I was unable to get unanimous buy in to an information letter to TTB on behalf of my committee, so I submitted a letter under my own signature. If TTB establishes an investigative task force to look into the adverse effects of state regulation on the national markets, you heard it here first. Here is the text. If some of this seems a bit technical and obtuse, please remember that I am writing to people who live, eat and breathe the regulatory technicalities every day.
October 1, 2021
The Honorable Amy Greenberg
Director, Regulations and Rulings Division
Alcohol and Tobacco Tax and Trade Bureau
1310 G ST, NW, Box 12
Washington, DC 20005
RE: Docket number TTB-2021-0007, Notice No. 204
Submitted electronically via Regulations.gov
Dear Director Greenberg:
I am the Chair of the Wine, Beer and Spirits Law Committee of the Business Law Section of the New York State Bar Association but I am writing to express my personal thoughts on the request for information referenced above. I recommend the following should be addressed to further President Biden’s desire to reduce or eliminate, “threats to competition and barriers to new entrants.”
Competition/Antitrust Enforcement.
There needs to be a reinvigoration of the antitrust laws as they apply to both the production and the distribution components of the market so that the largest players in the industry cannot increase their market power, and their ability to bully the smaller market participants, by the almost monopolistic share of the market controlled by a few players. One complaint that we often hear from the smaller producers is that they cannot compete with the behemoths because the distributors demand markups so large that sales outside their local community are economically unviable. Why can the distributors do this? Because their market power has destroyed competition and they would rather deal with a few producer conglomerates. The smaller producers have limited ability to seek better deals from competitors and thus they are left with the choice of either accepting very thin margins or leaving the market entirely.
Likewise, I have often heard from retailers that they have no choice but to provide excessive shelf space for products that they can barely sell in order for the few major distributors to be willing to sell them the bottles that their customers really want. Retailers, who are beholden to distributors for product and thus are less likely to comment publicly, often tell us privately that they cannot offer what they want to sell because the largest distributors have a stranglehold on the market. Although anti-tying antitrust jurisprudence should address this issue, it does not.
Evidence of concentration of power is easy to find. According to the Wine Analytics Report, the top two wine distributors in the United States accounted for more than half of the retail sales of domestic wines in 2019. Both of those companies are also significant participants in the spirit distribution business. Although there has been an increase in the number of producers, from craft brewers to boutique wineries to artisan and small batch distillers, the concentration of distribution power, combined with the requirement in many states that producers do business through distributors, limits the ability of these new and emerging companies to get their products into the hands of consumers.
Byzantine state regulation does not help, but the concentration of power in the hands of a few nationwide distributors makes things worse. The FTC, in 2019, quashed the merger of the second and third largest wine distributors, Republic National Distributing Co. and Breakthru Beverage Group, but Republic National was able to get approval for a partnership with Young’s Market Co. and thereby solidify its position. In August of this year, Republic National entered into another “partnership” with Heritage Wine Cellars, Ltd., one of the leading independent Wine and Spirits distribution and import companies in America. These partnerships, which seem to slip through the cracks in antitrust enforcement, do nothing to increase competition and improve the ability of producers to bargain with distributor. Competition, which the major players are working tirelessly to destroy, would give the producers the ability to seek more cost-effective distribution.
This problem is not exclusive to wine. It also exists in the spirits distribution sphere, where a handful of distributors have effectively cornered the market. As Emily Pennington, managing editor at Wine & Spirits Daily, said, the distribution sector has “hit a tipping point for consolidation.” She argues that as the biggest distribution companies have grown, their mid-sized competitors have either been bought or have closed up shop because they could not compete successfully, leading to a bifurcated sector populated by a few giants and a large number of smaller, craft-oriented companies. David Stubblefield, President of Independent Distributors Network, agreed, explaining that “The top 10 wine and spirits distributors account for roughly 75% of the national market . . . a trend for the past 20 years. It has led to more efficiency and economies of scale for those companies, but has also left more niche or craft wine and spirits brands with fewer options for 3-tier sales.”
As reported by Robert McMillan, EVP of Silicon Valley Bank and founder of the bank’s Wine Division in his 2020 industry report, “finding a sustainable path to sell it [wine produced in California] to the consumer . . . has been the dominant competitive issue since 2001.” If the target is to remove barriers to new entrants, and to ultimately give consumers more choices and lower prices, then the avoidance of concentration in the distribution of product, and an increase in competitive options available will go a long way towards advancing that goal.
The issue of consolidation is not just at the distributor level. Although I have been unable to obtain satisfactory data, there is no doubt that acquisitions of smaller companies by larger producers in the beer, wine and spirits industry have resulted in consolidation among existing players on the production side. This has the effect of blunting the positive effect of new entrants joining the industry. For example, three large conglomerates, Constellation, Bronco and Gallo, each control over 100 brands. Although I cannot determine how many of these brands were internally created and how many were the result of acquisitions, I know from my own experience that many small boutique producers that I used to patronize are now subsidiaries of the mega- players.
Although I do not begrudge the right of small producers to “cash out” and sell their companies, the effect of those sales is to increase the ability of the large holding companies to approach monopolization of shelf space at the retail level. New entrants report that they are fighting an uphill battle against large holding companies that gobble up small producers. The holding companies then have the ability to sell an entire portfolio through a distributor or directly to a retailer (depending on the state regulatory structure) and thereby monopolize shelf space. The appearance of diversity in product offerings is, in many cases, illusory when so many of those product offerings are different brands offered by the major producer conglomerates.
I urge the TTB to engage in a joint effort with other federal agency stakeholders to strengthen antitrust and trade regulation enforcement, both with respect to acquisitions, anti-tying and the payment of special benefits for shelf space. If entry into the market and a level playing field are the goals, the federal government needs to take the lead in putting a stop to industry consolidation and other restrictive trade practices so that they no longer create a bottleneck for producers as well as a limitation on choices available to consumers.
I know, from discussions with others and my review of some of the other “comment” letters, that many people identify restrictions caused by the three-tier distribution system and other state legislation as major threats to competition and barriers to entrance. Although I agree with those sentiments, I recognize that the authority granted to states by the Section Two of the 21st Amendment arguably puts many of those issues outside the TTB’s control. However, further investigation and analysis of the effect of state protective legislation on the market is needed. Therefore, I urge the TTB to establish a task force at the national level to investigate the extent to which state regulation does, in fact, impinge on interstate commerce and, if so, recommend actions to be taken to generate improvement in the markets on a national scale.
This letter represents my personal opinion as both a wine collector enthusiast and an attorney with an alcohol law practice. It does not constitute a formal comment letter of the New York State Bar Association, its Business Law Section, or the Wine, Beer and Spirits Law Committee….