Highlights of the U.S. Treasury Report

In July 2021, the Biden Administration issued an executive order directing the Secretary of the Treasury and Federal Trade Commission to study and assess the U.S. market with the goal of reducing corporate consolidation and protecting consumers and small businesses. 

The beverage alcohol space was among the industries the agencies were assigned to assess and on February 9, the agencies released a 63-page report on the status of the U.S. alcohol market along with recommendations for improvement. 

The Park Street team combed through the report to provide industry members with an overview of the government’s assessment of the beverage alcohol industry and recommendations for removing competitive barriers, reducing consolidation, and protecting consumers.

Major Trends in the Beverage Alcohol Industry

The report opened by highlighting two major trends in beverage alcohol that have dominated the industry in the last decade: growth and consolidation. 

The first trend is the growth of craft producers. By the Treasury’s count, there are more than 6,400 operating breweries, 6,600 operating wineries, and 1,900 operating distilleries. 

The second trend is consolidation at the distribution, retail level, and, for beer, the production level.

Areas of Concern 

The report went on to identify areas of concern for the beverage alcohol industry, including the following:  

• Differing federal tax rates for beer, wine, and spirits currently affect competition between each of those sectors.
• Molson Coors and Anheuser-Busch InBev account for 65% of beer revenue nationwide. Major brewery mergers may have links to price increases in certain markets.
• Potential discriminatory practices by distributors, as well as slotting, shelving, and other preferential practices by retailers.
• State and federal regulations including labeling pre-approval requirements, bottle size restrictions, mandatory classification of beverages, and complex application requirements are likely to cause unnecessary burdens on small and medium-sized producers, and new entrants to the market.
• State and federal regulations, including state laws that require distributors to publicly set and adhere to prices, may inhibit growth and competition and pass financial consequences on to consumers.
• The report also expressed concern that the spread of the direct shipment model to beer and spirits may result in more alcohol in the hands of underage drinkers. An FTC study found no evidence of this issue in wine shipments, but more evidence is currently needed for beer and spirits.

The Report’s Recommendations

The agencies also made several recommendations to address these concerns. We’ve grouped them by objective: 

Addressing Consolidation

• The Department of Justice (DOJ) and the Federal Trade Commission (FTC) should be mindful of the effect on distribution when a craft brewer is acquired by a major brewer and consider doing a study on pricing, innovation, and distribution resulting from major brewers buying craft breweries over the last decade.
• The DOJ and FTC Should pay attention to claims of “efficiencies” related to proposed merger deals. This recommendation is likely the result of a section within the report noting: “Merging parties consistently advocate for transactions with bold predictions about efficiencies sufficient to prevent price increases, but the agencies are not aware of evidence that those efficiencies have been borne out in practice.” [feel free to paraphrase if this quote is too technical]
• DOJ should look at vertical mergers & partnerships that may exclude independent companies. (Vertical mergers & partnerships refers to the business strategy of owning multiple points of the supply chain)
• Additionally, DOJ should reassess merger guidelines considering markets that are already highly concentrated.

Protecting Small Businesses

• DOJ should work with states on state laws impacting competition by submitting letters in response to state legislative requests for technical assistance.
• States are also encouraged to reevaluate regulations that may produce burdens on small businesses and new entrants or undermine their access to distribution.

TTB Recommendations

There were also a set of recommendations specifically for the Alcohol Tobacco Tax and Trade Bureau.

• The overarching suggestion for the TTB was to re-examine labeling rules and prioritize consumer and public health protection, but not make them so costly and complex that they’re a barrier to new entrants.
• More specifically, the Treasury recommended responding to the many requests for greater clarity, to sharpen and modernize the categories of conduct that are considered intrinsically harmful, and any exceptions. In such a course, TTB should solicit feedback on newer and less-well understood forms of exclusionary conduct.
• Strengthen the existing rule on category management—i.e., the design of shelving schemes and the offering of related services for “free”—to improve deterrence.
• Address complaints of under-enforcement, particularly about larger industry members.
• Increase enforcement on management schemes and tying arrangements.

It remains to be seen whether the Biden Administration will take further action on any of these recommendations. Since most alcohol regulation occurs at the state level, very few industry regulations can be addressed by the federal government.

Highlights of the U.S. Treasury Report

Perla Fernandez 0:00

Hi, I’m Perla Fernandez, Business Development Associate at Park Street Companies. In July 2021, the Biden administration issued an executive order directing the Secretary of the Treasury and the Federal Trade Commission to study and assess the U.S. market with the goal of reducing corporate consolidation and protecting consumers and small businesses. The alcohol category was among the industries the agencies were assigned to assess, and on February 9, the agencies released a 64-page report on the status of the U.S. alcohol category along with recommendations for improvement. The Park Street team combed through the report, and I’m here to provide industry members with an overview of what you need to know.

Perla Fernandez 0:51

The report opened by highlighting two major trends in beverage alcohol that have dominated the industry in the last decade: growth and consolidation. The first trend is the growth of craft producers—by the Treasury’s count, there are more than 6,600 operating wineries, 6,400 operating breweries, and 1,900 operating distilleries. The second trend is consolidation at the distribution, retail, and production levels for beer.

Perla Fernandez 1:19

Now let’s get into some of the areas of concern the Treasury report identified:

• Differing federal taxes for beer, wine, and spirits currently affect competition between each of those sectors.

• Molson Coors and Anheuser-Busch InBev account for 65% of beer revenue nationwide, and major brewery mergers may have links to price increases in certain markets.

• Potential discriminatory practices by distributors, as well as slotting, shelving, and other preferential practices by retailers.

• State and federal regulations—including labeling pre-approval requirements, bottle size restrictions, mandatory classification of beverages, and complex application requirements—are likely to cause unnecessary burdens on small and medium-sized producers and new market entrants.

• State laws that require distributors to publicly set and adhere to prices may inhibit growth and competition, passing financial consequences onto consumers.

• The report also expressed concern that the spread of the direct shipment model to beer and spirits may result in more alcohol in the hands of underage drinkers (though an FTC study found no evidence of this issue in wine shipments, more evidence is needed for beer and spirits).

Perla Fernandez 2:42

The agencies made several recommendations to address consolidation and protect small businesses:

• The Department of Justice (DOJ) and the FTC should be mindful of the effect on distribution when a craft brewer is acquired by a major brewer, and consider studying pricing, innovation, and distribution impacts resulting from major brewers buying craft breweries over the last decade.

• The DOJ and FTC should pay close attention to claims of efficiencies in proposed merger deals, as there is little evidence that promised efficiencies have prevented price increases in practice.

• The DOJ should examine vertical mergers and partnerships that may exclude independent companies and reassess merger guidelines for highly concentrated markets.

• To protect small businesses, the DOJ should work with states on laws impacting competition, and states are encouraged to re-evaluate regulations that burden small businesses or undermine their access to distribution.

Perla Fernandez 4:17

The report outlined a specific set of recommendations for the Alcohol and Tobacco Tax and Trade Bureau (TTB):

• The overarching suggestion was for the TTB to re-examine labeling rules to prioritize consumer and public health protection without making compliance so costly and complex that it acts as a barrier to new entrants.

• Sharpen and modernize the categories of conduct considered intrinsically harmful, as well as any exceptions, while soliciting feedback on newer forms of exclusionary conduct.

• Strengthen existing rules on category management—such as the design of shelving schemes and offering related services for free—in order to improve deterrence.

• Address complaints of under-enforcement, particularly regarding larger industry members, and increase enforcement on management schemes and tied-house arrangements.

Perla Fernandez 5:22

It remains to be seen whether the Biden administration will take further action on these recommendations, but there is only so much that can be changed on a federal level, as a significant amount of regulation in the alcohol industry is overseen by individual states. Thank you for watching! For more insights and education on the alcohol industry, click below to subscribe to the Park Street University channel.