American Alcohol: Competition or Concentration?

by Garrett Emmons

Image: CNN

What You Can Do:

  1. If you’re of legal age, help local breweries and other producers by buying their products at stores and visiting their premises.
  2. Follow the progress of President Biden’s White House Competition Council at
  3. Support alcohol-related organizations such as the Foundation for Alcoholism Research or the Substance Abuse and Mental Health Services Administration which operates a national helpline at 1-800-662-HELP (4357).

This summer, The Biden Administration released an executive order on economic competition in the United States [1]. It was no surprise that the order made mention of the most common targets of antitrust scrutiny: topics relating to ‘Big Tech’ like secretive data collection and lack of competition in Internet marketplaces. Other targets seemed similarly serious, such as “unfair anticompetitive conduct or agreements in the prescription drug industries” and “better [protecting] workers from wage collusion” [1]. One target might have been a little more unexpected, however: the American alcohol industry.

Compared with topics as obviously weighty as the accessibility of life-saving drugs or the inescapability of the data economy’s internet surveillance, the price of a case of beer has a much less urgent thrust, but American alcohol is no trivial industry. In 2019, alcoholic beverage sales reached north of $250 billion in the US, and 2020 saw the largest year-over-year increase in alcohol volume in two decades [2] [3]. Furthermore, competition must be protected in every industry that employs workers and is at risk of being overly concentrated. When corporations get bigger, workers have less bargaining power and so may be forced to endure worse conditions

What, then, did the executive order have to say about the American alcohol industry? Its overarching mission was “to protect the vibrancy of the American markets for beer, wine, and spirits, and to improve market access for smaller, independent, and new operations” [1]. It called on the Secretary of Treasury to assess anticompetitive practices by companies and unnecessary government regulations of the industry that needlessly raise costs for businesses without actually protecting public health or increasing consumer information. It directed the Alcohol and Tobacco Tax and Trade Bureau, or the TTB, to make changes to improve the aforementioned targets. More specifically, it charged the TTB with “rescinding or revising any regulations” of the alcohol industry “that may unnecessarily inhibit competition” and “reducing any barriers that impede market access for smaller and independent brewers, winemakers, and distilleries” [1].

Before we can understand what steps might be necessary to rectify a lack of competition in the alcohol industry, it is necessary to look at how the industry is structured, or rather, how it is required to be structured. Government laws in every state mandate that the industry be divided into three distinct sectors: production, wholesale, and retail. That means that breweries generally cannot operate their own retail stores where they sell directly to customers—a common exception is stores and restaurants on the brewery’s physical premises. Each alcoholic beverage has to go from producer to distributor to retailer to consumer. Since these sectors cannot overlap, the job of the regulator becomes easier in that they can look at the sectors one at a time in order to determine whether there is a lack of fair competition.

By far the most thought-about sector by the average person is production. Craft breweries have populated the country in increasingly numerous numbers. Grocery store shelves are stocked with beer bottles brandishing a seemingly endless litany of brewery names and a variety of styles, ranging from mundane to imported to downright bizarre. Though there have been some fears of acquisition-fueled concentration among breweries—see the high-profile acquisition by Anheuser-Busch InBev of SABMiller, which cemented its position as the world’s largest brewer—the data shows that alcohol production has more competition, especially small-scale producers, than ever [4]. Since 2010, small brewers have gained a 5% market share from large breweries [5]. At the end of 2020, the country boasted 12,532 TTB-approved breweries, an all-time high. It seems clear that if there is a competition problem, it isn’t on the production side.

It is even easier to dismantle any notion that alcohol retail is overly concentrated. Intuitively, think about all the places you can buy alcohol: liquor stores, grocery stores, gas stations, ballparks, football stadiums, even movie theaters. It definitely doesn’t feel concentrated. The data supports your intuition: the 50 largest retailers make up just 25% of alcohol-to-consumer sales [6].

The distribution side, however, is another story. In 1980, there were almost 4,600 beer wholesalers. By 2017, there were just 3,000 [5]. Wine and spirits wholesalers have an even more drastic drop: 1,200 in 2017 from 3,000 in 1995 [7]. Not only has the overall number increased but the top wholesalers make up a bigger share of the market than they did 10 or 20 years ago. Finally, since wholesalers are often geographically fragmented, small-scale breweries, wineries, and distillers often have very few choices for wholesalers to sell to. Small-scale alcohol producers have a more difficult time negotiating with the distribution oligopolists than their large-scale competitors. Distributors prefer to work with very large volumes whose market success has been confirmed, rather than untested, small-scale volume. Small producers may be forced to deal with worse arrangements just to get shelf space, leading to lower profit and less likelihood of success in the long-run. Bigger firms also mean workers have less bargaining power and may face worse conditions—a general concern for the economy raised in President Biden’s executive order. For consumers, that could mean higher prices and ultimately less choice. If the Biden Administration is looking for concentration issues, here is where to find it.

One potential solution to this problem is simply to remove the artificial and archaic barriers between producers, distributors, and retailers. Without these rules, smaller producers could bypass distribution giants and go directly to consumers. Select states, such as Washington, have even made exceptions in their rules so that breweries under a certain volume can do exactly this. One drawback of this dynamic approach is that it could create perverse incentives, where producers only produce up to a certain volume in order to be allowed to self-distribute, as opposed to a higher, socially desirable level. Another potential concern for this solution is that it becomes harder for regulators to make sure that the alcoholic beverages are following food and safety regulations when sale of those beverages is extremely dispersed and localized. A different solution is more heavy-handed: directly breaking up the concentration of the distribution sector. But this has its own drawbacks as distribution likely benefits from economies of scale, leading to natural monopolies. Natural monopolies occur when being the largest company provides a considerable advantage over smaller competitors, creating a monopoly ‘naturally,’ rather than through illicit, anticompetitive means. Economists usually believe that breaking up natural monopolies could cause higher costs and prices, since there is a loss of efficiency. 

The executive order made specific mention of its desire for “rescinding or revising any regulations” that inhibit competition [1]. With the market-based solution more likely to create a lower cost, competitive environment, I think a revision of the alcohol industry’s forced segmentation is the wiser choice of action. It is a good demonstration of the fact that sometimes the solution to a lack of competition is not a heavy-handed one—though there is certainly a place for that, especially with tech giants—but rather one that recognizes when the government is the culprit and undoes mistaken policy. There is no shame in admitting one’s mistakes.