Published on Nov 20, 2021
President Joe Biden’s July 9 executive order on promoting competition took the alcohol industry by surprise when it singled out beer, wine and spirits as a candidate for new rulemakings, industry sources said.
The order calls for the Secretary for Treasury, “in consultation with Department of Justice and the Federal Trade Commission,” to develop a report assessing competition in alcohol markets within 120 days.
In response, the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau (TTB) on July 28 released a request for information to solicit public comments to inform the proposed report.
That’s when the public health community realized something wasn’t right. Biden’s executive order was wide-ranging and noted its concern with consolidated power across the alcohol industry. But in one provision—and perhaps in a nod to TTB input—the order called for examining “any unnecessary trade practice regulations of matters such as bottle sizes, permitting, or labeling that may unnecessarily inhibit competition by increasing costs without serving any public health, information, or tax purpose.”
But the TTB in its request for information omitted the public health language, turning a seemingly already pro-industry provision into a deregulation free-for-all, encouraging industry to list any regulations it wants eliminated without any analysis of public health impact, alcohol health advocates said.
“It was phrased in a way that was incredibly dangerous, in that it essentially said that regulations should be reevaluated unless there is a proven public health benefit,” said Carson Benowitz-Frederick, research manager for Alcohol Justice, an industry watchdog.
Benowitz-Frederick added that the phrasing placed the onus on the public health community instead of industry. “The fact of the matter is that any industry that has the potential to severely damage or end a life should have the onus [to prove] that a deregulatory action will not enhance its ability to do so,” he said.
The TTB’s approach may signal a coming fight with anti-monopoly decision makers at the FTC and DOJ’s antitrust division. The three agencies must author the report together, and in doing so close an ideological chasm.
Previewing the fight over industry study: TTB vs. FTC, DOJ, and White House. Public health advocates and pro-competition advocates alike expressed concern that the omission of public health could foreshadow TTB’s approach to the report and subsequent rulemaking.
“This jumps out because it was really business as usual for TTB,” said David Jernigan, a health law and policy professor at Boston University who specializes in alcohol, who pointed out that the TTB has a liaison for the alcohol industry but no liaison for the public health community. “I see it as completely predictable activity from an agency that only listens to one set of mouths.”
TTB’s views on taxation and the role of public health are indicators of the bureau’s narrow worldview when it comes to understanding alcohol market competition.
Historically, the TTB has seen its role as strictly adhering to taxation. The agency has more than 500 employees, and defines its role as to “[b]oth serve to support economic growth and stability…and [ensure] that lawful U.S. alcohol businesses are competitive and thriving in the global marketplace.”
“It’s easy to take a step back and say we’re a tax and trade bureau and we’re not focused on public health, but if you look at the work they’re overseeing and in a lot of way they’re the arbiters of this three-tier system…all of that has to do with public health,” said Sparks. Put differently, Sparks said, alcohol taxation, marketing, and distribution have significant effects on consumption, and therefore public health.
In fact, the bureau’s 117-page annual report for fiscal year 2020 mentions public health just once—as it relates to the COVID-19 pandemic. In the prior fiscal year, the annual report had no acknowledgement of public health.
Title 27 of the U.S. code governing alcohol requires a permit to engage in the alcohol business (excluding retailers and breweries) but doesn’t mention public health. However, the statute section regulating relationships between alcohol industry members or “tied house” regulations—which bar vertical integration between retailers, distributors, and manufacturers—public health is a required consideration.
TTB director of Congressional and Public Affairs Thomas Hogue told The Capitol Forum the agency’s request was “specific” to the EO but did not respond to questions about how public health concerns will be considered in the report or subsequent rulemaking process.
Nevertheless, public health experts told The Capitol Forum that the TTB’s neglect of public health is a misreading of the law and the historical context under which it was passed.
The 21st Amendment gave states the power to regulate liquor sales and distribution, ensuring that every state had its own laws governing alcohol consumption. The amendment also requires the industry be organized into the three-tier system: brewers and distillers sell their product to wholesalers or distributors who then sell the product to retailers.
“This was good for consumers. It created diversification and it also was good for public health because no one brewer has power to change alcohol laws on their own,” said Barry Lynn, executive director of the Open Markets Institute in an interview.
The results of laissez-faire policies at TTB, DOJ, and FTC: consolidation, erosion of the three-tier system, outsized lobbying influence. In recent years, the integrity of the three-tier system has eroded as industry has pushed states to chip away at their tied house laws.
Wine delivery systems subsume manufacturing and distribution into one program and the biggest beer manufacturers also own distributors and exert influence over those they’re affiliated with. Big retailers have seen an opening in the deregulatory environment, with Walmart delivering alcohol to consumers’ doors and Costco developing its own in-house brands. PepsiCo even plans to launch its own alcohol brands next year.
In the last few decades, alcohol markets have become increasingly concentrated. Just three firms control 70% of the market for beer. Ten firms control 30% of the wine market, according to Jon Moramarco, editor and publisher of Gomberg, Fredrikson & Associates, a wine industry data and analytics provider.
Although applications for new breweries, wineries, and distilleries are at record highs, getting a competitive foothold in the market remains elusive. Since 2010, large breweries have lost just 5% of the market to smaller, craft breweries. And the big players have also been buying up craft breweries at a rapid pace to stymie the craft trend, with Budweiser brewer AB InBev seen as particularly acquisitive.
“It’s becoming much more like the cereal aisle, owned by one of two companies as the distribution market consolidates and as Big Beer buys and falsely advertises its beer as craft,” said Dan Croxall, associate professor of law at the University of the Pacific, who runs the blog Craft Beer Law Prof.
Consolidation has also led to enhanced lobbying power—for example, the Distilled Spirits Council has led a successful national campaign to convince some states to drop the prohibition on Sunday alcohol sales.
That’s led to public health harm, Jernigan, the Boston University professor, said. “We know that people are safer, we have less violent crime, less all sorts of things if the hours and days of sale of alcohol are reduced so lots of states banned sale on Sundays,” said
New leadership at FTC and DOJ, however, will likely reject the status quo analysis, urge broader understanding of competition in alcohol market, and call for a coordinated effort among the two antitrust agencies and TTB to imbue regulation and enforcement with moral goals.
Perhaps the easiest way to understand the fight between the TTB and new leadership at the FTC and DOJ is to view the bureau’s staff as continuing to embrace a consumer welfare frame—or focusing regulation efforts largely on ensuring low consumer prices while ignoring other goals. But Biden in a July speech unveiling the competition executive order explicitly rejected that approach, and his selection of anti-monopolists to lead the FTC and DOJ shows his administration’s interest in charting a new path for competition policy.
2012 New America Report shows path for different type of analysis. In 2012, New America’s Markets, Enterprise, and Resiliency Initiative (MERI) group published a report criticizing alcohol industry concentration. Tim Heffernan, who also wrote the Washington Monthly account of the alcohol industry “Last Call”, was the report’s primary author and contributors included Barry Lynn, Phil Longman, and current FTC Chair Lina Khan.
The report lays out a radically different approach to analyzing the alcohol market than the one TTB’s hinted at. Big companies’ abilities to push cheap alcohol onto society, and the attendant dangers to public health, is a key focus of the report. Similarly, the report focuses on independent brewers’ ability to access markets and provide real choice to consumers. To the report’s authors, the three-tier system is the paramount solution to the concentration problem.
The report establishes that the historic intent of the three-tier system was to “separate the activities of the retailer, the distributor, and the brewer and distiller,” which in turn “ensured that no company could consolidate sufficient power to push its product on the individual or the community, or to effectively oppose regulations and taxes.”
The report explicitly lays out a clear philosophy for considering new rules for all markets, including beer.
“If the reader is to take away one lesson, it is that making markets always also involves moral and political choices. Hence we, as individual citizens and as a society, have a responsibility to regulate our markets consciously, with care, to ensure they deliver the moral and political outcomes we desire.”
The report describes how the United Kingdom’s loose alcohol regulation laws offer “a glimpse of the hard reality of a consolidated alcohol industry, in which a poorly regulated market has resulted in a few giants pushing more and more alcohol onto consumers.” Doubling rates of cirrhosis and liver diseases in the UK since 1995 are just one consequence of the UK’s regulatory scheme, the report said.
Barry Lynn, the founder of Open Markets, and, before that, the head of New America’s MERI group continues to promote the conclusions from the report. “Traditional consumer welfare is to make beer cheaper,” Lynn explained. “Actually that’s not the goal. There’s a lot of other goals and price should come out of the market…the idea that federal policy aims for cheap beer is asinine.”
Public health advocates suggested that another federal authority helps make this point—the Centers for Disease Control and Prevention directly promotes an increase in alcohol taxes as a solution to excessive drinking. Lower prices means that everyone—from the social drinker to the heavy drinker—drinks more, contributing to significant public health consequences, explained Jernigan.
Institutional DOJ skepticism of vertical power in beer markets. At DOJ, the TTB may encounter similar resistance to its approach, given that Biden’s nominee to lead the department’s antitrust division, Jonathan Kanter, is set to be confirmed by the full Senate in the coming weeks.
Kanter appears to be a close ideological ally of Lina Khan. In a call with The Capitol Forum on October 19, Open Markets’ Lynn said “we have frankly been surprised by how fully the administration has embraced [Open Markets’ anti-monopoly] thinking,” adding that this was “evident” in Biden’s choice of Khan to lead the FTC and of Kanter to lead DOJ’s antitrust division, who Lynn described as, “a very close ally for many years.”
But it’s not just Kanter’s impending entry to the division that could point to potential DOJ pushback—some of the department’s recent consent decrees in the beer industry may provide further insight. Most prominent among them: DOJ’s 2016 consent decree with AB InBev related to the company’s proposed acquisition of SABMiller.
That consent imposed a host of restrictions on AB InBev’s future acquisitions of distributors, as well as its relationships with—and control over—its existing distribution partners. That lengthy set
of provisions is clear evidence of DOJ’s skepticism of vertical relationships in beer distribution—especially when those relationships involve a dominant player like AB InBev.
How will it all shake out? In short, it appears that the TTB will face significant resistance should it push a deregulatory agenda without a consideration for public health, and without analyzing the alcohol markets with a broader framework.
Very likely, the FTC, DOJ, and the White House—not to mention influential antimonopoly and public health advocates—will all push for a radically different analytical perspective from the TTB in the joint report.