Beer market needs liberty, not lawsuits

The U.S. Department of Justice wants to protect your ability to buy cheap beer. At least, that’s what it’s claiming to do in its January lawsuit to block a merger between brewers Anheuser-Busch InBev (ABI) and Grupo Modelo. The DOJ says the merger between the two large companies would stifle competition, increase prices, and reduce product innovation in America’s beer market. However, the suit ignores the ever-increasing vibrancy of the U.S. alcohol market and consumers’ ability to “vote with their dollars.” If we truly want to encourage innovation in the beer market, we ought to pursue ways to liberate small brewers and wholesalers rather than thwart the growth of larger breweries.

Reading the DOJ’s case against the proposed merger, one might think Anheuser-Busch InBev and Grupo Modelo control most of U.S. beer sales. In fact, the Belgian-Brazilian-owned ABI and Mexico’s Grupo Modelo — which produces several brands including Corona, Modelo, and Pacifico — together represent around 43 percent of U.S. beer sales. ABI is the largest beer company in the U.S., followed by MillerCoors. Grupo Modelo is the third largest. Yet as big as these beer giants are, they’ve seen their American market share shrink as craft brewers have grown in popularity. In 1978, there were only 42 breweries in the United States; by 2011, there were almost 2,000, with hundreds more in the planning stages, according to the Brewers Association. In 2007, craft beer accounted for 3.8 percent of beer sales; by 2012 that share had risen to over 5 percent.

So how can the DOJ argue that there is a near beer monopoly in this country? As The Wall Street Journal noted recently, the DOJ determines the level of competition or concentration within a market by measuring firms’ size compared to the market based on a metric known as the Herfindahl Index (HHI). The problem in applying the HHI to America’s beer market is that consumers can choose not only between a multitude of beer brands, but also other alcohol beverage options, including wine and spirits.

According to the DOJ, Grupo Modelo has gained market share by not raising its prices in line with ABI and other large U.S. breweries. This has prevented ABI from raising its prices too high too fast for fear that loyal Bud Light drinkers might trade up to the more expensive Corona if the prices were too close. It is true that were ABI to fully own Grupo Modelo (it already owns part of the company), the price of a Corona might increase, but it would make little sense for ABI to significantly raise the prices of either Corona or its other brands, as that would risk consumers switching to other options, including craft beer, which is already close in price to Corona. Indeed, more and more beer drinkers are ditching their traditional light American lagers for the diversity of options found among craft brews.

Instead of trying to prevent this change, ABI and other large brewers are embracing and attempting to capitalize on it. In 2011, ABI bought Goose Island Beer Co, a highly respected and popular Chicago-based craft brewery. Some observers feared that ABI would “kill” Goose Island by reducing its quality, but more than a year later, the consensus among drinkers is that the quality has remained the same — and even improved by some accounts. In fact, ABI expanded production at Goose Island’s Chicago facility and began to market and distribute its beers throughout the country, giving consumers far beyond Chicago more choices. It would make little sense for ABI to do anything different if it were to merge with Grupo Modelo.

Those in the craft beer movement have legitimate concerns about ABI increasing its power over wholesaling. ABI and MillerCoors have had such longstanding dominance that a large number of distributors make their living by primarily selling products from one of the two companies. About 60 percent of ABI’s distributors are exclusive — meaning they sell only ABI products.

Understandably, that situation has wholesalers, craft brewers, and craft beer fans nervous. Fortunately, it’s unlikely in today’s market that wholesalers will kowtow to big brewers by dumping craft beer. For distributors, the key to turning a profit is to make the most money per stop — that is, not how much beer you drop at each store or pub, but the money per case per stop. Because of their higher price-point, craft beers net a higher profit per case, bringing in more money per stop for distributors. If a distributor did bow to the pressure from a big brewer to only distribute its products, competing distributors would certainly seize the opportunity and pick up the dumped craft or premium beer brands.

In an attempt to address the DOJ’s antitrust concerns, ABI offered an amended deal last week, surrendering a full takeover of Grupo Modelo’s operations in Mexico. In the modified agreement, the Piedras Negras brewery, which produces Corona and Modelo brands, would be sold along with U.S. distribution rights to a wine company, Constellation Brands, Inc. This may very well sate DOJ lawyers, but exactly how much it benefits American beer drinkers is questionable.

The more effective way to preserve the vibrancy of America’s beer market is to increase the competitiveness of all three tiers of the distribution system. Brewers would benefit from laws that reduce operating costs by allowing self-distribution or cooperative distributorships with other brewers. States can increase competition by modifying state laws that prevent multiple wholesalers from distributing the same brands within a geographic region, which limits the number of wholesalers that can operate profitably in that region. States could also eliminate franchising laws that make it difficult and expensive for small brewers to distribute through wholesalers.

By making business a little easier and cheaper for wholesalers and brewers, the U.S. could increase competition and hopefully reduce costs for consumers. What the beer market needs is liberty, not lawsuits.