Anheuser-Busch InBev just wrapped up its controversial merger with Grupo Modelo — the parent company of Corona — despite initial opposition from the Department of Justice and then last-ditch efforts of consumer groups, rejected by the court. The merger, it was alleged, would lead to higher prices and less variety in beer. Leaving aside whether these concerns were real, there is something impacting beer prices and impeding the ability of brewers to bring new beers to market: government regulations.
Delivering better beer at lower prices isn’t easy. To continue to introduce interesting new beers, brewers like Anheuser-Busch are constantly experimenting with new tastes — Christmas beers, “strawberry lemonade” beers, etc. Bud Light Lime resulted from an initial crop of 26 experimental flavors. Brewers are constantly engineering better cans and bottles that are not only pleasant to drink from but also ensure the beer remains cold and fresh during transport. But there is one common business practice that brewers are prevented from undertaking: improving the distribution of their products.
Brewers are forbidden by law in many states from distributing their own beer because the government artificially partitions alcohol distribution into a three-tier system of brewers, distributors, and retailers. A relic from the tail end of Prohibition, this system forbids brewers from selling to retailers directly, mandating that they instead use middlemen. (There are exceptions. For instance, some states allow certain microbrewers to self-distribute provided they secure a license.)
In other industries, large companies such as Coca-Cola frequently distribute their own products to stores, allowing them to cut costs by centralizing operations like truck maintenance and routing. This also allows them to ensure that delivery schedules are planned in a manner that is most efficient for them, rather than relying on third-party shippers who may have several customers to please.
But brewers like Anheuser-Busch are prohibited from doing the same, and instead must deal with hundreds of distributors, each of which has its own priorities and procedures. In many states, it does not matter if Anheuser-Busch can cut costs by 20 percent with their own trucks; by law it has to rely on middlemen (five different ones in the St. Louis area alone).
The costs and hardships imposed by the three-tier regulations also impact small brewers. Rhonda Kallman risked everything to start her own beer company. She left a top executive position at the Boston Beer Company — the brewer of Samuel Adams — and mortgaged her house to finance her vision of introducing a caffeinated beer, which she called Moonshot. She worked hard to promote it, often spending late nights promoting her beer in local bars and visiting stores to ensure her beer had the display space she was promised.
But the government-imposed three-tier system was one significant obstacle that stood in her way. “Daily, I will get a request from a consumer that wants to buy a case or two or three,” Kallman explains in the documentary Beer Wars, “[but] I cannot get it to them. We can’t ship beer because we have to go through the three-tier system.”
In a truly free market, the main thing that a craft brewer would need to do to get his product on shelves is persuade the retailer to carry it. But under today’s government-imposed three-tier system, entrepreneurs face a giant hurdle: the requirement that they go through distributors, who may prefer to sign exclusive deals with larger brewers.
How absurd is it that in many states a microbrewer is forced to use a third-party distributor to take a few cases of beer to a convenience store down the street from his brewery?
Beer aficionados debate whether the three-tier regulations favor large brewers or small brewers. But what is essential is that they impose artificial obstacles on all brewers, big and small. Especially at a time when our sluggish economy is at the forefront of people’s minds, policymakers should be bending over backward to remove government-created obstacles that impede American businesses.