The way alcohol is sold is a problem, but don't look to government for help
On Feb. 9, the Treasury Department issued a report on competition in the beer, wine and spirits markets. Anyone hoping for dramatic changes to the three-tier distribution system that evolved after the repeal of Prohibition will be disappointed. Treasury does not recommend drastic changes in the way beverage alcohol is sold in this country, but the 64-page report clearly recognizes inherent problems in the status quo that restrict our ability to buy the brands we desire.
President Joe Biden requested the report in July in a wide-ranging executive order to promote competition throughout the U.S. economy. He directed the Treasury Department, which includes the Alcohol and Tobacco Tax and Trade Bureau, or TTB, to examine unlawful practices that hinder competition, consolidation in production, distribution or retail (the three tiers of the current system), and restrictive regulations such as labeling or bottle size requirements that stifle innovation and inhibit competition.
After the department requested public input on the executive order, I summarized some of the hundreds of comments from all sectors of the alcohol industry in two columns in September. Even then it was clear Treasury might not be able to effect dramatic change, because most of the problems inhibiting competition were at the state level. Once again, advocates of reform run up against the 21st Amendment to the Constitution, which repealed Prohibition in 1933 and left the primary responsibility for regulating alcohol distribution to the states.
The report cited conflicting trends since the late 1970s: A dramatic growth in the number of craft breweries, wineries and distilleries shows a vibrant, competitive market. But consolidation in the distribution and retail sectors constricts the path to market, like a narrow funnel between all those products and consumers. Smaller producers - the vast majority - have difficulty getting their wines to market, and consumers often cannot find those wines through traditional channels.
Treasury's recommendations fell along the edges of the three-tier system. It urged the Justice Department and Federal Trade Commission to continue enforcement of antitrust laws, with special scrutiny on large producers gobbling up craft brewers. In the wine markets, federal objections over the past few years led to significant changes in a sale of several brands by Constellation to Gallo to preserve competition. The Feds also blocked a merger of two of the country's largest distributors, Republic National Distributing Co. and Breakthru Beverages, because they compete directly in several markets.
The report recommended reviving earlier efforts to change labeling laws to give us more information about what's in the bottle. So we may see a new federal push to require nutrition and ingredient labeling on wine and other beverages.
Treasury urged states to examine direct-to-consumer sales as an end run around the constrictions of the three-tier system. Direct sales of wine are allowed in some form by 47 states and have been crucial for many small wineries. Now craft breweries and distilleries want to ship you their wares by FedEx and UPS, too. The report said there was no evidence that direct wine sales led to an increase in underage drinking, but it noted that beer and spirits may be more attractive to minors.
As for the three-tier system itself? "State legislatures might consider if the benefits of the three-tier system outweigh its costs to competition and study markets without a three-tier system," the report concluded with a wink. It also suggested states reconsider franchise laws that tie a producer to a single distributor and regulations that restrict competition and keep prices artificially high for consumers.
Not surprisingly, interest groups seized upon various parts of the report as support for their side.
"We are encouraged to see that throughout Treasury's report, maintaining a strong, independent wholesaler tier remains critical to federal and state regulators who work to ensure the U.S. alcohol marketplace is the safest, most diverse and competitive in the world," the Wine and Spirits Wholesalers of America said in a statement that sounded like a big sigh of relief. But then - deep breath:
"Any federal or state legislation that proposes a distribution model outside of the three-tier system introduces issues of compliance, tax collection, underage access, illicit product, anticompetitive practices and diminishes the effectiveness of regulators," the wholesalers group said.
The National Association of Wine Retailers, which advocates for laws allowing retailers to ship wines to consumers in other states, was more sanguine.
"Little can be done at the federal level to address the severe levels of anti-competitiveness that result from the discriminatory and protectionist state laws that are lingering vestiges of a time and of circumstances that no longer exist in the U.S. economy," the association said.
The report's authors at Treasury do not sound optimistic that significant change will come at either the federal or state levels. "As of 2017, alcohol companies reported 303 lobbyists in Washington D.C. and spent nearly $12 million on state-level lobbying," the report said, observing, "Lobbying is a feature of our political system." And three-tier distribution is a fixture of our marketplace.
Related Content
He's climbed the same iconic mountain 3,000 times. But now he'll need a permit.
Millions of baby boomers have left the workplace since 2020. Are they coming back?
