Do brewery mergers call regulation, “three-tier” system into question?
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Lager Heads had the honor of moderating a fascinating - and heated - panel at a beer conference last month in Chicago. The topic: Globalization and its effect on the regulation of alcohol in the U.S.
We wanted an answer to this question: Does the fact that the U.S. beer industry is largely controlled by foreign companies (Anheuser-Busch InBev, SABMiller, Molson Coors, Heineken and Modelo) jeopardize the current U.S. system of regulation?
In that system - instituted by the 21st Amendment - each state has wide latitude to regulate alcohol within its borders. Beer is generally sold by breweries to wholesalers, who in turn sell to retailers. The “three-tier system,” as the industry calls it, dates to the end of Prohibition in the 1930s and was intended to control the flow of alcohol and some of the worst abuses connected to over-saturation of alcohol.
In a Hyatt Regency conference room full of beer distributors, lawyers and regulators, the panelists dished a range of opinions.
First question: Do international brewers support the three-tier system, or do they see it as a hindrance? Do they want to eventually reduce the roles of the middlemen (i.e., beer distributors?). What of MillerCoors, the joint venture between SABMiller and Molson, which has aggressively tried to change its contracts with distributors, despite legal challenges?
Quoting Shakespeare, MillerCoors attorney Kelly Grebe said all the fuss about globalization’s possible threats to current alcohol regulation was “much ado about nothing.”
“We are fully in support of the three-tier system,” Grebe said. “We had to encompass the whole judicial system. The response [when MillerCoors was formed] was not, ‘How can we possibly circumvent this?’ We operate as we always did.”
Not so fast, said Michele Simon, director of research and policy at the Marin Institute, a longtime critic of alcohol companies. Simon said her group was concerned about the influence of foreign companies in the industry, and in particular the “rapid approval” of the MillerCoors and Anheuser-Busch InBev combinations by federal antitrust authorities. If the Obama administration is “going to look at merger approvals, why not look at these?” Simon asked.
The U.S beer industry is now a “duopoly” controlled by two companies, Simon said, citing Anheuser-Busch InBev’s roughly 50 percent market share, and MillerCoors‘ 30 percent.
Simon called Anheuser-Busch InBev’s hints that it may close U.S. breweries in response to excise tax hikes “scare tactics - a form of extortion.”
She predicted threats to the three-tier system, citing InBev’s record of squeezing distributors in Brazil and MillerCoors‘ recent efforts to cancel some contracts with distributors or get them to consolidate.
State attorneys general “should be vigilant while looking at potentially illegal contracts,” she said.
Whoa. Kelly, what is MillerCoors‘ response?
“The idea that the beer industry is a duopoly is ridiculous,” Grebe said. “We are not even close to a duopoly.”
Grebe said again that MillerCoors supports the arrangement of selling beer through wholesalers. Having wholesalers merge is not a threat to the system, she said - it actually makes the three-tier system “more efficient.”
“The other thing I take issue with is the idea that the three-tier system is inefficient,” she said. “From a beer perspective, the three-tier system is the best way to get it to market.”
Likewise, Pam Erickson of advocacy group Public Action Management said the three-tier system is a good way to avoid a society flooded with alcohol.
“Our regulatory system is very good and it works,” said Erickson, who has researched the effect of deregulation on drinking in the U.K.
She said deregulation there has caused massive problems, including very aggressive sales tactics to move vast volumes of alcohol out the door. Steep discounts - including selling alcohol at a loss - led to a British society beset with widespread public drunkenness and crime, Erickson said. The lack of regulation led to alcohol becoming a commodity.
Grebe disputed the idea that executives from companies based overseas would seek to undermine the three-tier system, or the system of state-based regulation.
She noted that Leo Kiely (CEO of MillerCoors) and Tom Long (chief commercial officer) were “born and raised in the U.S.A.”
Simon remained unconvinced. The foreign parent companies of U.S. brewers, driving for efficiencies and profits, will certainly question the already misunderstood three-tier system, she said. “These companies are going to come in and say, what the hell is this?”
Interesting stuff. We have no idea who is right about the future of U.S. regulations. But we will continue to watch the foreign brewers as they navigate the uniquely American set-up.
(2 votes, average: 4 out of 5)
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Jeremiah McWilliams is a native Virginian who came to the Post-Dispatch in early 2007 to cover beer and other consumer products. He previously covered manufacturing for the Virginian-Pilot newspaper in Norfolk, Va. He is a graduate of Washington and Lee University. 
Call the Marin Institute what they actually are — a neo-prohibitionist organization. i’m no fan of the Bud/Miller/Coors of the world, but quoting Marin as your only source outside the industry itself is irresponsible. Google exists, research your sources before you publish them.
It’s a little late to be worrying about this now that the horse is out of the barn ! The so-called Federal Antitrust regulators were obviously paid off or sleeping at the switch when these mega-buyouts were all too rapidly approved. Not surprising in view of them being Federal bureaucrats.
Of course MillerCoors supports the 3-tier system. The wholesaler is the moat that keeps challengers out.
If the distributors in your area don’t want to stock, say, Abita Turbo Dog or Flying Dog In Heat Wheat or Dogfish Head 90 Minute IPA, then guess what? No dogs for you. Have another Coors and quit complaining.
On the other hand, MillerCoors’s lawyer is off the mark when he says 80% isn’t a duopoly. I’d like to see Grebe tell that to the people who flew out of Lambert 20-25 years ago, when TWA and Ozark held that kind of market share and St. Louisans paid some of the highest airfares in the nation.
lonely pendant has it right. The 3 tier system helps to keep the little guy out. Many distributors don’t want to carry low volume products. Too much work to turn a profit. It’s much easier to move truck loads of bud light. Luckily, here in St. Louis, we have some very fine distributors who do stock many beers from a multitude of craft brewers. This is not the case everywhere, though.
John, the Marin Institute was on the panel — this story was about the discussion and disagreement on the panel. Hence, the quoting of the Marin Institute. No need to direct me to Google. We pointed out that the Marin Institute was a “longtime critic of alcohol companies.” I think that gets the point across. Also, Public Action Management (quoted in story above) is “outside the industry,” as you requested.
For many small breweries, the biggest challenge to getting your product on the shelves is finding a distributorship willing to take on your product.
Why should my distributorship carry your beer? Your beer, let’s say “Urr Brew”, has had a few tastings in the past couple of years where, say, thirty people have shown up. Can I really devote sales time, warehouse space, delivery time, and man power to a product that *might* sell to 30 people per week? Heck no. I’m dropping some Bud Blue on there and it’ll be gone before my second blink.
However, if you are making Urr Brew and that’s what determines your livelihood, I’m pretty certain you’d make sure it hits shelves and gets its fair share of marketing at retail.
In Missouri, at least, the three tier system is a little less intimidating for the newcomer. Craft breweries may obtain 2 of the 3 tiers. Craft breweries are able to distribute their own product to retail accounts, if they choose. O’Fallon distributed it’s own beer up until several months ago.
In regards to the quote about the 3-tier system not being inefficient…well, there are certainly opportunities, but, well run distributors know how to execute and manage costs. If this system is eliminated…you can count on huge reductions of marketing budgets…fleet to deliver our coveted products is expensive. Brewers should have the right to have all of their brands in one distributorship. In some cases, state laws provide too much protection so, one distributor may carry Heineken, another Dos Equis and a third Newcastle…all in the same region. That’s inefficient!