Home Legal US Treasury Alcohol Reform Report—Wine Industry Implications

US Treasury Alcohol Reform Report—Wine Industry Implications

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Expect to see the federal government try to make significant changes in the way wine is marketed and distributed in the wake of last week’s Treasury Department report on concentration in the beer, wine, and, spirits businesses.

 “The one consistency in the report is that the federal government is cognizant of the need to include small producers in the system,” says C. Paul Rogers III, the former dean of the SMU Dedman School of Law school in suburban Dallas. “They see a need to give small companies a chance to get their product to market.”

The changes were proposed to deal with continuing consolidation in alcohol manufacturing and wholesaling; the report focused on beer, where the two largest producers control almost two-thirds of the market and where the distribution side is almost as concentrated. But it included wine in its recommendations, where the five biggest wineries account for about 65 percent of U.S. production and the two biggest wholesalers control about half the market.

Close-up Of King Chess Pieces On Wooden Blocks With Mergers And Acquisitions

The recommendations were released in a report that is part of the Biden Administration’s promise last July to look at concentration and anti-competitive behavior in the U.S. in markets that include alcohol, meat packing, and hearing aids.

The report noted that concentration in beer, wine, and spirits has resulted in higher prices—beer consumers alone pay $487 million more a year than they should, it said. Also, concentration can increase the cost of a bottle of wine by as much as 18 percent and a bottle of spirits by more than 30 percent. Consolidation in all three tiers, combined with what the report called “exclusionary behavior” by the biggest producers, wholesalers, and retailers, means small companies have more difficulty succeeding.

Says Michael Kaiser, a vice president for the WineAmerica trade group, which represents U.S. producers: “I think there is a realization that some producers have trouble getting their product to market and that something needs to be done to help them.”

As part of this, the report “suggested stiffer Department of Justice and Federal Trade Commission oversight, tougher enforcement of existing rules and development of new ones. …” The goal, the report continues, would be to further competition in alcohol and to provide a level playing ground for the thousands of small producers.

But making any changes would be difficult, say those interviewed for this story, since the states are responsible for much of the liquor regulation in the U.S. This includes not only drinking age laws, but licensing retailers and wholesalers. In addition, the Byzantine knot that makes up liquor regulation would not be easy to untangle even if it was all under federal jurisdiction.

Still, they say, a variety of changes are possible— and could likely come in four areas:

First, more and tougher scrutiny of mergers, including the rumored Constellation Brands-Monster Beverage deal. Rogers, the Marilyn Jeanne Johnson Distinguished Faculty Fellow and professor of law at SMU, says this is the sort of transaction that the report says may need a closer look and is part of the Justice Department’s and Federal Trade Commission’s job.

Second, trade practices—especially on the wholesale side. This was not a surprising recommendation, says attorney Seth Weinberg, a partner in Manhattan’s Weinberg Zareh Malkin Price and whose practice includes alcohol and mergers and acquisitions. Trade practices have long been a subject of controversy, and even the Wine & Spirits Wholesalers Association, which denounced the original investigation, added its support for this recommendation.

Among the trade practices that could be reformed: slotting fees; pay to play, where retailers must buy one product so they can buy another; and shelving schemes similar to the Southern Glazer’s-Kroger proposal put forth a couple of years ago. Weinberg says regulators may also look at first refusal clauses in wholesaler-producer contracts, in which the former gets the opportunity to represent the producer in another state – even if the producer doesn’t want them to. 

Third, shoring up things that work, like direct to consumer. Kasier says this was one of the most important parts of the report for wine, since there has long been opposition among the second tier to DtC.

Fourth, that the federal government will assist state alcohol regulators to assess competition in the latter’s markets. For instance, do second-tier franchise laws need adjusting? Should states be more critical of proposed mergers within their jurisdictions that don’t violate federal law but may restrict competition locally?

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Jeff Siegel is an award-winning wine writer, as well as the co-founder and former president of Drink Local Wine, the first locavore wine movement. He has taught wine, beer, spirits, and beverage management at El Centro College and the Cordon Bleu in Dallas. He has written seven books, including “The Wine Curmudgeon’s Guide to Cheap Wine.”

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2 COMMENTS

  1. Jeff,
    The original reason that the states were allowed to make their own law when repealing prohibition was because some states wanted alcohol back and some didn’t. So, the feds said you can make your own decision about what you want. Meaning, you can have alcohol or not. Your choice. I don’t they really intended it to become all these other laws that prohibit free trade and competition in the market. Any chance we could take back under the federal jurisdiction everything but the decision to sell alcohol in the state or not. Also, in what areas in would it be dry or not would be in states hands. Outside of that, the feds rule. What do you think? It would probably need to go to the supreme court.

  2. The snake pit of state laws that have developed over the years since the repeal of Prohibition,
    were based initially on consumption but further on greed. State taxation on alcoholic beverages is a BIG source of funds for the states AND influential, dominate import and wholesale companies have a secure position within the three tier system. Each layer of taxation (federal, state, county for sales tax), plus importer (if of foreign origin) and wholesaler all add to the price a consumer pays. Several of these layers apply excessive taxes/margins depending on each particular state laws. Great differences among states is nonsense. Why should an American consumer in FL pay far more than an American consumer in CA? Reform is far overdue!

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