News How the three-tier system holds back BMC

Discussion in 'Beer News & Releases' started by DaveAnderson, Nov 15, 2012.

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  1. DaveAnderson

    DaveAnderson Devotee (479) Jan 11, 2011 Minnesota

    There's a terrific article on the Washington Monthly about horizontal and vertical integration in the beer industry, how our three-tier system stands in the way, and the myriad ways InBev and MillerCoors are attempting to get around the laws.

  2. beerturtle

    beerturtle Initiate (141) Dec 24, 2005 Pennsylvania

    This was a good article. Thanks for posting, I wasn't sure I'd have time to throw it onto the boards for discussion today. I really came away from the article with an even deeper distrust of AB-IB. Seems like now that the Busch's are out, it really is just all about $$$ and nothing else.
  3. bozodogbreath

    bozodogbreath Disciple (385) Oct 19, 2006 Indiana
    Beer Trader

    A great read!
  4. hopfenunmaltz

    hopfenunmaltz Meyvn (1,274) Jun 8, 2005 Michigan

    Boddingtons of Ireland - page 2. :rolling_eyes:

    If you read the comments, there are many points brought up that I agree with about the UK. Some of his statements on the Beer Orders don't ring true.

    He also did not point out that there are now more small start up craft breweries in the UK per capita than in the US.
    ONovoMexicano likes this.
  5. Hanzo

    Hanzo Initiate (0) Feb 27, 2012 Virginia

    So the three tier system was put in place to make booze cost more so people would drink less? Did I read that right?
    RichardMNixon and ONovoMexicano like this.
  6. MilkManX

    MilkManX Disciple (305) Jul 10, 2012 Arizona

    And people will still buy their products. That is the sad thing.
  7. IceAce

    IceAce Champion (856) Jan 8, 2004 California

  8. jacksback

    jacksback Initiate (0) Jul 20, 2011 Massachusetts

    And they will go on at length to come up with excuses, generally based in short-sighted selfishness, regarding why it's perfectly fine.

    Enjoy your BCBS.
  9. Eastside151

    Eastside151 Initiate (0) Jun 29, 2012 Ohio
    Beer Trader

    Great article, thanks for sharing. I'm posting it to my Facebook account so hopefully more people will read what is going on.
  10. JediMatt

    JediMatt Initiate (81) Jun 18, 2010 Iowa

    Same here.
  11. robmoak

    robmoak Initiate (0) Nov 13, 2012 Mississippi

    Let me get this straight, cheaper beer is a bad thing and will lead to alcoholism? If I wanted to get drunk for cheap, I could walk to the gas station and buy a brick of Natty for $15 or go to the liquor store and buy Everclear or any number of cheap liquors that will get the job done for about as much as it costs to eat at McDonalds. As far as bars go, it sounds like we already have a similar system; living in a college town, most of the bars here offer "3 for 1" specials or $1 wells.

    I'm not sure I believe that the only reason we have lower rates of alcoholism and teen alcohol use are simply because it costs slightly more, and that society as we know it would deteriorate if the price of a brick dropped from $15 to $10. I don't agree with the author's hypothesis as to why Great Britain has these issues. Just because there is a correlation between lower alcohol prices and alcohol related violence, injuries and disease, doesn't mean that there is causation. I believe that the destructive mores of their society cannot merely be explained by the cost of alcohol and that their abuse of the substance is a symptom of a much deeper societal problem. Also, the World Drug Report published by the United Nations Office on Drugs and Crime found that Americans use about twice as much marijuana as our friends across the pond... which might explain the lower alcohol consumption rates among teens...

    In regards to craft beer, I was under the impression that the three tiered system is what kept craft beer from being distributed more widely. Since breweries have to go through distributors, the big three tend to "crowd out" the smaller breweries. It seems like if the macros wanted to maintain their market share, they would fight for the three tiered system, not against it. I may be completely wrong about all this, and please correct me if I am; but I do think that the author's bold claims are unsubstantiated and that this is a prime example of yellow journalism. I refuse to believe that red tape and litigation are all that hold our society together.
  12. SammyJaxxxx

    SammyJaxxxx Poo-Bah (1,688) Feb 23, 2012 New Jersey
    Beer Trader

    Great article. Anybody who doesn't think supporting AB-Inbev and MillerCoors is bad for craft brew is deluding themselves. So go ahead and enjoy your BCBS. Just don't complain when most of your other craft choices disapear.

    I'm not the only one that thinks this way. Here are some comments from Tony Magee (Lagunitas):

    Lagunitas Brewing Co. owner and founder, Tony Magee, chimed into the comments in yesterday’s BeerPulse post. This excerpt captures Magee’s sentiments more succinctly than yesterday’s tweets in case you missed them.

    I am quite certain that Craft beer is at a precarious inflection point. This is the most dynamic and volatile time in the category called Craft’s short and meteoric history. There is enough of what we do now being sold in the market that the biggest brewers in the world want in and the big brewers within Craft want to close the door behind themselves. I think we’ll be ok one way or the other but smaller brewers will experience a future with more limited opportunities- that is IF the biggest brewers are allowed to have their way.
    Lagunitas owner on craft beer’s “precarious inflection point”When you drink those beers, delicious or not, you support the platform they will use to change the game. Lagunitas is not so big that we are in the entitlement class but we are big enough to see the landscape and I may seem like the angry complaining brewer but I’ve been doing this long enough now that I am done being silent about real threats to what we brewers all do and to what you consumers (our owners) have available to them. It may seem a strange stage, but is still all about y’all.
  13. jageraholic

    jageraholic Disciple (386) Sep 16, 2009 Massachusetts
    Beer Trader

    First, I'm a huge fan of Stone Brewing...but don't they distribute their own beer and are opening numerous bar/stores where it's selling it's products? I know they help get a lot of smaller local California brewers get distributed so they are fighting the good fight against the premium beer but also puts themselves in a pretty powerful position for the future.
  14. Providence

    Providence Initiate (0) Feb 24, 2010 Rhode Island

    Selfishness is much easier than using your head.
    SammyJaxxxx likes this.
  15. DaveAnderson

    DaveAnderson Devotee (479) Jan 11, 2011 Minnesota

    I think this suggests that, while the system was designed to prevent monopolization, the big corporations have been chipping away at those protections in a way that threatens to stifle distribution of smaller brands.

    It seems like a pretty good example of why deregulation hurts small business.
    luwak and Providence like this.
  16. FlakyBiscuit

    FlakyBiscuit Initiate (0) Sep 11, 2012 Pennsylvania

    Interesting POV by the author. A good read. I am even more committed to never supporting the big brewers. It will be an interesting dynamic in the future as craft beer continues to grow at double digits at the expense of the mass produced beers. I suspect one outcome will be further acquisitions of craft brewers ( e.g. Goose Island) by in-bev and coors. The small regional brewers could then be in big trouble. Either way, I do not like where this headed.
    Docrock likes this.
  17. robmoak

    robmoak Initiate (0) Nov 13, 2012 Mississippi

    Okay. But if breweries have to go through distributors, and distributors have finite amount of space (which is already occupied by the macros)... then how are the smaller breweries supposed to enter the market?
  18. hopfenunmaltz

    hopfenunmaltz Meyvn (1,274) Jun 8, 2005 Michigan

    More states than not allow self distribution.
  19. rings

    rings Initiate (0) Feb 4, 2011 Michigan

    While not entirely agreeing with the premise that "cheap beer" is the nation's greatest danger (causes of alcoholism are much more complex than just "price," while alcohol is already relatively cheap in the U.S. compared to nearly every European country), I absolutely agree with his conclusion that two immense companies now wield way too much power - particularly in the growing vertical integration they are pursuing - and they won't be afraid to use it to crush competitors, distribution "partners," retailers and consumers who stand in their way.
    Quite simply, while this is a long article, this is a must-read to understand what's happening in the industry. This, in my view, is the greatest threat to the craft industry: the might of AB InBev & SABMillerCoors (or their merged company, if it happens) can and will be used to either destroy these pesky little guys or prevent them from ever gaining foothold again.
    If you care about craft beer, you should avoid buying or consuming BMC products, including their affiliated brands. Period.
    carlitos92 likes this.
  20. robmoak

    robmoak Initiate (0) Nov 13, 2012 Mississippi

    So what is all the fuss about?
  21. DaveAnderson

    DaveAnderson Devotee (479) Jan 11, 2011 Minnesota

    For one thing, most allow it only for in-state breweries (see list). So if, say, Toppling Goliath wanted to expand beyond Iowa into Minnesota, it would need to use a distributor. And in a marketplace where a couple of breweries can bully distributors, this threatens the small brewery's opportunity to grow.
    russpowell likes this.
  22. DaveAnderson

    DaveAnderson Devotee (479) Jan 11, 2011 Minnesota

    If I repeat it enough times, it will happen, right tgchief?
  23. JediMatt

    JediMatt Initiate (81) Jun 18, 2010 Iowa

    I agree that the "AB removing the three-tier system will lead to alcoholism" seems something of a strawman argument to me. I'm much more concerned with AB trying to gain (more) control of the distribution system and forcing out smaller breweries.
    carlitos92, JackHorzempa and robmoak like this.
  24. StuartCarter

    StuartCarter Initiate (0) Apr 25, 2006 Alabama

    citation, please?
  25. jesskidden

    jesskidden Meyvn (1,259) Aug 10, 2005 New Jersey

  26. tozerm

    tozerm Initiate (0) Jul 1, 2005 Washington

  27. tozerm

    tozerm Initiate (0) Jul 1, 2005 Washington

    "By deliberately hindering economies of scale and protecting middlemen in the booze business, America’s system of regulation was designed to be willfully inefficient, thereby making the cost of producing, distributing, and retailing alcohol higher than it would otherwise be and checking the political power of the industry."

    There is one underlying problem with this guys whole premise... when Prohibition was repealed, there was no large organization of powerful middlemen... large distributors like we have today, simply did NOT exist when Prohibition was repealed. So the idea that there was some vast conspiracy to screw the populous is simply incorrect.

    This author also needs to go to school and understand the term "disintermediation" and why it doesn't work. There is absolutely nothing efficient about every single brewery in America selling directly to every consumer and every retailer. Are you going to pay the freight to ship 1 case of beer from an East coast brewery to your house in California? I think not. Does it make economic sense for Stone Brewing to sell directly to a beer store in Philadelphia? I think not.

    This author really needs to do more homework on the economic fundamentals of the industry before going on a rant.
    paulys55, Brew33, Zach136 and 2 others like this.
  28. StuartCarter

    StuartCarter Initiate (0) Apr 25, 2006 Alabama

  29. hopfenunmaltz

    hopfenunmaltz Meyvn (1,274) Jun 8, 2005 Michigan

    Thanks to JK and Tozerm you have the answer.

    Small breweries can only distribute in a limited area due to the expense (trucks, staff, etc) . Even some big ones like SN only distribute in a small area, essentially Chico.

    Stone set up a distribution company, which would be a way to handle it if you had the start up money, and the state allowed it.
  30. jesskidden

    jesskidden Meyvn (1,259) Aug 10, 2005 New Jersey

    But the Federal Alcohol Administration Act wasn't written until 1935 (2 years after legal 3.2 beer, 1.5 after full Repeal), by which time the largest of the alcohol beverage industries, according to testimony at the time, were the beer wholesalers who number 9,000 (pg. 31 - FAA Act, H.R. 8870). Granted they weren't "powerful" - which is why many of the state three tier laws are written to protect them from the larger breweries- a situation that is often reversed today, where small craft brewers deal with huge chains of multi-state wholesalers like L. Knife & Sons.

    There's no doubt that the "Tied House" concept in particular was seen as one they wanted to eliminate, and the creation of the wholesaler "middle tier" was the Feds primary way to separate the brewer from the retailer.
  31. frazbri

    frazbri Crusader (733) Oct 29, 2003 Ohio

    The comparison of the UK and US markets was hindered by the author's insistence that cheap alcohol is the main reason for alcoholism and drunken hooliganism. He did do a good job of discussing the tactics big beer uses to keep it's wholesalers in line.
    ONovoMexicano likes this.
  32. phanlon

    phanlon Initiate (0) May 7, 2012 Pennsylvania

    Agreed, the whole UK/alcohol thing was a huge distraction and made very little sense.

    That said - from most consumer's perspectives, having ABI and MillerCoors vertically integrate and thus supply cheaper beer would probably be seen as a positive. Its only the very small craft beer minority that sees it as an issue.
  33. Ariz

    Ariz Initiate (0) May 2, 2009 Alabama

    The problem is that is is feasible for the big guys to set up their own distribution networks. As it is now most small breweries depend on distributors that are also selling the BMC stuff. If the big players desired they could shut the small guys out.

    If it did get to where the big breweries were using unfair business practices, would federal antitrust laws or the states' rights to regulate alcohol prevail? I an interesting question. But if it ever gets to a legal battle many small breweries probably couldn't survive it.
  34. drtth

    drtth Poo-Bah (3,089) Nov 25, 2007 Pennsylvania

    If the big guys could shut out small local, then the craft breweries would have been shut out long ago, as would regional breweries such as Yuengling.

    As for the legal resolution it would depend on the practices. The Fed turned implementation of the three tier system over to the individual states which is why we see such variability across states and one reason why most small breweries need distributors in other states to distribute out of their home state, even if allowed to self distribute within their own state.
    Norica likes this.
  35. TgBC

    TgBC Initiate (0) Aug 28, 2011 Iowa

    We're working on it!
    luwak and DaveAnderson like this.
  36. familydog

    familydog Initiate (134) Jul 11, 2006 Pennsylvania
    Beer Trader

    The article states that de facto vertical integration is the next frontier for AB-Inbev and CoorsMiller. "Anti-trust" legislation will disallow further horizontal integration, so these companies will try and bypass or strip away the power of the three tier system.

    The article correctly points out that national and regional breweries had difficulty with distribution prior to prohibition. What it fails to mention is that the supposed anti-competitive tied house system (vertical integration) actually caused the market share for AB and company to dramatically decrease. Local breweries picked up that market share with the tied house system.

    We know that AB lobbied hard for the three tier system during prohibition. They did this in order to eliminate competition from local breweries. So, does AB-Inbev have a case of buyer's remorse? Maybe.

    My point is that vertical integration actually will help microbreweries more than hurt. Even with modern communications and technology, it would be very difficult for AB-Inbev and CoorsMiller to "take over" every bar, restaurant, store and wholesaler. They would need to hire significantly more people to oversee this. I just don't see it happening considering the rising market demand for locally produced craft/artisan beer. All the three tier system (and all government regulation) does is stand in the way of small producers trying to break into the market.
  37. jesskidden

    jesskidden Meyvn (1,259) Aug 10, 2005 New Jersey

    When exactly was that - when "the market share for AB and company ...dramatically decrease(d)"? The last quarter of the 19th century saw A-B's sales at around 44,000 bbl. (or less than 0.5% of the total beer production) in 1877 when they weren't even among the top 20 brewers in the country- selling less than half of what the large [over 100k bbl] eastern brewers like Ehret, Ballantine, Berger & Engel were, and far behind Best (Pabst), the largest of the mid-West brewers. They weren't even the largest St. Louis brewery, being outsold by Lemp at the time.

    By the mid-1880's, A-B was already part of the long-time pre-Pro US Big Three (AB, Pabst, Schlitz) and in the 300k bbl. range (about 1.7% of the market). They'd reach 1 million barrels in 1901 (after Schlitz, around the same time as Pabst), when their US share of the market reached about 2.5%.
  38. familydog

    familydog Initiate (134) Jul 11, 2006 Pennsylvania
    Beer Trader

    This article outlines how local breweries were overtaking national breweries in market share around the turn of the century. The author cites primary sources to come to this conclusion.
  39. tozerm

    tozerm Initiate (0) Jul 1, 2005 Washington

    Of course what you are saying is true... I was speaking directly to the article where it said "America’s system of regulation was designed to be willfully inefficient"

    This is patently false historically. For the most part, the laws (regulation) have been in place since the repeal of Prohibition, most changes in recent years have actually loosened the regulations on alcohol, not made them more strict.
  40. shamrock071521

    shamrock071521 Initiate (0) Aug 23, 2012 Michigan

    Great article.
    Working at a beer store, I have some insight to at least the distributor-retailer relationship. We have 5 distributors delivering beer most weeks, with the two 'bud' and 'miller' distributors accounting for probably a little more than half deliveries by dollars, quite a bit more by volume. And I think that second point is how they are able to influence shelf space more, because we get, and have to make space for, more volume of BMC brands. The bud and miller distributors can and do get the better shelf space, and especially cooler space, because they have a greater volume of products to be displayed (we have seven different size/package options for bud light just in the cooler).

    But, the 'bud' and 'miller' distributors don't just carry BMC products, they also have a portfolio of independent craft bands. For example one carries Sam Adams, while the other just got New Belgium several months ago, amongst others. Both these brands have a full shelf each in the cooler and many displays/signs throughout the store. Also, Corona is distributed by the Miller distributor despite it being partially (and potentially fully) owned by AB. And Goose Island isnt distributed by one of the top two despite full AB ownership.

    If corona and goose island move to the AB distributor, and the big two start dropping independent craft brands, then I'll get nervous. Independent distributors are IMO crucial to canceling the damaging influence BMC could bring down on the independent craft industry with its huge capital and marketing influence. I pretty much think of the huge growth of shock top, bud platinum, leinenkugel, etc. as AB/Miller snapping its fingers and demanding (or 'influencing') its major distributors to push these brands (from my vantage point thats what has happened, as those three are heavily marketed with cooler space/displays). But as long as these distributors also push New Belgium, Sam Adams, etc. and aren't solely comprised of AB/Miller brands, I don't think 'big beer' can dominate independent craft beer for shelf space/displays/etc at the retail level.
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