Don't Break Up the Big Wine & Spirit Wholesalers

There is a much better and more effective way of bringing competitiveness to the the wine and spirits industry

Last Friday was #AntiTrustDay. No. I don’t know who dubbed April 4, 2022 “AntiTrustDay”. However, it’s a good bet that folks who want to see America’s antitrust laws enforced in a more vigorous fashion and particularly those that want to bring down Big Tech a notch, may have been behind the hashtag celebration. What’s interesting is that in the past few days I’ve not only heard three different prominent members of the Alcohol industry support more vigorous antitrust actions inside the industry, but also support using antitrust efforts to BREAK UP some of the larger players in the industry. This is not the best idea.

First, let’s be clear about whom we are talking. When you hear folks discuss antitrust actions aimed at the alcohol industry, they are talking about wholesalers. In particular, they are talking about Souther-Glazers (SG) and Republic-National (RNDC), the two largest wine and spirits wholesalers in the United States who, together, have more than a 50% market share in a number of states.

SG and RNDC are in fact the subject of a federal lawsuit recently brought by B2B purchasing platform Provi that alleges violations of federal antitrust law, among other things. Wine wholesaling has already been scrutinized for anti-competitive mergers. In 2019 RNDC and the third largest wine and spirits wholesaler in America, Breakthru Beverage, called off their planned merger that would have created the largest wine and spirits wholesale company in the country. This occurred after the Federal government apparently made clear it viewed the merger as anticompetitive and harmful to the marketplace and consumers. According to Ian R Conner, deputy director of the FTC’s Bureau of Competition, the Trump Administration’s view of this merger was that it would bring “likely anticompetitive harm if the transaction were completed”

We don’t think of the Trump administration as a source of antitrust hawks. Rather, it is the Biden administration that has embraced the most pro-antitrust policies in decades. The Biden Administration’s antitrust regulators are not only more aggressive in pursuing greater regulation of business and particularly big businesses than previous administrations but they have also installed very progressive antitrust crusaders in key positions. They include Tim Wu—special assistant to the White House National Economic Council, Lina Khan—Chairman of the Federal Trade Commission, and and Rohit Chopra—Director of the Consumer Financial Protection Bureau. 

Recently, the Wall Street Journal, from a somewhat hysterical rhetorical crouch, described the Biden Administration antitrust reformers as ideologically driven:

“They view the rule of law not as a cornerstone of liberty and democracy, but as an impediment to equality and the means by which the ruling class suppresses the masses. In their view, economics-based antitrust enforcement under the consumer-welfare standard drives this oppression.”

Reference to the “consumer-welfare standard” of antitrust enforcement is a way of reminding WSJ readers that since the 1970s, the government has approached antitrust enforcement by using specific economic formulas to measure whether a merger or takeover benefited or harmed consumers. This is different from the period from 1930 through 1970 when the enemy of government antitrust efforts was simply bigness and monopoly. The Wall Street Journal is arguing that the Biden Administration is returning to the pre-1970s model when the government looked to prevent bigness to protect not just consumers but, well, everything. Today, “everything” is not just consumer welfare, but also workers, the environment, communities of color, competitiveness, rural communities, privacy, and more. You’ll note that when more than just consumer welfare is taken into consideration with antitrust policy, things begin to get more political.

Whether or not the Biden Administration is getting more political where its antitrust regulation, what is true is that the alcohol industry is being dragged into it beginning with President Biden’s executive order to examine competitiveness in the alcohol industry and the follow-up report from the Treasury Department on just that issue. In its introduction to its recent report on “Competition in the Market for Beer, Wine, and Spirit”, it was emphasized that “American consumers, small business owners, entrepreneurs, and workers should not have to suffer under the thumb of a highly concentrated beer industry.”

This brings us back to the question, how do you fix an industry with a high concentration of power among a tiny set of wine and spirit wholesalers? As I mentioned above, I have now heard three prominent members of the alcohol industry tell me the best and most effective approach to restoring more competition to the alcohol industry would be to break up the largest alcohol wholesalers. While this kind of drastic move would certainly deliver some form of heightened competitiveness to the industry, it’s not the immediate and impactful move to make right now.

Some will recall that when there were separate Southern, Glazers, National, and Republic, there was still a severe imbalance in the alcohol industry. While that imbalance wasn’t what it is today after the deals made four big wholesalers into two giant wholesalers, there was still a concentration of power that put both producers and retailers at a severe disadvantage.

Across industries, not just in alcohol, we’ve seen disintermediation around distribution. With new technologies and new logistics capabilities wholesalers in every industry have seen manufacturers forgo the wholesaler and use new tools to sell directly to the consumer and direct to retailers. What makes the alcohol industry far less competitive than it ever could be is the fact that producers CAN’T sell directly to retailers if they choose. They CAN’T bypass the wholesaler if they choose. Most states’ laws bar this direct to retail practice. Moreover, most states’ laws bar Interstate shipment by retailers, making the wholesalers working in each state even more powerful by controlling what wines and spirits are available to consumers in that state.

Breaking up the largest wholesalers as some of my friends and colleagues in the alcohol industry say is necessary isn’t the answer. The answer to leveling the competitive playing field in the alcohol industry is expanding the available and legal distribution channels.

In practice, this means allowing producer self-distribution to restaurants and wholesalers where the producer is not required to use a middleman to get their products on the shelves and wine lists.

In practice, this means changing the laws to allow consumers to receive wine shipments from out-of-state wine retailers.

In practice, this means allowing importers to sell wine directly to retailers and consumers in the states where they reside and across state lines.

In practice, this means allowing brewers and distillers to sell and ship their products directly to consumers in the states where they reside and across state lines.

None of this can be done through an exercise of federal power. It must be done by states. This doesn’t require action by federal authorities. It requires action by alcohol industry players and trade groups and by consumers willing to voice their discontent with a system that purposely empowers a few huge middlemen to rake in unearned billions through restrictions on consumer product access, producer restrictions on market access, and retailer restrictions on inventory access.

I can’t imagine any further wholesaler consolidation. If the Trump administration wasn’t going to allow Breakthru and RNDC to merge, the anti-big Biden administration certainly isn’t. But more to the point, simply breaking up SG and RNDC from two to four companies isn’t going to change the equation.

What the industry needs right now is a retreat from restrictions on market and product access. That’s what creates competitiveness.