocery stores to sell hard liquor and brew pubs to sell more of their products.”
Currently, in Florida, it is unlawful for breweries to sell half-gallon size growlers — a staple product for craft brewers seen as the “industry standard” — to consumers. This is because Florida, like all other states (except for Washington), utilizes a “three-tiered” alcohol distribution structure where (1) wholesalers are required to sell to (2) distributors who then sell to (3) retailers.
Florida has an exception to the three-tiered system, however: A law pre-dating the rise of craft breweries, which was designed to allow beer giant Anheuser-Busch to sell beer directly to consumers in the days when they owned the Busch Gardens theme parks, allowed craft brewers to pour pints and sell cans on their premises (thus avoiding beer distributors). Under the complex and capricious Florida beer laws, craft breweries were able to sell quarts and gallon jugs of beer, just not the popular half-gallon size. When legislation last year looked poised to fix this curious 96 ounce exception, it was derailed by language added at the behest of beer distributors. The new language required, among other things, craft brewers to sell their wares to distributors who would then sell it back to them (at a healthy markup, of course) before they would be able to sell them to brewery visitors! With their typically smaller profit margins, craft brewers — who often face a daunting journey just to turn a profit — saw this unnecessary layer of costs as a threat to their businesses. In fact, “holding the growler hostage” was merely a strategy of “Big Beer” to attack the craft brewers’ right to sell directly to consumers. (They said so themselves.) The craft brewers — in good disruptive innovator fashion — turned to Indiegogo to fund their lobbying efforts against big beer.
The distributors’ motivations for defending restrictions on craft brewers’ sales is clear. Similar to independent car dealers’ fight against Tesla, the distributors want to maintain their coveted role as middlemen. But why are the big beer makers supporting the middlemen too? Why wouldn’t large beer producers want to sweep away the complicated franchising system that prevents them from selling directly to consumers? Well, MillerCoors and Anheuser-Busch also own most of the states distribution licenses. In short, they own the middlemen too.
(As a long aside, the relationship between big brewers and distributors is a bit complicated. Some beer distributors are joint ventures [see MillerCoors] of the the biggest brewers. Others, like AB-InBev, own several regional/state distributors. Furthermore, the distributor ownership by large beer makers is a frequent political and legal fight. Despite the facade of competition, the consolidation in the overall beer market poses a challenge to independent brewers seeking to bring their beer to the wider market. Where major beer brands don’t, or can’t, own distributors, they often try to limit the competitive brands distributed by their licensed distributors, as a paper by the American Antitrust Institute points out:
Due to the mandatory three-tier distribution system in most states, craft beers are vulnerable to being excluded from the market by larger brewers. Most jurisdictions require structural separation between brewers, distributors, and retailers and prohibit brewers from selling directly to retailers. A large brewer like ABInBev can use exclusive dealing with distributors to exclude rivals or force them to use higher-cost channels. Given the large share of ABInBev, distributors often cannot afford to lose ABInBev brands and would have little choice but to accept exclusive dealing, even if they would prefer to carry the products of multiple brewers.
Okay, back to the blog post.)
The Sunshine State fight, although it has its own unique flavors, is a microcosm of a greater fight fermenting across the country. Like car dealers and music distribution, it is the story of an industry of middlemen (beer distributors) using political connections to protect their incumbent position in the face of rapidly changing market conditions and the rise of new technology that makes direct-to-consumer sales more attractive. Originally premised on checking the power of the major brewers, the three-tier distribution system is often captured (and sometimes directly owned) by the biggest brewers, which has often transformed the system from a way to check the power of big beer to a means of them maintaining their stranglehold on the market. In some states, major beer distributors are making last minute purchases of distributorships in order to get ahead of laws preventing beer brewers from owning distributorships. The complicated nature of U.S. beer regulation, which has unsurprisingly been gamed by the big beer brands, has even garnered World Trade Organization attention, as the system makes it much more difficult to import beer to the U.S. than export beer from the U.S. As one beer commenter noted:
The most likely reason InBev pursued the purchase of Budweiser was to gain better access to the distributors, not for the “great taste” of Budweiser.
The irony of the situation is overflowing its figurative mug, as this protectionist beer regime strengthens the hand and competitiveness of the two biggest beer conglomerates operating in the U.S., SABMiller and Anheuser Busch-InBev, neither of which are actually U.S. companies anymore.
Anticompetitive alcohol regulation isn’t a new phenomenon, as large producers of potent potables have long been well ensconced, with other titans of industry, in the circles of the politically elite. As the recent rise of home brewers and small-gin distillers illustrates (or even quasi-reality shows), barriers of competition in the production of alcohol are relatively low. Hence the need to protect your profit margins by raising legal barriers to entry. One particularly egregious law that dates back to the 19th Century, as discussed in Difford’s Guide to Gin, required distillers in England to have pot stills not less than 18 hectolitres in size. As the authors note, “[t]there is probably some truth in the suspicion that law on still size was designed to suit existing large distillers — a law requiring new stills in the UK to be a massive 18 hectolitres effectively prevented small boutique distillers providing unwanted competition.”
The FTC has tackled similar anticompetitive restrictions of wine distribution in a comprehensive 2003 report, which has led many states to relax restrictions on wine sales. And, in his previous life, one of the current commissioners of the FTC, Josh Wright, co-wrote a scathing economic analysis of some of the anti-competitive restrictions foisted on consumers by the current three-tier system of beer distribution system, which also questioned some of the consumer protection claims on which the regulations rest. (Hmmm… regulation premised on specious consumer protection claims, which has the effect of protecting legacy middlemen from disruptive change and competition. Where have I heard this before?)
Previously, on DisCo, I have discussed how stringent beer regulations have suppressed beer innovation in Germany. At the risk of being branded as the beer guy, writing about restrictions on the sale and distribution of beer is the flip side of the beer innovation (beernovation?) coin. The U.S. has a thriving craft brewing scene, that is creating jobs and pleasing consumers the world over. (Yes, craft beer is an export industry.) In Florida, craft breweries have helped revive downtrodden neighborhoods and created significant revenue for the state’s tax collectors. Not to mention, breweries such as Cigar City and Intuition Ale Works make some pretty damn good beer too.
Small brewers have come to perfectly capture the innovative dynamic. At a time when the beer industry was consolidating, cutting costs and focused on putting out a cheaper, blander product, the craft brewing revolution pushed into the void (see the growth in number for U.S. breweries starting in the mid-80s and hockey-sticking in the last few years). Clearly the consumer demand was there, and the big brewers eventually followed suit and began purchasing their own craft breweries. The original U.S. microbrewery, the Boston Beer Co. (maker of Samuel Adams), is not only the nation’s largest craft brewer, but it is also the third largest U.S.-owned beer maker. Given the competitive threat craft beer poses on the incumbent brewing industry, it isn’t surprising that big beer is trying to attach another provision to the Florida legislation: they also want to limit the number of establishments brewers can open.