Bottlenecks: Biden could be about to shake up an 88-year-old system

A global frenzy of beer company mergers has resulted in three big brewers – Anheuser-Busch InBEV, MolsonCoors and Constellation Brands – dominating the industry, with about 70 per cent of the market between them despite the explosive growth in the craft beer segment.

In spirits, it is companies like Beam Suntory, Brown-Forman and Diageo that dominate while in wine its E&J Gallo, Constellation, The Wine Group and (our) Treasury Wine Estates that are the major producers.

In the distribution tier, three companies – Southern Glazers, RNDC/Youngs and Breakthru Beverage – control closer to two-thirds of all wine sales in the US after a decade of intense consolidation.

Almost two-thirds of the distributors that existed a decade ago have been acquired or disappeared.
In retail, companies like Costco, Walmart and Total Wine & More have been growing their liquor businesses within a highly fragmented sector. That fragmentation tends to underscore the potential for the concentration in distribution/wholesaling to act as a choke point for competition and a barrier to new entrants.

For the big producers with the big brands and national marketing capacity – like Treasury Wines, or the big brewers and spirits companies – the dominance of the three big wholesalers probably isn’t an issue and might confer advantages. They’re big enough and their brands powerful enough to negotiate with the groups that can offer them wide, if not completely national, distribution of their products.

Earlier this year, for instance, Treasury Wine announced it had entered a long-term distribution agreement with RNDC, which had a pre-existing deal to distributed Treasury brands in three states, to distribute its wines in a further nine states.

Treasury Wine hasn’t made its own submission to the review but it is a member of an industry body, WineAmerica, that focused on the inability of smaller producers to change their distributor/wholesaler and the “exponential decrease” in the number of distributors.

Retail associations and smaller wineries echo those concerns about access to markets, constraints on consumer choice and argue that the state-based structure of the system enables anti-competitive conduct by wholesalers and inhibits direct dealing between producers and retailers.

Anything that weakens the control of the gatekeepers to access to retailers and ultimately consumers and broadens the choices consumers are provided with would, of course, be a blow to the distributors entrenched within the system since the end of Prohibition.

The Biden executive order seeks to protect and improve market access for smaller independent and new businesses and directs the administration’s agencies to assess the threats to competition and barriers to entry, as well as the effects of consolidation within the production, distribution and retail segments of the beer, wine and spirits markets.

It shouldn’t surprise that the Wine & Spirits Wholesalers of America argued in its submission that the structure of the sector had created the world’s most dynamic alcohol marketplace and one that balanced social responsibility with business growth.

It said the three-tier system was designed to have the middleman so that no tier could compel anti-competitive market leverage or outsized market dominance. Deregulation would, it said, lead to destructive market dominance and aggression “like we witnessed during Prohibition.”

The Biden executive order has a tight turnaround time. It wants the agencies’ reports lodged within 120 days of the order issued on July 9.

Will it upend the post-Prohibition structures that have governed the industry for nearly 90 years?
It is probably more likely to tinker around the edges than mount an assault on the middlemen that are the most obvious anti-competitive element of the structure, trying to make it easier for smaller wine, beer and spirits producers to sell directly to retailers in those states where there are obstacles.

For a Treasury Wine, big enough to have some counter-leverage with wholesalers and with brands that the big retailers want to stock, that shouldn’t be a threat and might even open some possibilities. It might also create opportunities for smaller Australian producers to market their brands directly to retailers.

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Anything that weakens the control of the gatekeepers to access to retailers and ultimately consumers and broadens the choices consumers are provided with would, of course, be a blow to the distributors entrenched within the system since the end of Prohibition.

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