Regulatory Capture in the Beverage Alcohol DTC and DTT Markets

By Published On: June 12, 2024

How Industry Influence Shapes the Rules and Limits Competition.

The Federal Trade Commission (FTC) is dusting off a long-latent rule, the Robinson-Patman Act, to file charges against Southern Glazer’s Wine and Spirits. This law, intended to level the playing field between small retailers and large chain stores, has been largely dormant for over 20 years. The FTC enforced it regularly until shifting its focus to consumer harm, particularly higher prices, which critics argued could result from enforcement. Despite a 1977 Justice Department report ceasing Robinson-Patman enforcement, the FTC never formally abandoned it. Current FTC commissioners, appointed by Biden, are now reviving its enforcement, emphasizing that the agency must uphold laws on the books. This move brings to light a critical issue within the regulatory landscape: regulatory capture.

Regulatory capture, where agencies prioritize the interests of a select few over the public, is particularly evident in the beverage alcohol direct-to-consumer (DTC) and direct-to-trade (DTT) markets. As consolidation has increased up to 2024, regulatory capture has only grown more pervasive. Let’s examine how regulatory capture manifests in today’s beverage alcohol market and the ways it influences the industry.

Lobbying and Legislation

Large alcohol producers and distributors have substantial lobbying power, allowing them to influence laws and regulations governing DTC sales. For example, companies like Anheuser-Busch and Diageo have extensive lobbying efforts aimed at shaping favorable regulations. This influence can result in restrictive DTC laws designed to maintain their market dominance and limit consumer choice. According to Open Secrets, $67m has been spent on beer, wine, and liquor lobbying in the United States since 2022.

State-Level Variability

The U.S. alcohol market is regulated at the state level, leading to a patchwork of laws. In some states, the regulatory environment heavily favors local distributors and large producers. For instance, states like Mississippi and Utah have the most restrictive DTC laws, making it impossible for producers to ship directly to consumers, thus requiring the three-tier system as the only method for expanded distribution in the State, granting a monopoly on distributed sales to a small number of three tier middlemen.

Licensing and Compliance Costs

High licensing fees and complex compliance requirements act as barriers for smaller businesses. Larger companies, with more resources, can manage these challenges more easily, further entrenching their market position. According to research done by Tablas Creek Vineyard in 2021, total expenses to access 43 shipping states at that time were $20,587. Prices for permits fees and the labour required for reporting have only gone up since then, pricing tens of thousands of small businesses out of the market for expanded direct sales.

Influence on Regulatory Bodies

In some cases, individuals with close ties to the alcohol industry end up in regulatory roles. This revolving door between industry and regulators can lead to favorable rulings for the industry, often at the expense of competition and innovation. A notable example is the appointment of three tier industry officials to positions within the Alcohol and Tobacco Tax and Trade Bureau (TTB), where their decisions can significantly impact market dynamics.

Public Safety and Control Arguments

The argument that strict regulations are necessary for public safety and control over alcohol distribution is often leveraged by large players to maintain restrictive DTC laws. While public safety is a legitimate concern, it can also be used as a pretext to stifle competition. Studies have shown that DTC alcohol sales do not significantly increase underage drinking or other public health issues, suggesting that some regulatory arguments may be more about protecting market share than public safety. Vinoshipper published a paper in 2022 highlighting age compliance rates across retail and DTC sales. The study found that retail establishments fail compliance checks 10% of the time, whereas DTC sales with pre-purchase age verification enabled had a 0% fail rate. Read more here – Study Linked.

Moving Forward

Deeply engrained regulatory capture in the DTC beverage alcohol market is creating an uneven playing field, where large, established companies benefit at the expense of innovative family owned craft businesses and the US consumer. By influencing legislation, leveraging state-level variability, navigating high compliance costs with ease, and maintaining close ties with regulatory bodies, these large companies can effectively limit competition and maintain their dominance.

This is exactly why on July 9, 2021, President Biden issued Executive Order 14036, “Promoting Competition in the American Economy.”, with the aim of reducing the trend of corporate consolidation, increasing competition, and delivering concrete benefits to America’s consumers, workers, and small businesses. These benefits include more choices, better service, and lower prices through a competitive market, as well as fairer opportunities for small businesses and entrepreneurs to compete. This was all put in place “to protect the vibrancy of the American markets for beer, wine, and spirits, and to improve market access for smaller, independent, and new operations,”

The FTC’s decision to revive the Robinson-Patman Act after decades of dormancy, as highlighted by their charges against Southern Glazer’s Wine and Spirits, underscores the need for a reassessment of our regulatory framework. The agency’s renewed enforcement of a rule that had not been used in over 20 years is a clear indicator of the broader issues of regulatory capture that plague the industry. Addressing regulatory capture requires greater transparency in the regulatory process, stricter controls on lobbying activities, and a re-evaluation of the public safety arguments used to justify restrictive DTC and DTT laws.

Ultimately, fostering a more competitive and fair direct alcohol market will benefit consumers through increased choice and potentially lower prices. Encouragingly, some states are beginning to reconsider their direct laws, signalling a potential shift towards a more balanced regulatory environment. The Craft Wine Association, in partnership with dozens of beverage alcohol businesses and associations, has put forward the National Direct Shipping Bill of Rights, as an update to the outdated 1997 Model Direct Shipping Bill. It outlines a number of small changes to the current industry that would increase competition, lower prices, and importantly, not do away with the three-tier system but release producers from being mandated to use it. The new system is being referred to as the three-channel system. Please consider supporting the National Direct Shipping Bill of Right, by adding your name. It is the most simple and effective way to drive change in the industry.

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About the Author: Taylor Harrison

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Taylor joined the alcohol industry directly out of college as an intern with Constellation Brands. Shortly after, he was awarded the ability to play lacrosse for Team England, so he moved to London, where he began working as a fine wine market analyst for the London International Vintners Exchange. During his summers, he would take time off to do vintage work at a nearby winery in Surrey. Taylor joined Vinoshipper, from London, in 2021 and started up the data analytics program, offering insight into the craft alcohol industry.