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Thursday, March 11, 2010

The Upside of Three Tiers

Nothing kills traffic as effectively as posts about beer distribution, but there's a case in Chicago I can't avoid. Before your eyes glaze over, read on--it's fascinating stuff!

At issue was an effort by Anheuser-Busch Inbev (ABI) to buy a local distributor in Chicago. Following Prohibition, beer companies were required to sell to distributors who in turn sell to retailers--a "three-tiered" system designed to limit brewery dominance (backgrounder here). Things were humming along on the Chicago deal until it reached the Illinois Liquor Control Commission.

The seven-member Illinois board ruled that Anheuser, as a company based outside the state, can't control a distributor in Illinois.... The commission said Anheuser—which is based in Leuven, Belgium—couldn't buy the 70% of City Beverage that it doesn't currently own, or it would revoke City Beverage's license to distribute beer in Chicago. City Beverage, which distributes the bulk of Anheuser's products in the Chicago metropolitan area, is part of Detroit-based Soave Enterprises. Anheuser and Soave were close to wrapping up the deal last month before the commission expressed concerns.

ABI is fighting back, of course. They are already allowed to own distributors in other states, and given that sales are flat or falling for macro beer, the only way to increase share is to strong-arm it from the competition. And here's where things get interesting. ABI doesn't really have a credible argument; the Illinois LCC ruled to limit this sale because it would effectively undermine the effectiveness of the three-tier system. ABI's response? Pretty much to agree:
Anheuser, the largest in the U.S. by sales, wants to own the Chicago distributor outright so it can improve its performance and make the brewer more competitive in the Windy City with MillerCoors LLC. MillerCoors, a joint venture of Molson Coors Brewing Co. and SABMiller PLC, is the nation's No. 2 brewer, but it has long led the Chicago market.
I have lots of problems with the three-tier system, which generally hurts small breweries. But where it is clearly needed is in protecting competition among players in the market. I've written about how the tied-house system in England may be one of the reasons pubs are dying off in such stark numbers. Control of the American beer market is now down to just three major players (craft breweries, in total, command just a micro 4.3% of the market), and ABI wants to take an even larger piece of the pie. Congratulations to the Illinois Liquor Control Commission--rulings like theirs will make it harder for the Belgian giant to consolidate power.


  1. I think the Chicago authorities, in asserting that ABInBev is Belgian, somehow missed the soaring bald eagle in the logo - what is more American than that?!?

    As an economist there is a tension in what we call the double marginalization of the beer industry (more layers means more 'cut' for the actors and higher prices for consumers), and the clear economies of scale implications that would hurt small brewers if they self-distributed.

    Don't know the answer - but I have heard craft brewers assert strongly (contrary to your assertion) that independent distributers are vital to their economic success.

  2. A little fact that didn't get into most news stories is that one of Jesse Jackson's kid has a competing beer distribution business.

    Chicago politics....

  3. Patrick, on the point of craft breweries and distributorships: it's complex. In Oregon, we have an anomalous situation--but even here breweries like Pelican had to change the law to make it work for them. In cities where there are just a few craft breweries, it's very different--of so brewers have suggested to me, soto voce.

    Anon, beer distributorships are cash cows that are often twined with power and politics. Cindy McCain, to use an example from the other side of the aisle, is the heiress to a massive A-B distributorship fortune. Seedy business, quite often.

  4. On that last comment--I'm not suggesting either Cindy McCain or Jackson are involved in corrupt activities. But the intersection of beer distribution, corruption, and political pay-offs is a much trafficked one, historically.

  5. A-B distributing their own product in Illinois does absolutely nothing to advance the prospect of Tied Houses. Illinois has numerous laws in place that prevent other tiers form having too great or corrupting influence on retailers or taverns. This isn't 1910.

    Furthermore, preventing an out of state brewer from distributing its own wine does nothing to advance the goals of the three tier system.

  6. In his book 'Empire Express: Building the First Transcontinental Railroad', David Haward Bain notes [something to the effect] laws codify an advantage to a special interest group.