(Illustration by Jeff Quinn)
During debate over a new bill in February, an Oklahoma state senator surprised another with a starkly different understanding of how the rest of the country deals with the issue at hand. Why, she asked, does the bill explicitly restrict alcohol manufacturers from operating wholesalers or retailers? During a quick Internet search the night before, she’d found many people calling such a three-tier system “outdated.” Some states are moving away from this system of alcohol regulation, so Oklahoma shouldn’t move toward it, she argued.
Puzzled, the senator defending the bill assured the committee that three-tier is “alive and well.” In fact, nine states had enacted laws like the provision in question in the last few years, he said. And in some cases, like Kentucky in 2015, the new law forced Anheuser-Busch InBev to divest one or more of the wholesalers it owned and operated, just as it would in Oklahoma.
Somewhat contradictory, but that’s all true. Depending on where you look or whom you talk to, you can see very different pictures, hear quite opposing stories about the system of laws that require alcohol sales to move through three distinct tiers of businesses. Taken together, the groups of laws insist on independence: Alcohol manufacturers shall not exert undue influence over distributors, which shall not threaten the independence of retailers.
The U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB) affirmed this in a ruling it handed down around the same time those Oklahoma senators debated. In it, TTB Administrator John Manfreda responded to questions about acceptable ways alcohol manufacturers or wholesalers may help retailers manage entire beer, wine and spirits categories in their stores. The ruling restated a previous exception that allows manufacturers and wholesalers to simply suggest ways stores should set up their shelves. But that exception is “limited.” Just about anything else? No good.
Moreover, some current industry plans and practices seem to go well beyond what the agency considers acceptable, Manfreda wrote. “If such practice results in exclusion of competitor products … such that the retailer’s independence is at risk,” it would violate federal law.
The fresh set of questions about “Category Management” came after Kroger, the nation’s largest grocery chain, announced a plan with Southern Wine & Spirits, the nation’s largest wine and spirits wholesaler. Most observers agreed that the TTB’s response effectively nixed the plan even without specifically mentioning either party. Others reminded of the difficulty of proving any violations, particularly for malt beverages. We’ll see.
Coincidentally, that ruling came down less than 24 hours before a state agency found that a licensee violated Massachusetts statutes aimed at keeping tiers operating independently. The public decision penalized a Boston-area distributor, Craft Brewers Guild (CBG), for paying a number of Boston bars for dedicated tap lines. Besides directly paying to keep its brands on tap, it offered different “rebates” to different licensees, another no-no in the state. In the ruling, the Massachusetts Alcohol Beverages Control Commission (MABCC) lays out the “extensive paper trail” investigators followed. That included references to check requests showing that CBG kept track of how much is spent to keep which brands on tap at which bars, often called “marketing support” or “menu programming.”
CBG agreed to pay the MABCC $2.6 million so that it could stay open rather than suspend operations for 90 days. The size of the penalty and strength of the ruling implied to many that the MABCC wasn’t done. The bar groups named in the ruling, at least, could also face penalties following hearings currently scheduled for May. Brewers too, if the regulators can find that they knowingly participated in the “kickback scheme.” Indeed, husband and wife team behind now-closed Pretty Things Beer & Ale Project, Dann and Martha Paquette, showed investigators an invoice from CBG for such “support” or “programming.” CBG told the Paquettes they didn’t have to pay, according to the investigators’ report. But did others? And did they know the reason for the bill?
Regulators do all of this, what some call “cleaning up a market” by prosecuting such violations, ostensibly in the name of beer drinkers. Some will argue for independence between tiers by presenting drinkers as a public, a group of humans whose health must be considered. Others think economically, arguing that separate tiers allow for a more competitive market and more choices for consumers.
Moves to more clearly delineate between tiers and others to create more exceptions inside it are accelerating at the same time. That’s as believers in completely free markets see three-tier as unnecessary regulation and wish to dismantle it altogether. Hard to say exactly how the market would play itself out if that happened. It could eliminate barriers to entry and make it easier for some smaller companies. It could also lift restrictions on larger ones that currently keep them from leveraging their scale even more. It’s a tricky negotiation. And if the pace of developments early in 2016 is any indication, it’s a negotiation that many more will have to consider. Much of that debate will go on in state legislatures. Not that anyone needs reminding in an election year, but we’re not just beer drinkers, consumers or humans. We’re also constituents.
Christopher Shepard
Christopher Shepard is a writer and editor for Beer Marketer’s Insights and Craft Brew News.
This article needs an update. The initial version of the bill would have required ABInbev to divest itself from the wholesale beer distributors it owns in Oklahona. But, ABInbev quickly went to work on our state senators and were successful in rewriting the bill overnight to preserve their ownership (literally written into the state’s constitution!). The bill ultimately passed both houses, obtained the govenor’s signature, and is now headed to a vote of the people to approve or decline this constitutional question. If passed it would give ABInvev a two-tier system that no one else could enjoy. This is being sold as “modernization”.