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.