Regulations Getting Between You and Your Beer
Anheuser-Busch InBev’s attempted merger with Grupo Modelo has stimulated discussion over whether the merger will result in higher beer prices or may prevent small, independent brewers from introducing new beers. This makes an opportune time to reexamine regulations that surely do impact prices and impede the ability of small, independent brewers to bring new beers to market. In particular, I am referring to the current, government-imposed three-tier system for alcohol distribution.
A relic of Prohibition-era America, the three-tier system prohibits breweries from selling beer directly to retailers; they are instead forced to use a middleman—i.e., a distributor. Likewise, this system prohibits breweries from selling beer directly to consumers; only licensed retailers are permitted to sell alcohol to consumers. (There are a few exceptions to this regulatory framework. E.g., restaurants that brew their own beer, such as Gordon Biersch and B.J.’s Restaurant and Brewery, are thankfully not forced to use a middleman.)
What are the consequences of depriving breweries of the freedom to sell directly to consumers? Here are two worth knowing:
- Breweries are prevented from engaging in vertical integration. Vertical integration is when a business purchases some of the companies involved in its supply chain. E.g., in addition to owning the licensing rights to its beverages, Coca-Cola also owns a private fleet of trucks as well as several private bottling plants. Businesses often vertically integrate because this enables them to cut costs—and therefore possibly offer lower prices to consumers—by better coordinating the operations of their distribution network with their production.
But unfortunately for brewers and beer drinkers alike, the government-imposed three-tier system bans brewers from owning their own distribution fleet, no matter how much money this could save Anheuser-Busch InBev or MillerCoors.
- Breweries have more obstacles to bringing their beer to market. In a free market, if a craft brewer—i.e., a small, independent brewer—wants to see his beer on shelves, he mainly has to convince the retailer to carry his product. As any entrepreneur in branded food and beverages can attest, it can be really tough to get and stay on the shelves of major retailers.
However, with the government-imposed three-tier system, a craft brewer now has two main layers of individuals that he must win over: He must convince a distributor that his product is worthy of space on his truck, in addition to having to have retailers convinced that his beer is worth keeping on shelves. Since he is legally prevented from trucking his own beer to a retailer willing to sell it, a craft brewer is forced to deal with a middleman. This could be especially difficult because truck space is limited and distributors often sign exclusive deals with larger brewers.
Isn’t it time to reconsider why the law should force brewers to have to deal with middlemen?