Competition in the Beverage Alcohol Industry Now Under the Microscope

July 12, 2021 Robert M. Tobiassen

[Booze Rules Note: This analysis by our friend and colleague Rob Tobiassen, the most astute participant in the national alcohol regulatory scene we know, is required reading for industry members attempting to read the tea leaves behind last week’s announcement of new regulatory review of the tied house” laws and the on-going trend of industry consolidation in both the supplier and the wholesaler tier. This is, as Rob notes, only the beginning of a new era of TTB and Anti-Trust enforcement – an era that may shape national marketing and distribution programs for decades to come. Welcome to the future and stay tuned. – John Hinman]

Competition in the Beverage Alcohol Industry Now Under the Microscope

Executive Order on “Promoting Competition in the American Economy” Takes a Laser Target on Consolidations and Trade Practices

By Robert M. Tobiassen[1]

     “Now, look, I’m a proud capitalist...I know America can’t succeed unless American business succeeds.

     “But let me be very clear: Capitalism without competition isn’t capitalism; it’s exploitation. Without healthy competition, big players can change and charge whatever they want and treat you however they want. And for too many Americans, that means accepting a bad deal for things that can’t go — you can’t go without.”

President Joseph R. Biden, Jr. speaking at the White House on July 9, 2021

Last Friday, President Biden, with great fanfare,[2] signed an executive order that defines his vision for our economy moving forward into the third decade of the 21st Century. The first two decades brought fundamental expectancies in a terrorist attack, a financial melt-down, never-ending wars, and a global pandemic not seen for a century. The change in direction of the American economy roadmaped in the executive order will be as striking as the afore events but will be a forward-looking industrial policy. This executive order and the Biden/Harris Administration’s infrastructure plan, if successfully implemented, will reimagine the “American Dream” for decades and serve as the lasting face of the United States in the global economy.[3]

Or, is it a pipedream?

What will affect me in this executive order?

The executive order[4] directs Cabinet Heads of Departments to address seventy-two specific activities or programs within the current authority of the Executive Branch agency. It encourages independent commissions, like the Federal Trade Commission and the Federal Maritime Commission, to take similar steps voluntarily. These range from broad edits like “net neutrality” and prohibiting many “non-compete agreements” to very pointed ones like obtaining hearing aids without a prescription and restricting poultry practices discriminating against farmers in fair pricing. And, yes, even two specifically apply to the beverage alcohol industry.[5] They direct the Secretary of the Treasury (with the Attorney General and the Chair of the Federal Trade Commission (FTC)) to look at the impact on small business from the consolidations occurring in all three tiers and direct the Alcohol and Tobacco Tax and Trade Bureau (TTB) to undertake new rulemaking on trade practices to update the regulations, rescind current regulations that unnecessarily impede competition, and reduce any barriers (within TTB’s legal authority and control) to market entry by smaller and independent distillers, wineries, or breweries.[6]

What just happened??????

Many people have asked me this weekend “why now” and how did these two very program focused provisions come to be in the executive order. Clearly, the detailed nature of these two provisions along with a review of the other 70 programs in the executive order establish that the authors were very knowledgeable and solid thinkers about these programs which indicates that career officials were involved. The Wall Street Journal reports that Professor Tim Wu of Columbia Law School is the White House senior advisor on antitrust policy and led the effort to prepare the executive order with input from agency officials. His philosophy is the general regulations of agencies should be used to advance the same goals that underlie the Federal antitrust laws.[7] There was no public notice in the Federal Register soliciting input from the public and other interested parties. Some of you may recall the public notice in 2017, by the Department of the Treasury during the prior Administration soliciting input to the Office of Management and Budget (OMB) on specific regulatory reforms at specific agencies.[8] Many companies and trade associations submitted comment letters with proposals. While no further action was undertaken by OMB on these submissions,[9] the files likely remain at OBM and could be the source of some of these executive order provisions.

Many actions in the executive order have received extensive media coverage and a simple internet search[10] would retrieve information on the controversy surrounding these actions, including the consolidation over the past decade in the beverage alcohol industry. The trade media closely followed E & J Gallo Winery’s acquisition of many wine brands from Constellation and prior to that the acquisition of SAB Miller by Anheuser-Busch InBev received huge and mainline business press coverage, along with anti-competition concerned voiced by the distribution tiers.

A simple internet search under “alcohol beverage consolidation” results in many hits.[11] Retailer consolidations[12] and distributor consolidations have gained notoriety in press coverage, as have wholesaler/distributor consolidations. At $27 billion annually, the top two U.S. distributors—Southern Glazier’s Wine and Spirits and Republic National Distributing Company—account for more than half of what consumers spend on domestic wines; that’s before imported wines and spirits are factored in.[13] Breakthru Beverage was created in 2015 by a merger of Wirtz Beverage Group and the Charmer Sunbelt Group; in 2019 a proposed merger of Breakthru Beverage and Republican National Distributing Company was terminated after delays in Federal government review.[14]

Some assert these consolidations are a good thing that benefits retailers and consumers through streamline shipping and economies of scale.[15] However, from my own consulting work, I know that consolidation has resulted in small importers losing key brands they built in the domestic market. One importer shared with me that fact that in the past six years, his company has lost nine major brands to a consolidated company.[16]

Established in 2019, the Independent Distributor Network (IDN)[17] believes that consolidation has resulted in market stagnation for new and exciting brands, which most likely would implicate the focal point of the executive order to safeguard and increase small businesses    Very likely this debate and contrary viewpoints will be analyzed in the report due in 120 days.

Nevertheless, even without knowing the exact original sources of these alcohol industry provisions, they are in the executive order and must be assessed in terms of where they may go. The first one (on industry consolidation) requires a report by the Secretary of the Treasury within 120 day and the second one (on unfair trade practices) requires a report within 240 days by TTB. The reports will be given to the newly created White House Competition Council.[18]

What do I need to think or worry about here on consolidation?

Let’s look at the two separate provisions. The first looks at consolidation in the beverage alcohol industry at all three tiers. In the big picture of the executive order this is not surprising because much of the public policy underlying the executive order is seriously concerned with the consolidation of, and literal monopolization by, corporate entities in virtually every line of business of good or services.[19] Alcohol is no different so section 5(j) fits the mold as evidenced by the above mergers at the producer, distributor, and retailer tiers.

President Biden’s remarks at the signing ceremony included:

“The executive order I’m soon going to be signing commits the federal government to full and aggressive enforcement of our antitrust laws. No more tolerance for abusive actions by monopolies. No more bad mergers that lead to mass layoffs, higher prices, fewer options for workers and consumers alike.”

Clearly this means future mergers and acquisitions within the three-tiers of the beverage alcohol industry will be much more closely scrutinized. The unknown is whether some mergers and acquisitions that did not required anti-trust review will now be scrutinized after the fact? Or will some aspects of past approvals be revisited to the extend the Federal anti-trust laws permit? The Secretary of the Treasury must rely on assistance from the Anti-Trust Division of the Justice Department and the Federal Trade Commission, so pay close attention to the team composition when an investigator “comes a calling” when a new industry acquisition of merger is announced.

What’s going on here about unfair trade practices?

Logic dictates that a White House program looking at competition in the domestic beverage alcohol marketplace must assess the unfair trade practices of exclusive outlet, Tied-house, Commercial Bribery, and Consignment Sales under the Federal Alcohol Administration Act (FAA Act).[20]    Nevertheless, I still wonder why it came up now and I speculate below.

The executive order direct two actions here. First, the use rulemaking the update the unfair trade practice recommendations and, second, to evaluate whether the any current regulations should be rescinded or revised because they impeded competition or impose barriers to hinder smaller and independent industry members.

Most of the current unfair trade practice regulations were adopted during public rulemaking in 1978-79, having their genesis in prior revenue rulings and ATF rulings. The regulations were revised in 1994-95, primarily because of the decision on the meaning of exclusion articulated by the Federal Court of Appeals for the District of Columbia Circuit in Fedway Associates v. U.S. Treasury, 976 F. 3d 1416 (DC Cir. 1992).

Over 25 years have passed since the last regulatory revisions of the unfair trade practice regulations so, at a minimum, the publication of an advance notice of proposed rulemaking seeking public input on the need for revisions to reflect the reality of today’s global and consolidated and its results on smaller and independent industry members and retailers is appropriate.

In these 25 intervening years, TTB has conducted major investigations into category management and other retailer promotional programs involving third parties but has issued informal guidance only through industry circulars and administrative rulings.[21] More important, for the past five years, TTB has instituted a very aggressive nationwide investigation of unlawful trade practices principally focusing on slotting fees, and in many cases, in conjunction with inadvertently terminated basic permits by unreported changes in control. Numerous offers in compromise and stipulated suspensions resulted from these intensive investigations.[22] Midway through these investigations TTB put on several in-person training sessions[23] with a handout and, more recently, created professional videos[24] on the unfair trade practices.

Regular readers of the Booze Rules Blog are acquainted with my skeptical views on the execution of the nationwide unfair trade practice enforcement and my views that TTB’s heavy handiness in conducting these investigations directly harmed and impeded small businesses.[25]   (Several related articles were penned by John Hinman.) Some of those adverse effects continue to be felt today by those small businesses. It would not surprise me if some impetus for the inclusion of unfair trade practices in the executive order is directly the conduct and settlement results of these investigations.

Most offers in compromise were from small or medium sized businesses. All of the 32 suspensions were small businesses except for one representing a large nationwide company. Readers of the cited Booze Rules Blog articles will see that we believe a number of these offer in compromises resulted from the duality of allegations of an unfair trade practice and operating without a basic permit due to an inadvertent alleged unreported change in control; the latter compelling the need to settle administratively. I know in one investigation a basic permit holder filed a complaint with the Treasury Inspector General-the outcome of which the permit holder was never advised.[26] There were other instances of overbearing and dispassionate investigative activities in which former clients as a consultant were not willing to waive the attorney-client privilege.

Finally, one aspect of the Treasury Department’s view of small businesses being disadvantaged in an area outside of the unfair trade practice enforcement is the recent permanent enactment the Craft Beverage Modernization Act. The Act required the Treasury Department to issue a report by the end of June 2021, on its initial plans on implementing the importer refund claims procedure effective on January 1, 2023. The report contains a detailed discussion on how the CBMA disproportionately benefits the larger producers over the smaller ones. The Treasury Department points this out as an irony of a tax benefit bill originally intended to extend the small producer tax rate or credit then received by wineries and breweries to craft distilleries.[27] There is no reason to highlight this point given the narrower mandate of the report.

Conclusion the “tea leaf reading” the future.

Early in his Administration, President Biden is putting forth an economic philosophy, industrial and agricultural policy, and a trade policy that sharply shifts away from, that of the past four decades—the shift that started with President Reagan.

The executive order shift is consistent with the Biden/Harris Administration’s international trade policies that are based on the two pillars of climate and worker-centered. Reading the executive order, clearly the absence of competition, in the President’s viewpoint, has harmed workers. The recently instituted dispute settlement with Mexico over labor union representation in a automobile factory in Mexico directly evidences the use of the USCMA ‘s labor provisions to protect workers both in Mexico and the United States, the latter being protected from job losses arising from cheap labor practices in Mexico.[28] Separately, the five-year suspension of the Airbus/Boeing tariffs in the dispute before the World Trade Organization (WTO) reflects the needs of workers by allowing pre-tariff jobs to come back during this period.

Given the gridlock on Capitol Hill and uncertain decisions by the Federal judiciary, the President is doing his best to put all his cards on the table and be transparent about his vision and his goals for the United States moving forward. Given the tight and contentious mid-term election in 2022 and the presidential election in 2024, the President is using every tool available to the White House to get this message out to the voters. Even if little of this is accomplished by the upcoming elections, the voters will keenly understand what they are voting for if they elect candidates favorable to the President.

By citing in his remarks, the two President Roosevelts—Theodore the Republican and Franklin the Democrat—President Biden is telling the public that his vision is ground shifting and is traditionally bipartisan.

For the beverage alcohol industry, the future is two-fold- in the short term, focusing on the two reports from the Treasury Department on consolidation and trade practices and in the long-run, coming to terms with your business model today and what it will look like tomorrow. These decisions will influence whether this vision is the new “American Dream” or is a pipedream.

[1] Mr. Tobiassen is the former TTB Chief Counsel and is currently the President of the National Association of Beverage Importers (NABI), Washington, DC. The views express in this article are solely his views and are not the views of NABI or its Members. With respect to the discussion of the unfair trade practice review required by Section 5 (j) of the executive order, Mr. Tobiassen was a consultant for law firms and industry members during the recent and extensive TTB enforcement program and b comments about those investigations are based on public information from, the TTB website on the resolution of those investigations or other public information.

[2] https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/07/09/remarks-by-president-biden-at-signing-of-an-executive-order-promoting-competition-in-the-american-economy/

[3] Perhaps most fundamental and telling about the magnitude of this pivot in our economy is the President’s statement which challenges the economic philosophy starting with the Reagan Administration in 1981:
“But, over time, we’ve lost the fundamental American idea that true capitalism depends on fair and open competition. Forty years ago, we chose the wrong path, in my view, following the misguided philosophy of people like Robert Bork, and pulled back on enforcing laws to promote competition.
“We’re now 40 years into the experiment of letting giant corporations accumulate more and more power. And where- — what have we gotten from it? Less growth, weakened investment, fewer small businesses. Too many Americans who feel left behind. Too many people who are poorer than their parents.
“I believe the experiment failed. We have to get back to an economy that grows from the bottom up and the middle out.”

[4] https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/

[5] (j) To protect the vibrancy of the American markets for beer, wine, and spirits, and to improve market access for smaller, independent, and new operations, the Secretary of the Treasury, in consultation with the Attorney General and the Chair of the FTC, not later than 120 days after the date of this order, shall submit a report to the Chair of the White House Competition Council, assessing the current market structure and conditions of competition, including an assessment of any threats to competition and barriers to new entrants, including:
(i) any unlawful trade practices in the beer, wine, and spirits markets, such as certain exclusionary, discriminatory, or anticompetitive distribution practices, that hinder smaller and independent businesses or new entrants from distributing their products;
(ii) patterns of consolidation in production, distribution, or retail beer, wine, and spirits markets; and
(iii) any unnecessary trade practice regulations of matters such as bottle sizes, permitting, or labeling that may unnecessarily inhibit competition by increasing costs without serving any public health, informational, or tax purpose.
(k) To follow up on the foregoing assessment, the Secretary of the Treasury, through the Administrator of the Alcohol and Tobacco Tax and Trade Bureau, shall, not later than 240 days after the date of this order, consider:
(i) initiating a rulemaking to update the Alcohol and Tobacco Tax and Trade Bureau’s trade practice regulations;
(ii) rescinding or revising any regulations of the beer, wine, and spirits industries that may unnecessarily inhibit competition; and
(iii) reducing any barriers that impede market access for smaller and independent brewers, winemakers, and distilleries.

[6] The lengthy remarks by President Biden at the signing ceremony reference many of the specific actions covered in the executive order but do not include any specific reference to the two beverage alcohol provisions.

[7] https://www.wsj.com/articles/the-man-behind-bidens-push-to-promote-business-competition-11625851555?campaign_id=4&emc=edit_dk_20210712&instance_id=35119&nl=dealbook&regi_id=161447251&segment_id=63230&te=1&user_id=6c3318edbacdf932fa5ed60b4f97

[8] The request by the Treasury Department in Review of Regulations, 82 Federal Register 27217 (June 14, 2017), as well as the extension for the submission of comments. Specifically, Executive Order 13777, Enforcing the Regulatory Reform Agenda (February 24, 2017) requires the task force to attempt to identify for repeal, replacement or modification regulations that eliminate jobs or inhibit job creation; are outdated, unnecessary, or ineffective; impose costs that exceed benefits; create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies; are inconsistent with the requirements of the Information Quality Act (44 U.S.C. 3516 note), or the guidance issued pursuant to that provision; or derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified.

[9] The OMB Office of information and Regulatory Affairs (OIRA) was headed by Ms. Neomi Jehangir Rao at the time. I subsequently spoke with Ms. Rao at an event at the Brookings Institution, Washington, DC, where she was speaking and asked her about the status of the regulatory review. She looked perplexed and did not know what I was talking about until I explained more. In March 2019, Ms. Rao was appointed as a Circuit Judge for the Federal Court of the District of Columbia Circuit.

[10] The general public would be surprised at how many Federal investigations germinate from internet searches by taxing, regulatory, and criminal enforcement agencies.

[11] http://www.eatdrinkpolitics.com/alcohol-policy/industry-consolidation/
https://www.fhafnb.com/most-prospective-global-alcoholic-beverage-markets/
https://seekingalpha.com/article/2215143-more-consolidation-for-alcoholic-beverages-companies
https://www.alliedmarketresearch.com/alcoholic-beverages-market
https://www.gminsights.com/industry-analysis/TCD-alcohol-DM-market
https://www.forbes.com/sites/thomaspellechia/2020/08/20/a-new-alcohol-distributor-network-aims-to-revolutionize-the-industry/?sh=261143e641f3
https://www.theamericanconservative.com/articles/a-sober-look-at-the-dangers-of-craft-beer-consolidation/

[12] https://www.grocerydive.com/news/gopuff-buys-another-alcohol-retailer-as-it-continues-acquisition-tear/602202/

[13] https://www.forbes.com/sites/thomaspellechia/2020/08/20/a-new-alcohol-distributor-network-aims-to-revolutionize-the-industry/?sh=a7b07cc41f32

[14] https://www.thespiritsbusiness.com/2019/04/rndc-and-breakthru-beverage-cancel-merger/

[15] https://www.freightwaves.com/news/consolidation-helps-shippers-satisfy-modern-consumers-and-retailers-demands

[16] The client gave me permission to included this matter.

[17] https://www.idndist.com/about

[18] See Section 6, of the executive order.

[19] “Yet over the last several decades, as industries have consolidated, competition has weakened in too many markets, denying Americans the benefits of an open economy and widening racial, income, and wealth inequality. Federal Government inaction has contributed to these problems, with workers, farmers, small businesses, and consumers paying the price.
“Consolidation has increased the power of corporate employers, making it harder for workers to bargain for higher wages and better work conditions. Powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs. And, while many occupational licenses are critical to increasing wages for workers and especially workers of color, some overly restrictive occupational licensing requirements can impede workers’ ability to find jobs and to move between States.

* * * * * * *
“The problem of economic consolidation now spans these sectors and many others, endangering our ability to rebuild and emerge from the coronavirus disease 2019 (COVID-19) pandemic with a vibrant, innovative, and growing economy. Meanwhile, the United States faces new challenges to its economic standing in the world, including unfair competitive pressures from foreign monopolies and firms that are state-owned or state-sponsored, or whose market power is directly supported by foreign governments.
“We must act now to reverse these dangerous trends, which constrain the growth and dynamism of our economy, impair the creation of high-quality jobs, and threaten America’s economic standing in the world.
“This order affirms that it is the policy of my Administration to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony — especially as these issues arise in labor markets, agricultural markets, Internet platform industries, healthcare markets (including insurance, hospital, and prescription drug markets), repair markets, and United States markets directly affected by foreign cartel activity.”

[20] Title 27, United States Code, sections 205(a), (b), (c), and (d) and Title 27, Code of Federal Regulations, parts 6, 8, 10, and 11.

[21] https://www.ttb.gov/images/industry_circulars/archives/2012/12-01.html
https://www.ttb.gov/images/industry_circulars/archives/2012/12-02.html
https://www.ttb.gov/industry-circulars/ttb-industry-circulars-18-7
https://www.ttb.gov/industry-circulars/ttb-industry-circular-2020-3

[22] https://www.ttb.gov/fo/administrative-cases

[23] https://www.ttb.gov/news/trade-practice-remaining-seminars

[24] https://www.ttb.gov/trade-practices#tpVideos

[26] The client gave me permission to share this matter.

[27] https://www.ttb.gov/images/pdfs/treasury-cbma-import-claims-report-june-2021.pdf See pages 10-11, “Impact of CBMA Provisions to Date.”

[28] https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/july/statement-ambassador-katherine-tai-remediation-plan-address-denial-workers-rights-mexico
https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/july/united-states-and-mexico-announce-course-remediation-workers-rights-denial-auto-manufacturing
https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/june/office-us-trade-representative-and-us-department-labor-convene-inaugural-meeting-us-mexico-canada

This blog is dedicated to occasional (and hopefully interesting) reports of state and national alcoholic beverage regulatory developments that we encounter in our practice. Booze Rules (and any comments below) are intended for informational use only and are not to be construed as legal advice. If you need legal advice please consult with your counsel.

Booze Rules Blog

Categories

Previous Posts