Competition EO: Changing Tides In Beer, Wine, And Spirits Industries – Anti-trust/Competition Law

President Biden’s July 2021 Executive Order on Competition in the American
Economy (the Executive Order) calls on federal regulators to
actively “protect the vibrancy of the American markets for
beer, wine, and spirits.”  In addition to calling for the
U.S. Department of Justice Antitrust Division (DOJ) and the Federal
Trade Commission (FTC) to ramp up antitrust enforcement across a
range of industries, the Executive Order directs the Secretary of
the Treasury, in conjunction with the DOJ and FTC, to review and
report on the competitive landscape in the markets for alcoholic
beverages.  The report will focus on: (i) unlawful or
anticompetitive trade practices that hinder small businesses; (ii)
patterns of consolidation among market participants; and (iii)
superfluous regulations that hinder competition.  The
Executive Order also calls for the Secretary of the Treasury,
through the Alcohol and Tobacco Tax and Trade Bureau (TTB), to
consider withdrawing or amending regulations that pose unnecessary
barriers to entry.  

The regulators’ report on competition in alcohol markets is
due in early November 2021, and any regulatory changes must be
considered by March 2022.  While the Executive Order could
trigger future regulatory changes, it may also foreshadow
increasing antitrust scrutiny in the beer, wine, and spirits
industries, and especially in alcohol distribution.

In some respects, the Executive Order’s alcohol-specific
mandates may come as a surprise.  Notwithstanding the setbacks
resulting from the COVID-19 pandemic, demand for craft beer,
wine, and spirits has grown in recent years and small producers
have been entering the market in increasing numbers.  For
example, according to data from the Brewers Association, the number
of craft breweries in operation nearly doubled between 2015 and
2020, with nearly 4,000 small producers opening for
business. 

Despite the steady stream of new producers, a recent report from
the Congressional Research Service revealed that
craft producers accounted for only 8% of the total alcoholic
beverage market in 2020.  With most of the market controlled
by a smaller number of large players, regulators will be looking
carefully at how existing regulations and business practices affect
competition. 

Indeed, the TTB has already sought public comments on how current
regulations are affecting competition.  The overwhelming theme
in the comments submitted by small brewers, distillers, and
vintners is frustration with the three-tier distribution
system.¹  Under this system, beer, wine, and spirit
producers generally rely on distributors (or wholesalers) to move
their products to the retail market.  The frameworks for
regulating alcohol distribution in many states offer protections
for wholesalers and distributors, including exclusive regional
territories and caps on the amount of beer, wine, and liquor that
producers can distribute and sell themselves. 

Many commenters have argued that territorial exclusivity and
rigid rules governing distribution agreements give distributors
unjustified leverage in negotiations.  Some have also voiced
concerns that consolidation among distributors further limits
the distribution options available to small producers, making it
even more challenging to compete for retail shelf space, as larger
brands are generally more profitable for, and hold more sway over
distributors.² 

As possible solutions, some commentators are calling for regulations
that limit distributors’ ability to consolidate and claim
exclusive territory, as well as promote producers’ ability to
self-distribute and negotiate for more
favorable distribution contracts.  Many are also calling for
more liberal rules allowing producers to sell their products directly to consumers. 

In fact, the antitrust regulators have been focused on
competition policy in the alcoholic beverage markets for some
time.  For example, in March 2020, the FTC and DOJ sent a
joint letter urging the California State Assembly to vote against a
proposed bill that would limit beer producers’ ability to
cancel, alter, or decline renewal of their agreements with
distributors.  The agencies argued that the bill was
“likely to diminish competition between California beer
wholesalers and increase manufacturers’ costs of obtaining
distribution services from wholesalers.”³  The proposed
bill never received a vote in the California State
Assembly.

The Executive Order may also drive the DOJ and FTC to begin
paying more attention to mergers among distributors, as well as to
potentially anticompetitive business practices in the
industry.  Larger market participants may face investigations
and be called upon to respond to civil investigative demands
concerning their business practices.  The agencies may be
looking carefully for any practices or arrangements among larger
producers, distributors, and retailers that limit smaller
players’ ability to compete.    

Key Takeaways

• Large producers and distributors of alcoholic beverages should
  review their business practices and be prepared to justify any that
  may be seen to disadvantage smaller competitors.




• Market participants, and especially distributors and producers,
  should proactively advocate to regulators and lawmakers, either
  individually or through trade associations, to ensure that their
  positions are adequately represented in any future revisions to
  state and federal alcohol regulations.

This article is part of our “Unpacking the Executive Order
on Promoting Competition” series. Click
here for other related articles. Please contact a member of the
Winston & Strawn Antitrust/Competition Practice Group or your
Winston relationship attorney for further information.

Footnotes

1. The
TTB’s request for information and the public comments submitted
to date in response can be viewed here.

2.
See, e.g., Comment 29: Anonymous (Aug. 6,
2021).

3. Ltr. from FTC and DOJ Antitrust Division to the
Hon. Jim Wood, Cal. State Assembly (March 20,
2020).

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