Published on Dec 17, 2021
Tim Wu, a special assistant to the president for competition policy, at a recent town hall discussion organized by American Economic Liberties Project identified distribution and vertical integration in alcohol markets as problems that he hoped that an upcoming study and rulemaking from the Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) would address.
“Efforts to try to restrict distribution to ensure that beer stores or restaurants or bars or stadiums only serve the products of the big guys,” are a concern for the administration, said Wu, adding that “Congress in the 1930s made alcohol into an industry where vertical integration is very difficult, and I think that’s in many ways had a good effect on the flourishing of this industry.”
The administration is hoping to address these concerns through a multi-agency effort, Wu said. “The Treasury and the TTB and the Justice Department and the FTC are working together to understand these industries better, to try to understand the kind of distribution blocks that are coming up, and see if we can rewrite some of the rules in this area to improve things.”
Wu’s comments point to several areas of concern—access to distribution, vertical integration, and agreements that favor or provide exclusive access to big producers—as likely targets of rulemaking or other administration action.
The FTC deferred comment to Treasury and the TTB did not respond to repeated requests for comment.
The DOJ also did not respond to a request for comment.
Competitive concerns over category management. Experts said that category management, a practice in which big retailers partner with big producers or captive distributors to place product on shelves in a way that favors big producers, lines up with Wu’s concerns with vertical power and restrictive distribution agreements.
The glaring concern with category management is the obvious conflict of interest and competitive implications of a big retailer partnering with a big producer that allow the producer—oftentimes beer industry No. 1 Anheuser-Busch InBev (BUD)—to put its product in the best retail locations, typically at eye level or next to a very popular product.
A famous example of the problems associated with category management appears in the 2009 documentary Beer Wars.
“Each set captain is going to in large measure look out for their brands and perhaps even not look out specifically for other people’s brands,” said New Belgium Brewing founder Kim Jordan in the film. In 2009, 75% of category captains for top grocery chains worked for Anheuser-Busch, the documentary says.
A Midwestern craft brewer, who asked for anonymity over fear of retaliation, told The Capitol Forum that the system is tantamount to telling small brewers to pitch to AB InBev for shelf placement.
In one instance, the brewer said that a change in shelf placement resulted in over $40,000 in lost sales, and said that he knows of breweries that have suffered a 40-50% loss in sales due to changes in placement. Ultimately, although most individual changes have a marginal effect, they add up to significant advantages for the category captain’s company, he said.
“Because beer is an impulse purchase, brewers say shelf placement can swing the sales volume in any store by up to 50 percent,” wrote Washington Post columnist Steven Pearlstein in 2013, in an article describing how captains place their company’s products in the most lucrative spots while sticking competitors in inferior positions.
Category management also increases small brewers’ barriers to entry, industry sources said.
Before category management became commonplace, brewers would pitch a new product at a grocery chain’s headquarters. But now those meetings are more likely to take place in meeting space set up by the category captain.
“Walking into hostile distributor you don’t work with into a room with a competitor that doesn’t have a great track record of being competitive and you’re new to this game and don’t know what you’re doing and trying to make this pitch—that’s why you’re hampered from the get-go,” said the Midwestern brewer.
Beyond shelf placement, category management gives big beer companies control over meaningful stores of data they can use to their advantage—and potentially rivals’ detriment.
The Midwestern craft brewer said that category captains purchase expensive sales data to crunch the numbers and design the shelf schematics. When a retailer needs details on sales, they request that data from the category captain, rather than examining the data in-house.
This data outsourcing by the retailers allow big brewers to disadvantage their competitors even more efficiently.
David Balto, a contributor to the FTC’s 2001 report on category management, told The Capitol Forum that antitrust authorities have increasingly become “very skeptical of companies collecting information on rivals.”
He added that AB InBev’s “long track record of anticompetitive conduct,” could put the company in the crosshairs of any future rulemaking or antitrust enforcement.
AB InBev has not yet responded to a request for comment.
Proposed solutions: Roll back 2016 decision, enforce 2016 decision, new rulemakings. Experts who criticized category captaincy identified a few potential solutions to the issue.
One part of the problem, critics said, is a 2016 ruling from the TTB that effectively creates a legal loophole to allow for category management, even though the concept seemingly contradicts the Federal Alcohol Administration Act’s prohibition on kickbacks between retailers and producers or distributors.
That 2016 rule says that alcohol producers can provide a shelf schematics to retailers on how to distribute shelf space for wine, spirits, and beer without fear of violating the Act’s prohibition on kickbacks. The ruling prohibits the kind of activities including purchasing and analyzing third-party data and using human resources hired by a producer or retailer to provide management services handling any issues with the schematic. However, the ruling specifies that malted beverages don’t have the same prohibitions as wine and spirits unless there is a corresponding state law.
“A shelf plan to shelf schematic provided under this exception is a simple sales tool offering options as to how an industry member thinks a retailer’s shelves should appear,” the TTB wrote in its ruling, adding that the bureau therefore “does not object to furnishing retailers with shelf plans or shelf schematics.”
But critics of the system said that retailers allowing alcohol producers to determine shelf space gives large breweries and other major players something valuable, meaning that the TTB should view category management as a kickback and prohibit it in new rules.
“The way [category management] is practiced, it’s being used to give things of value to retailers in order to favor certain products and exclude others,” said Marc Sorini, general counsel for the
Brewers Association, the trade group representing independent breweries. Sorini added that the TTB can justify prohibiting category management without relying on a determination of value. “You don’t need a thing of value, because if the retailer has surrendered control of its shelves to a supplier-tier industry, then everything they recommend is an exclusive outlet,” Sorini said.
“And under subsection A of the FAA Act, ‘exclusive outlet’ can be in whole or part. So it’s no surprise that biggest suppliers always get more shelf space then the market demands,” he said.
Paul Pisano, general counsel for National Beer Wholesalers Association (NBWA), said that President Biden’s July 9 executive order on promoting competition has created the perfect opportunity to revisit concerns around category management and undertake a TTB rulemaking to clarify the scope of allowable conduct.
Concerns including “inducement, exclusion, how the TTB determines similar state law, items of value, exclusion whole or in part, etc.” can all be addressed in a clarifying rulemaking, he said.
Critics also said that if the TTB doesn’t have the stomach to roll back its 2016 ruling, it should at the very least enforce it—even under the ruling, category captains often go well past providing shelf plans, particularly when it comes to sharing data, they said.
Adding extra urgency to the situation is the impending entry of PepsiCo (PEP) into alcohol markets through a Mountain Dew-branded malted beverage, critics said.
That development means that “preventing pay to play in alcohol is more important than ever,” said Pisano.
Because Pepsi is already a major player in soft drinks, chips, and other food products where slotting fees are legal, it increases the stakes for regulators seeking to prevent the company from influencing retailers to place its new alcoholic products in prime real estate via slotting fees for other products, Pisano said.
Pisano added that having the third tier of independent alcohol distributors, particularly independent wholesalers, who have incentives to sell multiple beer types helps mediate producers’ incentives—unlike in other markets in which PepsiCo is a key player.
A PepsiCo spokesperson didn’t respond to a request for comment.