Beer

Let the Beer Giants Merge, But Scrap the Mandatory Middleman

Allowing AB InBev to buy SABMiller won't hurt consumers. But the nation's government-mandated three-tier alcohol distribution system hurts them every day.

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Budweiser
Credit: North Charleston / photo on flickr

Earlier this week, Anheuser-Busch InBev, which brews Budweiser, and SABMiller, which brews Miller, agreed in principle on the parameters of a deal, worth more than $100 billion, in which the former will buy the latter. The deal, which will create a brewer responsible for seven out of every ten beers worldwide, ranks as one of the world's biggest. SABMiller had rebuffed previous acquisition efforts—including one made just earlier this month—by Anheuser-Busch InBev.

The potential merger has raised two key issues. The first is whether the U.S. government (along with governments abroad) will approve such a merger. Indeed, the Associated Press reports the merger is "likely to invite resistance from regulators" in the U.S. and abroad.

Despite the expected impact of the deal on the global market, its impact in the U.S. will be far smaller. That's because AB InBev, based in Belgium, is expected to sell off Budweiser's main domestic competitor.

"AB InBev is widely expected to sell SABMiller's stake in U.S.-based MillerCoors if the merger goes through," reports Reuters, "leaving its U.S. market share unchanged at 46.4 percent." The domestic craft beer market is also strong and growing. These are good reasons why the federal government should adopt a nothing-to-see-here approach to the merger.

Others agree. As Reason's Peter Suderman blogged this week, "there's no reason for regulators to get involved in a market as obviously competitive and innovative (and tasty) as this one."

The second issue is whether the merger could hurt those same craft beer makers. That question doesn't pertain, though, to whether concentrating more hops, malt, and yeast in the hands of a single brewer is a bad thing. Again, Budweiser and Miller, the domestic leaders in beer sales, won't share the same owner. Instead, the question about the impact of a merger on craft beer makers pertains not to brewing beer but to its distribution.

Beer distribution in America is a process that is needlessly archaic and complicated, thanks almost exclusively to the country's so-called three-tier system, a set of lousy post-Prohibition state laws that limit competition. Generally speaking, the three-tier system in place in most states prohibits many direct beer sales from a brewer to a consumer. Instead, the system requires beer first be sold by a brewer to a distributor or retailer before either of the latter can then sell to a consumer. If mandating this approach sounds like a bad idea, that's because it is.

As former Reason editor Radley Balko wrote in a 2008 piece on Sen. John McCain, whose wife Cindy owns one of America's largest and best-known beer distributorships:

Alcohol wholesalers (in this context, wholesalers and distributors essentially have the same meaning) thrive thanks to what's known as the "three-tier system" of alcohol distribution, a series of laws that date back to just after the end of prohibition in 1933. The 21st Amendment gives states the power to regulate the sale of alcohol within their borders. Some states decided to assume control of all alcohol sales (they're known today as control states). Most of those that didn't adopted laws mandating a state-based middleman between alcohol producers (brewers, distillers, wineries) and retailers (restaurants, grocery stores, liquor stores). There are some exceptions, but generally in three-tier states no one is allowed to buy directly from a producer. Everything must go through a distributor. And while it's possible to envision a role for a beer or wine distributor in a freer market for alcohol, it's clear that the industry wouldn't be nearly as lucrative or prominent as it is today were it not for these protectionist laws.

As Balko notes, Cindy McCain's $100-million fortune is thanks largely to her status as a beer-distribution heiress. Indeed, there's a lot of money to be made by distributors like McCain. As a Huffington Post piece detailed last year, the middle of the three tiers helps add $2.73 to the price of an average six-pack of beer. If you're a distributor—the mandatory middleman—that's a pretty cushy, cash-rich spot to be in. It's territory worth defending. For breweries and consumers, it's a far less desirable position.

And it may become even less desirable. Even as AB InBev looks to buy SABMiller, rumors emerged this week that the former is the subject of a Justice Department probe into allegations the brewer, according to a Reuters report, "is seeking to curb competition in the beer market by buying distributors, making it harder for fast-growing craft brewers to get their products on store shelves." That would make the already gloomy distribution situation mandated under three-tier system even worse.

As a teenager in Massachusetts, my first real summer job involved a variety of grunt work—mainly removing damaged beer cans from six-packs and repackaging them, or loading beer cans for recycling onto semi-trucks, along with the odd forklift operation—at the local Anheuser-Busch distributor. When I worked there in the late 1980s, their limited beer offerings included just the A-B product line (including Budweiser) and, if I recall correctly, a handful of imported beers—along with Eagle Snacks and imported sodas like San Pellegrino.

Today, the same distributor distributes dozens of craft beers from around the country. They distribute Ballast Point (Calif.), Breckenridge Brewery (Colo.), Butternuts (N.Y.), Cape Ann (Mass.), Founders (Mich.), Full Sail (Ore.), and my own personal favorite, Green Flash (Calif), whose West Coast IPA is a marvel of grapefruity hoppiness.

My point, then, isn't that beer wholesalers are evil. Far from it. Many, like the one where I once worked, help distribute craft beers that might otherwise not be able to find new markets, particularly outside the state in which they're brewed. The problem, then, is not in the distributors but in the state laws that both mandate and protect them. That's bad for craft brewers, consumers, and competition.

Beer distributors have an important role to play in meeting consumer demand. But they must be able to stand on their own two feet to make the process work.

The government shouldn't be looking why and how this merger could harm competition. Instead, it needs to take a long look in the mirror and see how it's harming competition. Doing away with the mandatory three-tier system would help foster a better future for brewers and consumers alike, while carving out a niche for distributors who compete and create real value for those brewers and consumers.

NEXT: Surviving Nagasaki

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  1. The government shouldn’t be looking why and how this merger could harm competition. Instead, it needs to take a long look in the mirror and see how it’s harming competition.

    I wonder which of these two things the government will be doing.

    1. One of those things allows politicians to grandstand. The other one, not so much. Guess which one the politicians will do.

  2. This article didn’t answer why the three tiered system came into being. What was the rationale? It seems needlessly inefficient, even worse than the state laws that mandate cars can only be sold from dealerships.

    1. IIRC it was put in place right at the end of prohibition.

    2. The 21st Amendment gives states the power to regulate the sale of alcohol within their borders. Some states decided to assume control of all alcohol sales (they’re known today as control states). Most of those that didn’t adopted laws mandating a state-based middleman between alcohol producers (brewers, distillers, wineries) and retailers (restaurants, grocery stores, liquor stores).

      The states wanted to regulate the alcoholic beverages sold to their peons, including rules about alcohol content, container size, protection of domestic producers, all the usual suspects. It’s much easier to monitor the inventory of a few large distributors than that of hundreds of small package stores and bars.

    3. A 3 tier system creates a lot more union jobs. What other reason need there be for big government?

      1. in Pennsylvania, there is a union for liquor store employees! Independent State Store Union (ISSU)

  3. Typically, distributors for most any shippable good will naturally arise. Its a valuable specialization that can be a cost saving service to retailers and manufacturers.

    BUT, forcing them on an industry and protecting them is never a good thing.

    1. For example, firearm distributors.

    2. Government meddling in business never is…

  4. I like beer. I also enjoy reading the beer threads, lots of advice about what beers to try next. I’ll have to come back and see what develops.

    Also, you know who else drank bier?

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  6. …and my own personal favorite, Green Flash (Calif), whose West Coast IPA is a marvel of grapefruity hoppiness.

    Ugh, Cascade is so 1990.

  7. I don’t know the best way to distribute beer, but I am sure the market can figure it out.

    1. geo1113,

      Gets a bit tiresome, dealing with a Gov and most voters who don’t seem to realize this, when it used to be such common knowledge that the comment by a former Pres become a common phrase (then)-the business of America is business. Now, it veers from the business of America is to be the worlds refugee center, the western hemispheres welfare depot, the worlds on-off kinda cop. Whoo-we. Geo, since Rand isn’t hittin’ on all cylinders as many Liberty lovin’ libertarians wanted, would you mind steppin’ up and winning the election? Thanks. I’d do it but my lazy retired ass is too busy surfin’ and clicking.

  8. Works for me. Pabst BR Miller Lite and Coors are all the same product anyway.

  9. Google pay 97$ per hour my last pay check was $8500 working 1o hours a week online. My younger brother friend has been averaging 12k for months now and he works about 22 hours a week. I cant believe how easy it was once I tried it out.
    This is wha- I do…… ?????? http://www.buzznews99.com

  10. Start working at home with Google! It’s by-far the best job I’ve had. Last Wednesday I got a brand new BMW since getting a check for $6474 this – 4 weeks past. I began this 8-months ago and immediately was bringing home at least $77 per hour. I work through this link, go? to tech tab for work detail,,,,,,,

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  11. Alcohol laws in Pennsylvania are so odd. If you want a 6 pack you buy it from a restaurant. My first day in West Chester I stopped into a little pizza joint and asked them what their specialty was–“Beer” was the answer.

  12. The government shouldn’t be looking why and how this merger could harm competition. Instead, it needs to take a long look in the mirror and see how it’s harming competition.

    Hmm. So when governments try to investigate or even block private monopolies that’s bad for competition, but when a corporation buys out a competitor, resulting in a situation where it has pretty much nobody competing against it anywhere around the world, that’s great for competition and for consumers.

    So please tell us, Baylen, just how DOES competition work with a monopoly? Especially a multibillion-dollar monopoly.

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