Anti-competitive practices in the wine business have come under the government’s microscope – so be warned.
By W. Blake Gray | Posted Tuesday 20-Jul-2021
Major US wineries are warned: Federal regulators have been ordered to essentially find ways to make their operations more difficult.
Earlier this month, on a Friday afternoon (important because that’s when agencies seek to avoid media coverage), President Joe Biden issued a new executive order directing all federal agencies to “tackle overconcentration, monopolization and unfair competition in the US economy.”
The order includes 72 separate initiatives; two relate to the alcohol industry. The order has been covered up in the press: it’s an ambitious attempt to reframe the U.S. economy in a way no president has done since Ronald Reagan. Over time, this can become very important.
The first provision states that within 120 days, the Treasury Department is expected to submit a joint report with the FTC and the Department of Justice on “Models for Consolidation of Production, Distribution or Retail Markets. beer, wine and spirits ”.
It will not take long for these agencies to see that the consolidation of distributors is the greatest threat to wine and spirits producers by limiting access to markets, but also to consumers by limiting access to products and maintaining high prices. Experts in the wine industry have been talking about it for over 15 years, but the trend continues. But no one in the federal government has ever taken it seriously – nowhere near as serious as consolidating producers.
The FTC suspended a sale of cheap brands of Constellation wine to Gallo for two vintage cycles because of concerns that Gallo would have a monopoly on production; distributor mergers like the Southern Wine & Spirits and Glazer’s mega-merger in 2016 simply did not receive such scrutiny, although they had a much greater impact.
I wonder if fear of federal antitrust action is a reason Gallo did not bid for Ste Michelle Wine Estates. Many people I spoke to when SMWE was for sale speculated that Gallo was an obvious buyer. I’m not sure somehow if Gallo has ever been interested, but it is possible that this was a case where the government’s scrutiny of an earlier acquisition limited its interest in the next one.
The second provision of Biden’s order calls on the TTB to follow up on the Treasury Department report by updating the TTB regulations, “by reducing the barriers that hinder market access for brewers, winemakers and more distilleries. small and independent “. The consolidation of distributors is arguably the biggest obstacle; small wineries and especially small distillers find it difficult to put their products on store shelves because large distributors are not interested in them.
Having said that, I wondered how the Treasury Department and TTB can possibly approach ATM consolidation. So I called Robert Tobiassen, former TTB chief counsel and now president of the National Association of Beverage Importers. Tobiassen wrote a long blog post (with 100 footnotes!) On the changes this week for John Hinman’s Booze Rules blog. Few people understand better than Tobiassen what the TTB could do if it wanted to.
Tobiassen was very impressed with the way the sections of Biden’s alcohol decree were drafted. Many US government agencies outside the TTB struggle to understand the alcohol industry, as we learned in the United States Trade Representative (USTR) hearings on wine tariffs, when it seemed that government officials did not understand the three-tier system. But Tobiassen said the Biden administration had clearly consulted with experts in the alcohol industry.
“It is very telling that no input from the public was solicited,” Tobiassen said. “It tells me they’re not doing it for the show. I don’t think any trade association has backed it. I think what the administration is trying to tell the American people is my vision. of the future.”
Distributors vs producers
Biden hired Tim Wu, a professor who lectures on antitrust laws, to lead the effort. Wu is known for saying that tackling competition is not just the FTC’s responsibility, but requires all federal agencies to work together.
Tobiassen pointed out that the National Environmental Policy Act of 1970 required that every trade action that had an impact on the environment be assessed; that’s why there are EPA reviews of every major construction project. He said the government could require similar assessments for every trade action regarding how it affects competition and antitrust laws.
He said that, if it wishes, the TTB can regulate distributors as each must have a basic license in each location where they operate. He said that until 1950 distributors only had one license for their nationwide operations, but distributors demanded and obtained that this law be changed because it made their operations less vulnerable to suspension. permits.
“If someone messed up in Milwaukee and their license was suspended for 30 days, they would be suspended nationwide,” Tobiassen said. “The industry wanted local permits because they wanted the consequences for one place. Look at Southern Glazer. They probably have 150 base permits.
“You could go back to just one permit and that would make them fear God,” Tobiassen said. “But if Southern Glazer were suspended for 30 days, you would have riots in the streets because they can’t have a drink.”
Still, it begs the question: If Gallo’s license were suspended for 30 days, despite being by far the world’s largest producer, there wouldn’t be a shortage of wine. Distributors are much more powerful.
“The APC can do a lot in the regulatory zone to try to level the playing field,” Tobiassen said. “Maybe they can’t tackle the consolidation problem directly. But they could make regulations that favor the small over the big.”
For example: “TTB might issue a regulation that if you are a wholesaler or importer with gross receipts of less than $ 1 million, none of those regulations apply to you,” Tobiassen said. “But if your gross receipts exceed $ 20 million, here are the draconian new regulations.”
However, an example like this gone awry is the CBMA, the Craft Beverage Modernization Act, which was created to reduce taxes for small producers. The big producers have been successful in pushing to be included and now all wineries, brewers and distillers pay lower taxes; what was once a tax benefit for small producers is now a multi-million dollar windfall every year for large producers.
“I’m sure the small distillers knew the big ones were going to take this advantage, but they thought it was okay, I have to have this advantage,” Tobiassen said. “In the long run, you’ve accepted a situation that puts you at a competitive disadvantage.”
It can happen with any well-intentioned change in Washington: the industry begins to lobby, and the original focus disappears. But Tobiassen said Biden has an advantage over 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 achieved.
“Because of the stalemate, a lot of the things Biden proposed will not get done unless, in the midterm election, the Democrats make a lot of gains,” Tobiassen said. Biden said, “If you give me the power, this is America you can expect. But you have to tell me you want it by going out there and voting. “
“If I were a big [alcohol company]I would be very worried for the next 18 months, ”Tobiassen said. “I would play my cards carefully because if Biden is successful in January 2023 there will be a lot more going on. If he succeeds and gets a filibuster-proof majority in the Senate and a much larger majority in the House, a lot of these things are going to happen. I would sleep with one eye open for the next 18 months. “