Brewery consolidation in spotlight: US report

A United States Government report released last week called for a “level playing field” for brewers, prompting discussion about similar challenges in the Australian beer market.

In the report, the US Department of the Treasury alongside the US Department of Justice and the Federal Trade Commission, commended the growth of new entrants to the markets, but also detailed the challenges facing small businesses from competition and regulatory perspectives, which echo those experienced by Australian brewers.

“American consumers, small business owners, entrepreneurs, and workers should not have to suffer under the thumb of a highly concentrated beer industry,” said Assistant Attorney General Jonathan Kanter of the Department of Justice’s Antitrust Division in a media release.

“Enforcement and regulatory authorities should have the courage to learn and the fortitude necessary to enforce the law and protect competition.”

The criticism of a highly concentrated beer market is one that Australian brewers will know well.

“I would agree that any recommendations that [create] a “better level the playing field for small businesses and new marketplace entrants by enforcing existing laws that promote competition and modernising outdated alcohol regulations” would be welcome here,” said Kylie Lethbridge, chief executive officer of the Australian Independent Brewers Association.

“That is the language we have used in our advocacy efforts with the ACCC and many of the matters raised in the report resonate with our experience in Australia.

“It would be ideal if our government could look at the changes to the taxation framework that have recently been made in the UK as well as the outcomes of this report as the independent beer industry is, sadly, now one of the most stymied in the world.”

Market consolidation in the US

The US Treasury report highlighted the significant growth in the number of small and “craft” producers of beer – now more than 6,400, up from a low of 89 in the late 1970s. The brewing industry has “helped build a strong global reputation for quality and craftsmanship”, and become leaders in innovation globally, it said.

However, the report raised concerns that there has been significant consolidation, in both the production and distribution of beer.

In observations that Australian audiences will recognise, the Treasury highlighted the duopoly in the market, that two major brewers have dominated the US markets since 2008, and today account for 65 per cent of the beer market nationwide by revenue.

The report acknowledged that studies have shown direct links between major brewery mergers and an ability to raise prices in the markets in which they compete. It also highlighted the exclusionary behaviour by large producers, distributors and retailers such as ‘slotting’ – a fee charged by retailers in order to stock their products.

Some regulations and laws at state and federal level were critiqued for placing a “disproportionate burden” on small and medium-sized producers “without corresponding justifications based in public health or the prevention of anti-competitive behaviour”.

It made a slew of recommendations, including to consider the impact of vertical mergers and acquisitions of craft brewers by major brewers, re-examine labelling regulations and eliminate regulatory requirements that create compliance costs.

The report has been largely welcomed by the US industry.

“We are glad to see that the report recognizes that some laws, even those originally designed for a pro-competitive purpose, have inhibited the growth and competitiveness of craft producers,” said Bob Pease, president and CEO of the US Brewers Association.

“While there remains significant work to be done at the federal and state level to translate these recommendations into improved market conditions, suggestions such as a re-examination of state franchise laws, greater direct-to-consumer access, updating trade practice regulations with an eye toward exclusionary practices, and considering the effect of small brewer acquisitions on distribution all stand to improve the ability of small firms to enter and effectively compete in beverage alcohol markets.

“The Brewers Association remains committed to ensuring a level playing field exists for small and independent brewers and looks forward to providing feedback to federal and state lawmakers on these recommendations and how they can be translated into a safe, competitive, and modern beverage alcohol market.”

Australian competition and consolidation

Australian brewers will be very familiar with some of the issues raised in the report.

Lion and Carlton & United Breweries have owned more than 80 per cent of the Australian beer market for decades, and it has only been in recent years that the craft industry has started to make even incremental headway.

The US report also highlighted the link between increasing market consolidation and higher prices from consumers.

Combining the high market concentration and the fact that in recent years, Australia has been called one of the “most profitable beer markets” globally by major players, the Australian industry could come to similar conclusions.

Consolidation has also been a key issue in recent years with the acquisitions of Balter and Stone & Wood, some of the biggest players in the independent space, as well as the acquisition of Carlton & United breweries by Asahi Beverages, which prompted the ACCC to force the company to offload a number of beer and cider brands to Heineken. The IBA warned at the time that the deal could lead to anti-competitive practices.

So too has onerous legislation, from excise obligations to Container Deposit Schemes, and many brewers have criticised tap contracts as an “exclusionary practice”.

But the situation in Australia has its own challenges.

The role of the Australian Consumer and Competition Commission (ACCC) has been of growing importance to the brewing industry in recent years as the number of smaller and independent breweries in Australia increases. But the ACCC itself has been hamstrung by its existing powers.

Asked about the report, Associate Professor Rob Nicholls of UNSW Business School explained that this report presents two opportunities to the craft sector in Australia.

“The first is to use it in a budget submission to the Australian Treasury. The second is to brief the new chair of the ACCC, Gina Cass-Gottlieb,” he explained.

The example of the US competition report could add additional weight to Australian beer industry arguments with regards to the consolidation of the market, amongst other issues.

“On 10th February, the ACCC and the Law Council of Australia hosted Lina Khan of the US Federal Trade Commission. She reinforced the problems of recent mergers in the US, which have been mirrored here,” explained Dr Nicholls.

“Lina Khan said that there is growing recognition that competition in the United States has suffered in part because our merger enforcement over the past four decades has been insufficient.”

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