Time to shed a tier for beer? Part I
Before the enactment of Prohibition in 1920 the distribution of beer was minimally regulated. Most breweries were relatively small and served a local market. Some breweries owned their own retail outlets, typically a neighbourhood tavern. Privately-owned outlets were often given incentives by the breweries to carry their beer exclusively. These incentives ranged from equipment and supplies to interest-free loans. In these early, freewheeling days, intimidation and corruption were relatively common.
Brewers were anxious to increase sales without concern for the social costs that this might bring to bear. Most consumption was in public houses and went up on pay days. Public drunkenness increased and the abuse of wives and children became more common.
This gave rise to the temperance movement, which was spearheaded by the American Temperance Union and the Anti-Saloon League. Increased social acceptance of this movement gradually shifted public opinion from moderate consumption of alcohol to complete abstinence.
This eventually led to the 18th Amendment to the Constitution of the United States, which mandated a prohibition against all alcoholic beverages.
Prohibition did not end the consumption of alcohol. It simply drove it underground. Production continued with bootleggers and through smuggled imports. Product quality suffered while the government lost an important source of excise tax. Organised crime reaped the benefits from strong demand and a limited, illicit supply.
The unemployment and hard times brought by the Great Depression helped to change public opinion regarding the sale and consumption of alcoholic beverages. With the legalisation of alcohol there were many jobs to be gained as well as government revenue, which could be used to help alleviate social suffering that had increased immensely with the onset of the Great Depression.
Beer was the first to be set free with an act of Congress that took effect on 1 April 1933. The definition of intoxicating beverages now excluded beer with an alcoholic content of 3.2% abv or less. Later in the same year the 21st Amendment was ratified, which gave each state the right to regulate the production, importation, distribution, retail sale and consumption of alcoholic beverages within their borders.
This set the stage for the three-tier system of distribution that remains in operation to this day.
Once Prohibition was repealed, Congress passed the Federal Alcohol Administration (FAA) Act which was to be administered by the Bureau of Alcohol, Tobacco and Firearms (BATF). This law set broad limits on the rules that states might establish. The idea was to eliminate anti-competitive practices that were common before Prohibition, such as brewery ownership of retail outlets and inducements to retailers to limit competitive brands. This was accomplished by separating the producer and retailer with a third tier in the distribution system: the distributor or wholesaler.
Producers, which include brewers and importers, can only sell to wholesalers. Wholesalers, in turn, can only sell to retailers. The intent was to provide a controlled system that would promote competition and insure efficient collection of excise taxes.
Producers usually give distributors an exclusive right to a territory so a brand would not be competing against itself in any market area. In the mid-twentieth century, there were more than fifty regional and national brewers and more than 5,000 distributors. Most distributors carried products from several breweries. In recent years though, market concentration has reduced the number of large breweries to three: Anheuser-Busch, Miller and Molson/Coors, with the latter two have recently joined distribution forces to effectively make only two large national competitors. These breweries control over 80 percent of the market with the remainder being filled by more than 1,400 smaller craft breweries and beer imports.
Along with the concentration of brewers, the number of wholesalers fell to nearly 1,500.
Due to the power of advertising and economies of scale, there are no breweries between the size of one million barrels and twenty million barrels of beer. In fact, distribution in many parts of the country is conducted by just two distributors in each area: one for Anheuser Busch and one for Miller/Coors.
There are some specialty distributors in urban areas but the majority of distributors are tied into one of the major brewers.
This is where the problems start to surface. In the past, there were a number of distributors competing with each other all around the country. Smaller brewers did not have much of a problem finding a company to handle their products. But today the big brewers are more likely to ask their distributors to give “100% share of mind” to their products and to not handle the products of other breweries. This can make it very difficult for a small or regional brewer to find a distributor in today’s market.
Wholesalers do appreciate the fact that the big three breweries “only” supply about 80 percent of the market, so there is a demand for imports and specialty beers. To satisfy the needs of wholesalers to add more of these profitable brands to their sales, the big brewers have made investments in imports, the main example being Anheuser-Busch’s investment in Mexico’s Grupo Modelo (Corona Extra being the number one import in the U.S.), and in the specialty beer market by buying into craft brewers as Anheuser-Busch has done with Widmer.
The craft brewery Widmer gave a 27 percent interest in the company to Anheuser-Busch in return for USD 18 million in cash, and more importantly, access to Busch’s distribution network. Anheuser-Busch retained 100 percent share of mind of their distributors, the distributors gained specialty products to improve their profitability and Widmer gained access to national distribution. At the exclusion of all other non-Busch owned craft brewers, we might add.
The system that was formed to open competition is now acting as a restraint to smaller breweries at the expense of the controlling oligopoly. And this is not the only complaint against the three-tier system.
The problem of corruption in the early days has now just been shifted to the distributors. There are allegations of sales representatives crowding out tap handles of smaller competitors with free “samples”, supplies and other incentives.
Plus big brewers regularly tweak their products with minor variations and new package sizes which increase their SKU’s (stock keeping units), thereby crowding their smaller competitors from limited shelf space.
Moreover, the added layer in distribution raises costs for the consumer for there could be savings if breweries could deliver directly to some retailers. Adding further to this list are importing brewers who complain that the three-tier system does not conform to the requirements of the General Agreement of Trade and Services (GATS). The World Trade Organization (WTO) could step in to challenge, and possibly force changes to the system.
