Craft Alcohol Makers Thrive as Government Launches Antitrust Investigation

The Prohibition-era three-tier system is causing consolidation, not the market.


The recent executive order on economic competition issued by the Biden administration this summer directed agencies across the federal government to look into anticompetitive barriers in dozens of industries. While the order's potential ramifications for Big Tech dominated the headlines, it also included America's favorite pastime: alcohol.

Under the executive order, the Alcohol and Tobacco Tax and Trade Bureau (TTB) is tasked with investigating "the conditions of competition" in the drinks industry. On cue, TTB in July called for public feedback on whether there are competition concerns in the alcohol sector. Now that the comment period has closed and TTB regulators begin to consider any actions, they should quickly realize that the real competition issues in alcohol are not what they seem at first blush.

Calls for enhanced antitrust scrutiny of American alcohol markets have been a consistent theme in many left-leaning political circles for years now. This hand-wringing largely stems from Anheuser-Busch's high-profile 2016 acquisition of SAB-Miller, as well as splashy news stories about Big Beer buying up microbreweries.

But before jumping on this antitrust bandwagon, alcohol regulators should take a hard look at the facts. The American alcohol industry is unique in our economy in that it is artificially divided between three sub-sectors: producers, wholesalers, and retailers. This tiered system is a vestige from the aftermath of Prohibition, and government laws in every state require these tiers to operate as legally separate entities.

These rules make it nearly impossible for a producer, such as a craft brewery, to also own a retail store or restaurant. Instead, that brewery is legally required to sell its beer to a wholesaler, who then turns around and sells it to a retail outlet, who then can finally sell it to consumers.

The upshot of this convoluted system is that when competition concerns are evaluated within the industry, each of these three tiers needs to be scrutinized independently to determine where problems may exist. Any honest effort to do so quickly leads to only one conclusion: Alcohol markets are more competitive than ever—with the exception of the wholesale tier.

The first tier is producers such as breweries, wineries, and distilleries. The rise of the craft alcohol movement has created an increasingly diverse variety of alcohol producers. Contrary to hyperbolic headlines about Big Beer gobbling up microbreweries, the overall market share has shifted by 5 percent from larger brewers to small brewers since 2010.

The sheer number of new breweries that opened in America over the last several decades also underscores just how dynamic the American brewery sector is: In 1991, there were 312 breweries in America; in 2020, there were 8,884—only 120 of these are categorized as non-craft/large breweries. If anything, Big Beer's power is declining, not increasing. The distillery and winery sectors tell a similar story as more craft producers enter the marketplace.

The retail tier of alcohol is also incredibly competitive. Alcohol can be purchased everywhere from football stadiums and grocery stores to the neighborhood bar. As a result, the top 50 alcohol retailing companies account for only 25 percent of market sales, making it virtually impossible for any single entity to exert undue control at the retail level.

In contrast to producers and retailers, however, the wholesale tier has been rapidly consolidating. The number of wine and spirits wholesalers declined from 3,000 in 1995 to 1,200 as of 2017, while the number of beer wholesalers fell from 4,595 in 1980 to only 3,000 in 2020. Large wholesalers are also increasing their dominance: The top 10 wine and spirits distributors accounted for 59 percent of the market share in 2010, but now comprise 75 percent of the market. Worse yet, alcohol producers often note that they effectively only have one or two choices for wholesalers in most local markets, creating a de facto duopoly in many regions.

No one wants American alcohol markets to become monolithic and concentrated in a few large companies. But times have changed and breweries, wineries, and distilleries are operating in a robust and healthy marketplace, as are alcohol retailers.

While wholesaler consolidation is a real concern, the best answer could be to break up the artificial three-tier system entirely to remove the wholesaler bottleneck. This would mean that producers could sell and deliver their products directly to retailers and consumers, thereby reducing the influence of the consolidated wholesale tier. While some defend the three-tier system as vital, it's merely one of many potential regulatory options that could be used to ensure alcohol is safely handled and sold.

Increasing competition in American alcohol markets can best be accomplished by reducing the role of government through three-tier system reforms, rather than via enhanced antitrust scrutiny.

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  1. Agree 100%! Distribution is *the* problem with alcohol these days in the United States. The government has mandated middlemen stand between an alcohol producer and consumer.

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  2. The “middlemen” are where the government gets to play “winners and losers”. Unless you are in Pennsylvania. There the State government controls the retail of everything except beer and wine.

    1. I don’t know if they’ve done so in the past, but I would love for Reason to publish about the Liquor Control Board in PA.

      Out of staters are always amazed when I tell them about this. Just last weekend someone in my local Wawa asked me why there wasn’t any beer. Grocery stores have to apply for licenses and become pseudo-restaurants to sell beer and there are ridiculous rules on volume per transaction. When I worked in a grocery store, we would tell people to complete their transaction, walk out and come back in to buy more. Our state stores have terrible selection, extremely limited hours (most stores at 9-8 at the most and close early on weekends), and even our ineffectual state Republicans, who consistently campaign on repealing the PLCB, bow to the unions and the tax coffers once they reach Harrisburg. The state is making such a killing by hijacking the alcohol industry that nobody wants to return power to the people.

      Most Pennsylvanians are bootleggers at some point in their lives. People cross the border into NY, OH, MD, DE and NJ to get better alcohol. Plus our neighbors are ahead of the curve on legalizing marijuana, so don’t be surprised if PA has a Weed Control Board too.

      Our state is sadly the perfect example of why government is the problem and not the solution. Government has no reason to return power.

  3. Pretty good analysis. You can definitely see the evidence of macros using their market weight to stimy competitors- ask any bartender if they’ve had to buy a crap ton of bud light or something else just to get one of the beers from their “Constellation” brand. Only real reason they’ve bought up former craft breweries like Elyssian, Wicked Weed, etc. They can use it to strongarm places into taking their normal swill when otherwise they wouldn’t.

    Would fully be in favor of breaking up the three tier system.

  4. Get rid of ABC systems. I live in NC, a handle of SoCo in this state costs about $37 with tax. I just went to SC where it was $22 with tax. It also limits me to not being able to get certain liquors because they are not in the state registry which is limited based on products in warehouses across the state.

  5. It’s all about money. Alcohol taxes are big money. As a result state governments control the show so they get the money. Same as the lottery.

    1. I got really good at making my own beer. Like really fucking good. Made everything from session ales to Eastern European lagers in the style of Pilsner Urquell. Never tried distilling. Too illegal I guess. Wasn’t worth the risk.

      One thing I never could do was sell it. The beer that is. In a free country I could have opened up my garage, set out a few stools, and poured brews from the tap for my neighbors.

      But nooooooooooo. I’d need to spend a good $20K on licenses and permits and such, and even then I’d need to brew and serve in a building separate from the one I live in.

      So obviously I didn’t take my hobby any further.

      Free enterprise? Yeah right. We’re in the land of the free to ask permission and obey commands.

      1. Some people do manage to make the leap though. A friend of mine I used to brew with did. How a nice and trendy brewpub/restaurant now. But it was a bitch to get because politics. A councilman’s cousin wanted to open a brewpub in a neighboring town, and didn’t want the competition. So it was a lot of lobbying tot he other councilmen to get the permits in a state with a limited number of licenses that are still being handed out according to connections.

        1. Correct me if I’m wrong, but your friend must have had capital to risk or taken out loans. I’m not a gambler so I never tried that route.

          I was getting really good while Baxter Brewing was taking off. They’re in Lewiston Maine.

          Those guys shook the industry. Before them literally all craft brews were in glass. He started the trend of small operations putting brews in cans. Might seem insignificant, but you can’t take bottles to a campsite. It’s against the rules. When you take everything back with you, bottles are a heavy, loud, breakable pain in the ass.

          Now you see everything available in cans.

          Baxter Brewing started it.

      2. Florida has turned that way with cosmetics. In other states, there’s free flow between the most active hobbyists and start-up cosmetic businesses, because no licenses. Now in Florida it’s just like booze, with a non-residence address, licenses, product registration, and inspections — almost as onerous as the EU, where safety dossiers are required too. Fortunately Florida exempted the biggest category: soap; not so the EU.

    2. There are some heavily taxed goods that don’t have such a system of distribution control. Consider gasoline and the vehicles they’re put into. There are arbitrage opportunities for differentially-taxed heating oil vs. diesel fuel, yet the controls against diversion are nothing like this.

  6. All those paragraphs and not one word about how the feds can best control the political messaging of beer makers and sellers?

    Pretty lame reporting.

  7. Folks are being bamboozeled.

  8. I’ve been in the industry for about 5 years now. Having been through the red tape, I’ve seen the steps that they take to protect consumers.

    That is why I can confidently say, “Abolish the TTB.” No one will be less safe, everyone will be better off.

  9. That day the IRS branched off to the TTF of UN-Constitutional Regulation.

    The power to tax =/= the power to regulate… F’en Nazi’s.

  10. Is the guy in that picture a giant or something?

  11. Nice analysis of something that shouldn’t exist. Every article here should just read “X is bad because it violates the NAP.”

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