Big US wine companies are on notice: federal regulators have been ordered to essentially find ways to make their business more challenging.
Earlier this month on a Friday afternoon (significant because that's when agencies seek to avoid news coverage), President Joe Biden released a sweeping new executive order directing all federal agencies to "address overconcentration, monopolization, and unfair competition in the American economy".
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The order includes 72 separate initiatives; two involve the alcohol industry. The order has been undercovered in the press: it's an ambitious attempt to reframe the US economy in a way that no president has done since Ronald Reagan. Over time it might be a very big deal.
The first provision says that within 120 days, the Treasury Department is supposed to submit a joint report with the FTC and Justice Department on "patterns of consolidation in production, distribution, or retail beer, wine, and spirits markets".
It won't take that long for these agencies to ascertain that distributor consolidation is the biggest threat to wine and spirits producers by limiting access to markets, and also to consumers by limiting access to products and keeping prices high. Wine industry experts have been talking about this for more than 15 years, yet the trend continues apace. But nobody in the federal government has ever taken it seriously – not anywhere near as seriously as producer consolidation.
The FTC held up a sale of cheap wine brands from Constellation to Gallo for two vintage cycles because it was worried about Gallo having a production monopoly; distributor consolidations like the megamerger of Southern Wine & Spirits and Glazer's in 2016 just haven't received that kind of scrutiny, though they have had far greater impact.
I wonder if fear of federal antitrust action is a reason Gallo didn't bid for Ste Michelle Wine Estates. Many people I spoke to when SMWE was for sale speculated that Gallo was an obvious buyer. I have no knowledge one way or the other about whether Gallo was ever interested, but it's possible that this is a case where government scrutiny on a prior acquisition limited its interest in the next one.
The second provision from Biden's order asks the TTB to follow up on the Treasury Department's report by updating TTB regulations, "reducing any barriers that impede market access for smaller and independent brewers, winemakers, and distilleries". Distributor consolidation is arguably the biggest impediment; small wineries and especially small distillers struggle to get their products on store shelves because big distributors aren't interested in them.
That said, I wondered how the Treasury Department and the TTB can possibly address distributor consolidation. So I called Robert Tobiassen, formerly chief counsel for the TTB and now president of the National Association of Beverage Importers. Tobiassen wrote a lengthy blog post (with 100 footnotes!) about the changes this week for John Hinman's Booze Rules blog. Few people understand better than Tobiassen what the TTB could do if it chooses.
Tobiassen was very impressed with the way the sections of Biden's executive order on alcohol were written. Many US government agencies outside the TTB struggle to understand the alcohol industry, as we learned from hearings the US Trade Representative (USTR) held on wine tariffs, when it seemed government officials didn't understand the three-tier system. But Tobiassen said the Biden Administration clearly consulted alcohol industry experts.
"It's very telling that there was no public input solicited," Tobiassen said. "This tells me they're not doing it for show. I don't believe any trade associations were behind it. I think what the administration is trying to tell the American people is, this is my vision of the future."
Biden enlisted Tim Wu, a professor who lectures on antitrust, to lead the effort. Wu is known for saying that fighting antitrust is not just the responsibility of the FTC, but requires all federal agencies to work together.
Tobiassen pointed out that the National Environmental Policy Act of 1970 required every business action that has an impact on the environment to be assessed; it's why there are EPA reviews of every large construction project. He said that the government could require similar assessments for each business action regarding how it affects competition and antitrust.
He said that, if it chooses, the TTB can regulate distributors because each has to have a basic permit in every place where they conduct business. He said that until 1950, distributors only got one permit for their nationwide operations, but distributors asked for, and got, that law changed because it made their operations less vulnerable to permit suspension.
"If someone screwed up in MIlwaukee and they had their permit suspended for 30 days, they would be suspended nationwide," Tobiassen said. "The industry wanted local permits because they wanted the consequences just for one location. Look at Southern Glazer. They probably have 150 basic permits.
"You could go back to a single permit and that would put the fear of God into them," Tobiassen said. "But if Southern Glazer was suspended for 30 days you'd have people rioting in the streets because they can't get a drink."
Yet that brings up the issue: if Gallo's permit was suspended for 30 days, despite it being by far the world's largest producer, there would not be a wine shortage. Distributors are significantly more powerful.
"TTB can do a lot in the regulation area to try to level the playing field," Tobiassen said. "Maybe they can't directly hit the consolidation issue. But they could issue regulations that favor small guys over big guys."
For example: "TTB could issue a regulation that if you are a wholesaler or an importer whose gross receipts are not over $1 million, then none of these regulations apply to you," Tobiassen said. "But if your gross receipts are over $20 million, here are the new draconian regulations."
However, one example like that that went wrong is CBMA, the Craft Beverage Modernization Act, which was created to lower taxes on small producers. Large producers successfully lobbied to be included and now all wineries, brewers and distillers pay lower taxes; what once was a tax advantage for small producers is now a multimillion dollar boon every year for the big guys.
"I'm sure the small distillers knew the big guys were going to get this benefit, but they thought that's OK, I have to have this benefit," Tobiassen said. "In the long run you have agreed to a situation that puts you at a competitive disadvantage."
That can happen with any well-meaning change in Washington: industry starts lobbying, and the original purpose goes out the window. But Tobiassen said Biden has an advantage on other presidents because his long career as a senator gives him a deep understanding of how Washington works, which means his plans are more likely than most to actually be carried out.
"Because of the gridlock, a lot of the things Biden proposes are not going to get done unless, in the midterm elections, Democrats make a lot of gains," Tobiassen said. "Biden is saying: 'If you give me the power this is the America you can expect. But you have to tell me you want it by going out there and voting.'
"If I was a big [alcohol company], I would be very concerned for the next 18 months," Tobiassen said. "I'd play my cards carefully because if Biden is successful, in January 2023 there's going to be a lot more going on. If he's successful and he gets a filibuster-proof majority in the Senate and a much wider majority in the House, a lot of this stuff is going to come to pass. I would sleep with one eye open for the next 18 months."