Apr 25, 2023
On April 21, The Capitol Forum held a conference call with Harry Schuhmacher, editor and publisher of Beer Business Daily and Wine & Spirits Daily, to discuss antitrust issues in alcohol markets and the three-tier distribution system. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Good morning and thanks to everyone for joining us for today’s conference call on antitrust issues in the beer and alcohol markets. I’m Teddy Downey. With me today is my colleague Paul McLeod, The Capitol Forum correspondent, and Harry Schuhmacher, Editor and Publisher of Beer Business Daily and Wine and Spirits Daily and just an absolute guru of the beer and alcohol markets. Today, we’re going to talk to him about antitrust issues, the three tier system and what’s going on in the market right now.
Before we get going, I just want to make a couple points. You’ve joined the presentation using your computer speaker system by default. If you prefer to join by telephone, you can select telephone also to submit questions. The best way to do it is to do it in the app and the go to webinar control panel. There should be an app or whatever it’s called on your end. Or if you have a problem with that, just email us at editorial@thecapitolforum.com. And with that, Harry, Paul, thank you so much for doing this today.
HARRY SCHUHMACHER: You bet. Good to be here.
PAUL McLEOD: Good to be here.
TEDDY DOWNEY: So, Harry, you wrote, I think, a pretty comprehensive take on this moment for both the alcohol industry and antitrust enforcers. And you kicked it off with, I think, just an incredible intro. You said, “In my 30 years covering the industry, I’ve never seen so much chicanery going on”. And I think that is just a great way to introduce what you’re seeing right now in the industry. And what Paul and I can probe further. But what do you mean by that? What do you think about this moment in particular in the industry?
HARRY SCHUHMACHER: Well, like I said, I’ve been doing this for 30 years. And when I started in the industry, the people who were older than I was, kind of mentors who are now retired or dead, imparted upon me the importance of the regulated, the regulated part of the industry and following the rules. Because when I first got into the industry, I was like, oh, these regulations suck. This is terrible. No, no, no, no. This is how we operate. It levels the playing field and it’s a good way to do business as long as everybody’s playing by the rules. And, in fact, I remember Carlos Brito, the ex‑CEO of Anheuser-Busch, when they were buying AB, I asked him some questions. Like, are you guys going to abide by the rules? And he said to me, Harry, we make the most money in the more highly regulated markets and we know to follow the rules. I’m sure he’s glad I’m telling what we talked about on a public stream. But whatever, that was the thought. And everybody kind of—there’s always been outliers, but everybody’s been playing by the rules. And everybody still does for the most part. And maybe there was some hyperbole in the title. You know, you’ve got to have clickbait these days a little bit. But it’s still you’re just seeing on the margin, as more players get into the industry and as larger corporations are overseas, and all these things kind of come together where you’re seeing people maybe not play strictly by the rules. Or trying to figure out ways to get around the rules still in a legal way. And it just it kind of makes a mockery of the whole purpose of the 21st Amendment and the way the industry was set up.
TEDDY DOWNEY: Yeah, I want to let Paul to add some context to this question. But you mentioned AB InBev and that’s kind of one of the things that’s kind of gotten us really back into focusing on this industry. We covered the AB InBev Grupo Modelo purchase a long time ago, which is when we first met. And there was a big consent order there, subsequent big consent order in AB Miller/Coors. And we focused specifically—I say we, but Paul—on their new software systems and you mentioned that in your piece. Paul, feel free to add any additional color or context. But I’m interested to get your take on whether or not you see that type, you know, how that is playing within the roles or sort of complicating the integrity or compromising the integrity of the three tier system.
PAUL McLEOD: Yeah, sure. I’ll just jump in for a second, just for a 30 second background for people who are maybe new to this world. There is this three tiered system where you have the producers of alcohol who sell to the wholesalers, who sell to the retailers, and these are supposed to be separate entities. And what Anheuser‑Busch InBev is doing is they’re pushing platforms that they’ve developed in-house that essentially tie these tiers together. And in particular, their platform BEES, is a software link up between the distributors and the retailers, the bars and restaurants who are selling their products.
And what’s interesting about BEES, I find, is that in particular you have this feature where you can auto generate orders. So essentially, a retailer opens up their ABIcreated software and it’s auto filling. Based on what we think you want, here’s our auto generated order. And it seems to essentially sideline the middle tier, the distributors. And ABIhas said, no, no, no. This is just—it’s nothing more than a template. You can still go in and change everything around. You still have to approve it. But to me, when I was looking into this, it seemed like this is a sort of unprecedented overriding of one of the tiers, I mean, maybe sort of elidingaround one of the tiers. And I’m just curious, Harry, what you make of all of this.
HARRY SCHUHMACHER: Yeah, well put, all of that. And the BEES system, it doesn’t break any rules. We should start there. It doesn’t break any laws that I know of. I’m not a lawyer. But it sure does undermine the spirit of the separation of the three tiers. And those rules were presented in the 21st Amendment of the Constitution, which repealed prohibition and basically left it up to the states to mostly regulate beverage alcohol.
And the second part of that was to create three different tiers so that it’s inherently inefficient. And the reason why the alcohol industry is different from all other industries, pretty much, is that the government’s interest is to prohibit consumption or to put a leash on consumption. So they want it to be inefficient. They want pricing to be high. And they want taxes to be high, which they are. And so that’s the reason why we have these three independent—it’s almost like government where there’s checks and balances between the three tiers. So that nobody can just overwhelm the system and just flood the market with cheap alcohol, which is what you see in many other countries.
So that’s kind of the basis of all that. The problem with BEES in particular was it is an overreach in the view of distributors. Because just, like you said, they’re auto generating orders and while the AB says it can’t or it won’t look at competing brand sales and orders and inventory and those kind of details that are in the system at the wholesale level, we’re just going by their word, and that’s the problem. It doesn’t break any rules, but it sure does give the opportunity to break rules in a very easy way and in a way that’s unenforceable for regulators because they just can’t see it.
TEDDY DOWNEY: Yeah. Well, I think one of the interesting things about BEES is it’s almost like AB InBev was kind of jealous of Amazon or Facebook or put out a big tech platform and their access to data about their competitors, their sort of control over the middlemen. And we do see antitrust investigations in big tech. And the DOJ even has a whole project. I think they’re working with the FTC to figure out, okay, are these big tech type strategies being used in other markets?
And it would seem to me to be that BEES is precisely the type of thing if you’re concerned with big tech—and by the way, you don’t even have three tier system laws in big tech, which I agree with you, it’s not just—the only thing I would say about those laws is it’s also to distribute power, in addition to sort of making it inefficient or having the price be higher. I think it is, look, you don’t want any of these one tiers or you don’t want any kind of vertical Goliath to emerge. And we do a lot of reporting on health care as well as the problem with these vertical Goliaths. And it does seem to me, to your point, I think that’s a really astute one about how, even if it doesn’t break the rules, it certainly is in violation of the spirit of the rules and enables some chicanery, some bad behavior, anti-competitive, potentially anti-competitive, conduct around that. And Paul, anything else related to BEES and AB InBev around that you want to talk about?
PAUL MCLEOD: No, I guess I would just really quickly ask. I mean, what we have heard is that after some backlash, maybe the push by ABI to sort of—so these platforms, we should say, are ostensibly voluntary. But, of course, in a business entirely based on relationships, there’s a lot of ways you can sort of pressure people to use your platform. And what we’ve heard is that that pressure has maybe died off a little bit since some of the blowback. And I guess I would just real quickly get your thoughts on if you think this issue has gone away for now or the fight for the software that sort of undergirds this whole industry is going to keep raging on?
HARRY SCHUHMACHER: I don’t think it’s over, certainly. And a lot of that depends on I think part of the problem is that AB is a global company. And so when they hand out bonuses and when they create their key operating indicators, they do it at a global level. And guess what? BEES works great in Latin America and in Europe. And it’s huge. It is the Amazon of alcohol there. And the problem is when they’re focusing on the United States, it just it doesn’t align with the regulatory structure here.
So that’s the issue. And whether they back off or not—I don’t know if you want to get into it, but there are third‑party software providers that provide basically the same thing that BEES does. One of them is Provi. And in fact, Provi is suing two big wine and spirits wholesalers, Southern and RNDC, for antitrust issues because they feel like they’re being crowded out of the market by those distributors on proprietary systems.
So there’s kind of a fight among softwares right now in the Wild West. And keep in mind Provi is not licensed. And there’s certain retailers, if you want to call them that, like a Gopuff that’s an app or an Instacart, that’s an app, that are delivering alcohol, but they’re unlicensed as well. So how do you treat those entities? And it’s a whole mess that it’s really going to have to get—I think we have years of litigation, honestly, ahead of us, which is nothing new in this industry, unfortunately. And it’s just going to probably take five years to play out.
TEDDY DOWNEY: We’ve also written a lot—and Paul, please feel free to chime in. We’re very interested in soda entering the beer market. We’ll stick with beer for a little bit longer here. And in particular, the problem of, okay, well, slotting fees are prohibited for beer. But all of a sudden, you now have Coke and Pepsi coming up with their own hard seltzer products or hard soda products, whatever they’re calling it. And you just have this really obvious conflict of interest all of a sudden where your beer producers are prohibited from having any slotting fees. But all of a sudden, you have these companies that pay tons of slotting fees that then can potentially use that kind of leverage with the retailer to get favorable treatment to their alcoholic products. I mean, you actually go further about the problem of these companies getting into these markets in that they’re alcohol‑izing brands beloved by kids, like Simply Fresca, Mountain Dew, SunnyD and Coke. I did not know about SunnyD. That is really disturbing, honestly. But give us your take on big soda getting into the beer aisle in supermarkets.
HARRY SCHUHMACHER: Yeah, there is that obvious conflict with the slotting fees. Now, to be clear, Pepsi and Coke and others have said, we do not pay slotting fees on our alcohol products. But like you said, there’s an unspoken, an unwritten, maybe quid pro-quo. Because those two are the largest payers of slotting fees just about. I mean, maybe P&G and a couple others are bigger. But they are the big money slotting fee payers in the United States. And so to come out with an alcohol brand and say, hey, I want this NCAP, but I can’t pay you for it. But wink, wink, I am your biggest payer, by the way, Walmart they’re going to get the display right. And so again, it’s the spirit of the law is being broken but not really the letter of the law. And so that’s the conundrum.
PAUL MCLEOD: Yeah, I find this interesting. Because, as you wrote about, there seems to be a lot of deliberate undermining of the system. And I mean, you can look around—and we’ve reported on this—and you can see kickbacks happen. You can see discounts given to large retailers than to smaller. These are things that were written into law in the 1930s that were supposed to be outlawed and we’re seeing them happen.
But the Coke and Pepsi entering into the market feels fundamentally different to me because you’ve got these two giants that are already so intertwined into their own systems – the slottingfees is a perfect example. They’re paying millions in slottingfees. And you’ve got people like the craft brewers and others saying, how is it possibly realistic to expect that people paying millions of fees, that would be illegal for us to ever pay a penny of—how is it possibly realistic that they’re not going to see some sort of benefit in terms of the placement of their products? And I’m with you. I have not talked to anyone who has actually alleged—been able to point to any specific wrongdoing or say that this is happening yet. It seems more of an existential question of can these companies fit in the industry?
And I just want to throw another example at you. You have your Pepsi who is partnering with Boston Beer to make hard Mountain Dew. They have this distributor network that they want to utilize. And okay, we can’t make this and distribute it. So they license off Mountain Dew to Boston Beer. But they still control the taste or at least have the rights to sign off on the taste. They don’t control the facilities, but they have the right to inspect them. They don’t do the marketing, but they can set guidelines of what the marketing can be. And then they turn around and distribute this product and say, well, we’re not making it. We’re just the distributor here. And all this to me seems just sort of unforeseen and unprecedented in the industry. So I would just like to get your thoughts about whether you think fundamentally these can fit into such a heavily regulated three tier system.
HARRY SCHUHMACHER: You know, Pepsi getting into the distribution industry and alcohol in this kind of convoluted legal pretzel way of we own Mountain Dew, but we don’t own Hard Mountain Dew. Boston Beer Company, the people who make Sam Adams, own Hard Mountain Dew and they are in charge of the marketing and they make the beer because it’s beer by government standards. And we just distribute it. We just drop it off at the convenience store.
Well, Pepsi and Coke are so much bigger than any brewers combined. I mean, they’re just so much—and you’re right. They’re just these giant companies. And for them to kind of game—for Pepsi in particular to kind of game the system to get around what the intention of the law is, and that is, like Teddy said, it’s a separation of powers. Well, when you have the second largest beverage company in the world becoming a distributor, the power structure in the industry gets all out of whack. And it does crowd out—it could crowd out craft brewers and smaller brewers or just smaller seltzer producers that would compete with something like Hard Mountain Dew.
And then there’s the issue that Pepsi, as a beverage alcohol distributor, that’s fine. But their culture comes from a non‑alcoholic bottling culture where you put displays wherever you want and you put them in high traffic areas. Alcohol distributors know by nature that you don’t put beer displays in the toy aisle or you don’t put them—you keep them away from certain sections of the store. And so there’s a cultural difference. All of this is technically legal, but what do you do? And so that’s kind of where we are today. And it’s a huge story because it hasn’t really affected the industry yet, but it could. And so that’s where we are because Hard Card Mountain Dew such a small brand at this point.
TEDDY DOWNEY: I want to stick on this concept that it’s technically legal and sort of bring up a couple of points. One, you bring up that one of the reasons why these companies sort of feel like they can push the envelope so much is because of the laissez faire approach of the TTB and the FTC previously, I think. And then even DOJ in their consent orders. And then lastly, state regulators being underfunded or not paying enough attention.
I want to talk a little bit about—get your take on what how different does this environment right now feel to you from an industry standpoint? I mean, there are all these companies pushing the envelope. You’ve got ABS pressing their advantage with technology. You’ve got Coke and Pepsi. Most people would have just said, no way would they even dare to do something like this. And all of a sudden, even under a very aggressive regulatory and law enforcement regime under Biden, they’re doing it now which seems pretty bold.
And then, at the state level, in your piece, you mention that Utah Governor Spencer Cox signed a bill requiring Utah ABC to reject beer packaging that’s so similar to a label or packaging that’s used on a well-known or widely available nonalcoholic beverage that the label or packaging for the beverage is likely to confuse or mislead a patron into believing that the beverage is a non-alcoholic beverage. Just sort of like weighing in on these like soft drink brands, what’s your feel right now about this moment when it comes to reassessing whether changing that laissez faire approach and how the beer industry and alcohol industry should think of the current moment?
HARRY SCHUHMACHER: Well, it’s been, I guess, a little laissez faire. It has picked up more recently to talk about enforcement of trade practices and regulation. It’s always been there. It’s just picked up lately. And one of the issues is that the way the industry was structured is, as I indicated earlier, that the states have more power in alcohol than the federal government. In fact, the federal government really only just issues licenses to the brewers and wholesalers.
Now, the state issues licenses to retailers. So if a state is trying to enforce an action, trade practice violation—for instance, Pepsi putting up Hard Mountain Dew next to Hot Wheels or even though that’s not against the law –how do they enforce that? And so they can’t go after the retailer because the retailer’s usually based out of state. So you have all these different branches of government trying to regulate different branches in the industry. And then you have the complications of non-alcoholic companies coming in and being distributors, but not producers and licensing. And I think the reality of the industry kind of caught up with the regulation and caught up with the enforcement. And I believe now that the federal regulators are kind of just waking up to this. When you see the Biden competitive report on alcohol, it’s like, hey, TTB, go look at the regs. Make sure the current regs are written in a way that’s appropriate so that small producers aren’t getting killed. And maybe make some other changes because it’s a good industry.
Now, I will say it’s very competitive. We have 10,000 craft brewers out there that are thriving—maybe not thriving right now, but they have been thriving. And it’s a very fragmented industry on both the wholesale and the distributor side and the producer side with craft brewers.
So it is very competitive. And that’s really the point of my article, is that we’ve got a good thing going here. Let’s not screw it up by just, on the margin, cheating and creating these little loopholes that will wake up a monster and then we could end up with a completely different landscape that we don’t know about that. The unknown is not preferable to the known.
PAUL McLEOD: That’s an interesting point, Harry. And at one point, I was talking to a guy who formerly worked for the Virginia ABC, the liquor control board in Virginia. And I was asking him about how you would address some of these issues, such as the slotting fee issue with Coke and Pepsi. He said, well, one way you do it is you go through and you investigate the invoices and you look at the invoices and you compare them to the placement that companies got. And that’s how you would be able to nail someone for that. And two, he said, “we have never done that. We have no capacity to do that.” I mean, as you well know, it’s more of a complaints based system right now. They do not do these types of proactive invoice comparison investigations. And he said that they have nowhere near the staffing or capacity for that level of complexity right now, or at least the vast majority of states don’t, if any do. And so that does raise the question, as you broached, of should the feds take a more active role? Should this be something that the federal level seizes more power in overseeing this. I guess I’m wondering whether you think that will happen or predict that will happen?
HARRY SCHUHMACHER: Whether it should happen or not, it’s always been a heavily state regulated industry. And I think most of the participants in the industry like it that way. Because each state is just so different in how people view alcohol. For instance, in Utah, you would probably view alcohol differently than if you lived in New Jersey. And so, as far as regulation goes, it is good to have it more local.
Do I see it going more federal? Yes, because I think everything is going more federal in all industries. But the problem is do the feds want to look at invoice level type deals? The industry has self-regulated. And when I say self-regulated, I mean regulated each other. In other words, told on each other like tattletales. That’s how the industry regulates itself. But when you get too much consolidation on the producer level, they’re not going to tell on each other because they’re both doing it. And so, I think that’s the fear that we have with this kind of corporatization of beverage alcohol that goes along with that.
TEDDY DOWNEY: In a second, I want to shift to talk a little bit more about the distribution layer. But before we do that, there is competition, I think, in certain different ways at the producer level. But it’s still heavily dominated by some of the big players. Some of the players are just like they do engage in allegedly anti‑competitive conduct. And so they are showing some signs of a market power, either maybe not just based on their market share, but also their influence over the distribution, I think. And we talked about AB InBev. You noted something in Constellation about Constellation Shadow terminating distributors. Can you talk a little bit more about that and any sort of other complaints that you’re getting in terms of producer anti-competitive practices by at the producer level? And then maybe we can get then that distribution.
HARRY SCHUHMACHER: Yeah, I don’t think per se that constellation shadow banning—shadow terminating distributors is anti-competitive. My comment there was more it’s just bad behavior in the industry. It’s just not courteous. It’s just not the way we’ve done business. You stay loyal to the people that brought you there and you don’t use the legal system to then turn around and kind of screw that. So that was the issue there. And it’s just a matter of distributor preference. But yeah, when you get down to it, my point there is that, again, let’s not poke the bear. The industry is highly regulated for a reason. There are valid public policy reasons why it’s regulated this way. It’s not just—some of it’s arbitrary. But hell, the law was written in 1929. So it’s been a while, but that’s the reality we live in.
TEDDY DOWNEY: And maybe we could talk about the distribution layer. And maybe we can talk a little bit about both beer and liquor. When it comes to beer, I think to your point, it has been, I mean, there are some issues, obviously, with producers’ influence over distribution. But for the most part, especially if you compare it to liquor, beer wholesalers is more of a competitive distributed market. But there are definitely threats to that, right? There’s definitely been some consolidation. There are definitely some concerns. Can you talk a little bit about consolidation in the beer distribution market and any complaints about that? Or separately, and additionally, any sort of problems that you’re seeing in terms of actual influence from the producers over the distribution that’s problematic from AB InBev Coors in particular?
HARRY SCHUHMACHER: Sure. Yeah, there has been a lot of consolidation in the wholesaler tier over the last twenty years, but it’s really picked up over the last ten. And there’s been a few players, particularly Rias, who’ve been active in rolling up different markets. And the thing about it is, from an anti-competitive standpoint, it really doesn’t track. Because each market is different. It really has to do with market share in that particular market.
So let’s say Rias bought Austin. Well, they bought Austin, but they still have the same market share that they had before they bought it. They haven’t increased their market share. Market share is where you can get anti‑competitive. So because beer is physical and it’s very different—and market shares are very different in each market. I mean, the market share in Austin is very different than the market share in Dallas. You would think, why? It just is. So you could buy up distributors in 30 states and you could still have low share and not affect competition at all. So let me make that clear on that point.
However, the more and more the beer middle tier consolidates, the harder it is for like a small craft brewer may get left out on the road. Because the distributors, they’ve consolidated, they’ve gotten so big, that they don’t want to mess with the smaller producers. And so that’s the complaint that the craft brewers have about distributor consolidation.
And you do see it on the wine and spirits side where the middle tier is much more consolidated. There’s really only four or five major wine and spirits distributors compared to 200 or 300 major beer distributors. So very much more consolidated. So it’s harder, if you’re a distiller just getting started, it would be harder to get the attention of those giant corporations. So you’re already seeing it on the wine and spirits side. And the fear is that the more and more beer distributors consolidate, it’s going to get harder and harder. But the difference is that in most states, beer enjoys a franchise protection law like auto dealers do. To where if you’re a distributor and you represent these brands, those brands can’t just yank it away from you willy‑nilly. And that has slowed consolidation because there’s no incentive to leave the business. If they can’t force you out, then you can continue on forever. And it’s a good business. It has high returns. It’s highly profitable. Where else, you know, if you sell, where are you going to put your money? T-bills? So there’s not a huge incentive to sell.
TEDDY DOWNEY: Go ahead, Paul.
PAUL MCLEOD: So Harry, I think we’ve both heard the same complaints from distillers in particular about dealing with these very concentrated middle tiers and the fear of, if you’re shut out, you can’t really complain too much if you find out and you’re just screwed essentially. And I suppose one sort of more ambitious reform would be to try to break up this industry, break up the spirits distributors, which from what I can tell, there’s been really no movement, serious movement on that. And then, of course, what they’re pushing for, and does seem to be happening in certain places across the country, is allowing direct sales to customers below a certain threshold. And I’m just curious if you think that will become the norm as sort of a way to appease these smaller distributors who are being squeezed right now.
HARRY SCHUHMACHER: Yes, I do. Years ago, that direct mail delivery was a boogeyman because of underage delivery. And how can we ensure that this isn’t getting into the hands of kids? And I think over the last ten years, the industry has proven that’s not a huge problem. You’re not going to see 16 year old kids buying an expensive bottle of wine or even a bottle of whiskey because it’s so expensive to get it through the mail. But yeah, I think opening up the laws is the natural way to help those guys out. I’m going to be unpopular—I tell you right now—for just saying that, with many in the industry. Because there are three tier purists that believe that’s just letting the camel’s nose under the tent and that we shouldn’t allow it.
But to me, if it’s not a public policy problem, if it’s not creating more drunks, if it’s not creating more drunk driving and underage drinking, then I think a reasonable carve out like that it should be and probably will be more and more common. Just like drinks to go became more common where restaurants were allowed to sell drinks to go during COVID. Many of those laws are becoming permanent because they found that guess what? Drunk driving really didn’t go up that much. So that’s what we’re seeing.
TEDDY DOWNEY: I want to talk a little bit, stay on alcohol, stay on liquor, in terms of there is an FTC Robinson‑Patman Act investigation into the liquor distribution market and wanted to get your take on that. You mentioned in your piece some other antitrust litigation in the space. Maybe talk a little bit about what you’re seeing legally and anything else you’re hearing about in terms of have we really reached the point where people are just fed up with the type of conduct that’s going on in the liquor industry when it comes to anti‑competitive conduct, particularly around pricing and favorable pricing to specific maybe like big chain stores and things like that?
HARRY SCHUHMACHER: Yes, there’s really two issues there. One is quantity discounting where you give a discount, the more you buy, which is widespread in all of beverages and a lot of products. I think the Robinson‑Patman Act, since it hasn’t been enforced in so many years, that everybody just assumes that it’s all okay.
But the second part of that, which is even, I think, more of a concern to smaller producers, and that is controlling the category management at the retail level. And they call it controlling the mouse. And what that means is that most retailers, big retailers, Kroger, Walmart, in each category like beer, they will assign one company to be the category manager for the shelf for all of the Walmarts or the Krogers or whatever. And usually that company is Anheuser-Busch, Molson Coors, Constellation, and maybe Heineken sometimes.
So, once Anheuser-Busch controls the mouse, what are you going to do as a small player? They’re supposed to control it fairly and on behalf of the retailers to maximize profits for the category on the shelf. But if you control the mouse, jump balls go to you every time. So that category management issue is probably going to be an issue with these more interested in Robinson‑Patman enforcement and also QDs, quantity discounts, which is rampant in the industry and has been for a long time.
TEDDY DOWNEY: The FTC is saying they’re going to bring a Robinson‑Patman case soon. They’re investigating big soda. They’re investigating liquor distribution. They’ve made some comments that there are illegal kickbacks in health care as well that could be subject to this type of thing. Is there anything in the marketing, advertising allowances, promotions, in addition to category captains that would be a little bit of a red flag when it comes to Robinson-Patman? And then also separately, the FTC—I mean, this is kind of connected. I want to sort of put it in your head—the FTC has historically sort of discouraged state pricing laws and state pricing enforcement. But with the FTC saying we’re going to do Robinson‑Patman, we are going to enforce it. I wonder if that kind of bolsters the state pricing laws as well. Just want to get your take on pricing.
HARRY SCHUHMACHER: That’s a great question. Because on the one hand, you have the federal government—for years, by the way, this is not new—has criticized states that have what we call price imposed laws. Where the wholesaler once a month or a given period has to post their pricing for all of their products and it has to be public and it can’t change usually. And so what that does is, if you’re posting your pricing a month in advance, you’re not going to be discounting a lot. Or there’s no last minute discounting. But it’s a pain. So the government’s criticized that.
Well, now when you have more of a focus by the administration on Robinson‑Pacman, which is more concerned with leveling the playing field of competitors, then you have this interesting dynamic where price and hold and price posting laws actually do level the playing field. And there’s no quantity discounts, there’s no chicanery. And so you have these kind of competing ideas. And so, yeah, it’s interesting. But yeah, the answer to your question, yes, price and hold laws and price posting laws would help do away with that issue of an unlevel playing field based on size.
TEDDY DOWNEY: You bring up in your piece, Provi is suing SJWS and RNDC for alleged anti-competitive behavior. In 2015, they tried to plan and help fund Kroger’s plan of Graham’s Center for Excellence. I mean, can you tell us a little bit about that? And just is that the type of thing that’s just like kind of front and center for a problematic, effective slotting fee in the industry? And I guess, would you think that is more like a TTB thing? Like should TTB already be going after that type of thing and stopping that?
HARRY SCHUHMACHER: Yes, that particular thing was where Southern Glazer, an alcohol distributor, was working with Kroger to set up an entire division to plan shelf space funded by the alcohol business, not by Kroger. And that’s a real gray area of the law. And the reason the TTB hasn’t jumped on this or other areas is because the TTB does allow for category management services by wholesalers and suppliers to retailers. And like, controlling the mouse, that’s technically legal as far as alcohol laws are concerned and three tier laws are concerned. Now, from the DOJ and FTC, I don’t know. We’ll wait and see. But yeah, that stuff’s legal now.
But setting up this whole center where everybody’s going to pay in 100 grand a month or whatever it is, whoa, whoa, whoa, whoa. Pull in the reins a little bit on that one. And they did pull in the reins because I think they did fear action by the TTB. Because to me, it was a de facto slotting fee and just a way to get around it. And that’s the kind of chicanery that I’m kind of talking about, like, come on, guys. Just have everybody play by the rules. Don’t make it so obvious that you’re paying these retailers. Good Lord.
PAUL MCLEOD: Well, let’s talk a little bit about some of this. Because it does seem like we’ve seen some TTB enforcement in recent years, not just on legal sponsorships, but legal sponsorships tied to third-party entities, tied to charities. So instead of sort of me saying here, Bill, I’m going to give you this money for your bar, it’s here, Bill, I’m going to sponsor this golf tournament that your bar – it started off as a charity, but it’s sort of an in‑kind of wink‑wink agreement that then we get more space. And, of course, there was a huge $5 million AB settlement a few years ago.
So TTB has been active in one sense, but only really against distributors. They don’t touch the retailers. And what I have heard is from the other tiers in particular distributors, is that this has left this incentive for retailers to just push and push and push and try to fight for a better deal and try to fight for these extra bells and whistles or these gray areas that we’ve been talking about here. And because they don’t really face the same risk of enforcement if it falls to the states, because it’s a bit more up in the air and enforcement levels. So I’m just wondering whether you think that status quo is sustainable or whether there needs to be something done to shake up enforcement, in particular on the retailer side?
HARRY SCHUHMACHER: Well, the problem there is that the states—the TTB doesn’t have any enforcement capabilities for retailers. Retailers are licensed by the states. And so what are they going to do, revoke their license? They can’t. So they don’t have any teeth to go after retailers. And that’s just an intrinsic problem. Or if you want to call it a problem. It’s just the reality of what it is. So, I don’t think there’s a solution there. But where the TTB does have teeth is in slotting fees and payment in kind.
And you mentioned charity. Charity golf tournaments run this industry. If you want to have a second job, just go start a charity golf tournament and get hooked in with a retailer and a brewer and you’re going to do fine. You know, that’s a reality that [assume this word was not rappers. I think it was “craft brewers” if I recall correctly] don’t like. And the other thing is stadium signage. You buy stadium signage, that’s not supposed to guarantee you that you’re the only beer served in the stadium. But guess what? It happens. And it happens a lot.
And the TTB has been more active recently, like you said, finding AB1and being more active in these signage deals or these third-party marketing firms where you’re paying the sports marketing firm, but it’s not tied to this event. But guess what? My beer is going to be poured at that event exclusively, yadda yadda, like wink‑wink, nudge‑nudge, all this BS. And it’s going on. And the problem is the TTB (a) doesn’t have jurisdiction over retailers. So retailers are always going to still ask, ask, ask, because they’re not breaking any laws. They’re not going to get hurt. So it is unfair to the wholesaler that’s getting pressure. But two, they don’t have teeth. And then also, it’s legal. And how are you going to go to court and prove a wink‑wink, nudge‑nudge? And the only way they’ve been able to do it is through actual invoices. And so short of falsifying invoices, it’s hard to enforce. That’s the issue really.
PAUL MCLEOD: Yeah, I definitely heard the same thing with talking to different people. I mean, most people don’t, for the same reasons, want to talk on the record about their experiences. But they’ll say things like everything is for sale. Nothing comes for free. Alan Dietrich of Bendistilleryin Oregon was one of the few people who would sort of openly talk about this with me on the record. And I remember him saying that, yes, when you go to a stadium and you want to sell, in his case, his spirits, you can maybe get a meeting, but you’re going to need to have a meeting with their advertising people and here’s their advertising package. And it’s sort of implicitly understood that if you decline the advertising package, you’re just not going to get your product on the shelf.
And as you’re saying, how do we prove this? They can always say, well, we just decided that their products didn’t meet our needs. Or we just want to serve Tito’s instead? And so I don’t know. I guess I wonder whether there is maybe some sort of room. You’re right. Obviously, TTB is limited and you can’t partner with retailers who are not federally licensed. But whether they could be partnering more with FTC or even with DOJ as just some sort of sign of we’re going to take a more holistic view of enforcement here.
TEDDY DOWNEY: Yeah, I want to follow‑up. Can I piggyback on that really quickly? Because this has been a very under enforced space, particularly the TTB, which has pretty vast authority, very rarely seems to use it. And so you’ve got a rulemaking process going on there should they be revamping their sort of tools and the way that they do their enforcement.
And then you also have, I mean, a lot of these states—I mean, obviously, the FTC does have Robinson-Patman authority, but states often have similar authorities as well, as you mentioned, that aren’t used. If you have a world where the TTB—and this remains to be seen—but let’s assume for the moment that they are really serious about this competition rulemaking that they’re doing. They are serious about stopping this type of practice, put in rules to prohibit this exact type of thing, this kind of quid pro-quo situation. You’ve got the FTC and maybe states doing more Robinson-Patman enforcement. I could see a world where this these loopholes are closed pretty quickly, even if technically people think they’re legal right now. What’s your take on that, Harry?
HARRY SCHUHMACHER: Honestly, just from a personal opinion—and again, I’m not a lawyer—we have the rules in place. I don’t think there’s a need for more regulation. We have a lot of rules. It’s just getting people to follow them. And you mentioned maybe the TTB should work more with the FTC and the DOJ, and maybe they do. From my perspective, they should work more with the ABC. And what I mean by that is all 50 states, alcohol, beverage commissions and whatever they call them, it’s usually ABC. But each state has an alcohol regulatory commission and they’re understaffed. Just like the TTB is. Let’s be honest. I mean, the TTB takes in more taxes per employee than any other agency in the federal government. They’re understaffed and they’re the richest. And so, it sucks for them.
But working more with the states to enforce—because the way the FAA act is written, federal alcohol law is only active if it’s also in the state alcohol law. And so where the federal law and the state law coincide, which it does in a lot of cases, I would say most cases, that working with the states, because the state has that retailer leverage, that would make meaningful change. Because you can find these wholesalers and you can fine these producers $1, $2, $5 million all day long. It’s not going to solve the problem because the juice ain’t worth the squeeze. And it’s not enough money to change anybody’s behavior at that level. What are you going to—you’re going to tell this giant stadium somewhere, you’re going to say it’s not legal for me. So I’m going to pull out. Sorry, guys. And then just give it to your competitor who’s going to do it anyway. So the incentives are out of whack. And the only way to go is to get people to quit asking for it, to me. Cut the demand and supply is, you know.
TEDDY DOWNEY: One thing I want to talk about briefly before we let you go. We haven’t talked a lot about like retailer consolidation and just this market power of these retailers. And I want to get into a bunch—or I just want to get your take on where you get the most complaints from the industry. I mean, what have I read about complaints about Costco with wine and liquor as they’re getting into the liquor industry, particularly around pricing, low pricing. Walmart, again behemoth, when it comes to supermarket market share pricing concerns there as well. And Amazon comes up every now and again. Although, it’s kind of unclear to me what their role is. Where do you see the most complaints, the most concern, from a consolidated power in beer, liquor, wine when it comes to retailers? Total wine. I can’t believe I forgot that, but anyway.
HARRY SCHUHMACHER: Yeah, I was going to say from the wine and spirits side, total wine is the one that they complain most about. They do offer the best pricing and people wonder how do they do it? So I’m not going to speculate how they do it, but they do it. And it’s tough for the mom and pop liquor stores around the country. We don’t get any complaints about Walmart anymore. I don’t know why. But Walmart was a big boogeyman five, ten years ago. And now they’re everybody’s best friend. It doesn’t seem like they’re throwing their weight around as far as that as much. But Amazon obviously is a big threat because they do have that brick-and-mortar component. That’s not an issue, owning Whole Foods, as much as their ambitions to get into distribution.
And again, that is way not what the crafters of the 21st Amendment or any beverage alcohol regulator would have imagined. It changes the game. It looks like they’ve looked at it and they decided that it’s too much trouble, at least right now. Because any time you try and bend or get into these rules, there’s just going to be lawsuits and you’re just going to get bogged down. I mean, look at Costco. They went through ten years of lawsuits. And is it worth it? I mean, it’s up to the retailer.
TEDDY DOWNEY: What about other big supermarkets? We’re seeing a big supermarket merger attempt right now, Kroger/Albertson’s. Do you get any complaints about them ever? I mean, we just talked about Kroger being involved in some kind of scheme to come up with a de facto slotting fee. Any other complaints or chatter?
HARRY SCHUHMACHER: Mostly from Crackers. They feel like they’ll get more kicked out of more shelf space if that merger occurs. And that’s the main complaint there. Most of their stores don’t overlap so much. So it’s not like a problem for distributors. Or it’s a consolidation in each market type problem. It’s a problem of a consolidation of buying power at the corporate level where, if you want to go and get authorized to be on the shelf, it’s much harder to get a meeting with a much larger grocer like that than it would be to meet with them separately because there’s two teams. So it’s half as easy. It’s as simple as that.
TEDDY DOWNEY: Paul, any last questions for Harry?
PAUL McLEOD: No, but I do just want to highlight one thing you said a little while back, Harry, is that I think is a really good point is that this is an industry that is entirely built on self‑policing, self‑snitching, and that these concentrations of the industry means that there’s the whole fundamental principle is weakened if you don’t have anyone who’s got the incentive to snitch. And this is all happening at a time where there is this rulemaking going on and we’re at the back end of a comment period. And I guess just the final question sort of has to be, do you have any predictions of what the result of this rulemaking will be?
HARRY SCHUHMACHER: Oh, man, come on. I really—I don’t. I really don’t. I think we get the regulations we deserve. And I think the point of that article that we’ve been referencing—by the way, we put it on the outside of the pay wall if anybody wants to go read. It’s at beer@netcom. They can read it for free. But the whole point of that article is do we really want all this attention? And I would say no. But on the other hand, there are some anti‑competitive parts of the industry that could use improvement. And so, I hope that the TTB focuses on those things and we move forward.
TEDDY DOWNEY: If you don’t mind, I’m going to read from the end of your piece, which I think kind of sums up how I feel about what’s about to happen pretty well. You write whatever the outcome, the industry has primed itself to endure tightened regulatory guardrails at a minimum and are loosened for smaller players, and less likely, but completely possible, a total reshuffling of the go to market category management practices we take for granted, along with stricter and more transparent data, media and money transfer rules between and among the three tiers.
I mean, we could even do, by the way, a totally separate podcast on just the media and money transfer rules, which we didn’t really get into as much today. But again, I encourage everyone to go read Harry’s piece because he talks about FTC cracking down or sending letters out to some of these players on their marketing and social media posts.
HARRY SCHUHMACHER: Excuse me for interrupting, but I wanted to also— probably the best read on all of this is alcohollawreview.org—I think it is. The MBWA’s kind of alcohol blog. Am I saying that right?
TEDDY DOWNEY: Yeah, I think you are. I think you are.
HARRY SCHUHMACHER: I’d feel really stupid if I gave—
PAUL MCLEOD: It’s dot.com. But yes, alcohollawreview.com.
HARRY SCHUHMACHER: Okay. Sorry to cut the pacing there. But yeah, that’s a good resource. Because this is complex. Because you have the antitrust component, but then you also have the uniqueness of the alcohol structure in the United States. So you have those two dynamics working together and sometimes they don’t align. Sometimes they are in direct conflict. And we’ll see how it plays out. But no predictions beyond that. But good try, Teddy.
TEDDY DOWNEY: There’s actually a recent post on there, kind of relevant to what we’ve been talking about. “Renewed attention to Robinson-Patman Act is potentially good for state alcohol pricing laws”, April 14th Alcohol Law Review. Yeah, alcohollawreview.com.
HARRY SCHUHMACHER: Yeah.
TEDDY DOWNEY: A lot to read about, a lot to cover. We’re excited to be in the same space again as you, Harry, in terms of following this. It’s been such a pleasure to catch up and get your thoughts. And Paul, thanks again for doing this. Yeah, can’t thank you enough, Harry.
HARRY SCHUHMACHER: No, thank you guys. Great discussion. All right. I’ll see you in Washington maybe next week.
TEDDY DOWNEY: Yeah, yeah. We’re going to swing by. So hopefully we’ll see you when you’re here. Okay. Thanks to everyone so much for joining the call today. And this concludes the call.
