As we previously reported, Executive Order 14036 (E.O. 14036) required the Treasury secretary, who oversees the Alcohol and Tobacco Tax and Trade Bureau (TTB), to issue a report to the White House Competition Council (the Council) chair, assessing the current market structure and conditions of competition in the U.S. alcohol market.

In response to the E.O. 14036 and hundreds of public comments, the Treasury recently issued its report titled, “Competition in the Markets for Beer, Wine, and Spirits” (Report). The Report provides an overview of the key federal agencies that regulate the beverage alcohol industry and the state regulatory framework. From a substantive perspective, the Report highlights two key trends over the last several decades: (1) an explosion in the number of small and craft producers of beer, wine, and spirits, including over 6,400 operating breweries in the U.S. (up from a low of 89 in the late 1970s), more than 6,600 operating wineries, and more than 1,900 operating distilleries; and (2) consolidation at the distribution and/or retail levels for beer, wine, and spirits and at the production level for beer.

The Report highlights the following concerns:

• The FAA Act’s competition provisions may not fully address the exclusionary impact of some business practices and may unnecessarily burden smaller, new marketplace entrants.

• Some federal and state laws and regulations (e.g., labeling preapproval, bottle-size restrictions, beverage classifications, and complex permit application requirements) may impose a disproportionate burden on small and medium-sized producers without corresponding justifications based in public health or the prevention of anticompetitive behavior.

• Some federal and state laws may inhibit the growth and competitiveness of small producers. Other laws may unnecessarily inhibit forms of marketing that could otherwise help competition. Restrictive laws also can have financial consequences for consumers. Some state laws require distributors to set publicly and adhere to prices, stifling competition and likely increasing prices to consumers.

• Federal tax rates differ between beer, wine, and spirits and affect competition between each of those sectors. Rates that differ between domestic and foreign producers, as well as between large and small producers, also affect competition.

• Concentration of production and distribution has generated concerns from craft brewers about their ability to raise prices in the markets in which they compete.

• Despite TTB’s active enforcement of the Federal Alcohol Administration (FAA) Act’s competition provisions, complaints about exclusionary behavior by large producers, distributors, and retailers are common. These complaints include allegations of discriminatory conduct by distributors, slotting, shelving, and other preferential practices, despite a ban on such practices.

• The direct-to-consumer model, common in wine, has been spreading to beer and spirits and offers distribution opportunities for small producers. Some, however, argue that direct shipment risks making alcohol available to under-age drinkers. A Federal Trade Commission (FTC) study of direct wine shipments found no evidence of such abuse, but there is a lack of evidence specific to beer and spirits.

In light of the trends and concerns above, the Report makes the following recommendations:

• The Department of Justice (DOJ) and the FTC, which contributed to the Report, should continue to enforce antitrust laws, while continuing to examine their approach to horizontal consolidation and to evaluate the effectiveness of their remedies in the alcohol markets.

• DOJ should consider the effects on distribution stemming from the acquisition of craft brewers by major brewers.

• DOJ and the FTC should apply particular skepticism to claims of efficiencies, as well as particular attention to concerns relating to coordination, in assessing mergers and in considering revisions to merger guidelines.

• DOJ and the FTC should engage with state actors on state laws impacting competition in the alcohol markets by submitting letters in response to state legislative requests for technical assistance.

• DOJ should consider conducting a retrospective on the pricing, innovation, and distribution impacts from craft acquisitions by major brewers.
• DOJ and the FTC should consider guidance as to already highly concentrated markets.
• DOJ and the FTC, in consultation with TTB, should consider taking a closer look at vertical mergers or arrangements that may lead to monopolization or exclusion in the alcohol markets, particularly exclusion of small firms or new entrants.
• TTB should consider a rulemaking to update certain trade practice regulations under the FAA Act including:
  • Responding to the many requests for greater clarity, to sharpen and modernize the categories of conduct considered intrinsically harmful, and any exceptions. In such course, TTB should solicit feedback on newer and less-understood forms of exclusionary conduct; and
  • Strengthening the existing rule on category management — i.e., the design of shelving schemes and the offering of related services for “free” — to improve deterrence.
• TTB should reexamine its labeling and other practices to prioritize labeling rules that protect consumers and public health, while reducing or eliminating any regulatory requirements that create compliance costs, potential barriers to new entrants, or burdens to small businesses.
• TTB should evaluate its trade practice enforcement policies, including:
  • Addressing complaints of underenforcement, particularly as it pertains to conduct by the larger members of the industry;
  • Focusing additional enforcement efforts, wherever possible, on category management schemes and tying arrangements;
  • Continuing to exercise enforcement discretion to temper enforcement against entities lacking market power in the absence of obvious anticompetitive effect; and
  • Collaborating with DOJ or the FTC with respect to large and complex cases.
• States should examine the effects of their regulations on small producers and their ability to compete, including their access to distribution.

As the Report highlights, the alcohol market has undergone a number of changes over the last few decades. Some of these changes merit amending regulations and enforcement approaches to reflect the state of the market today. In accordance with E.O. 14036, TTB now must at least consider initiating a rulemaking to update its regulations. It will remain to be seen whether the Treasury’s recommendations to other agencies will also lead to any meaningful change.