Beer fanatics get bent out of shape when Anheuser-Busch InBev acquires one of their beloved craft breweries, but such transactions are not the greatest cause for concern. Industry insiders have long said that the beer behemoth is targeting the craft beer industry not only for acquisition, but for destruction. This, in response to diminishing sales attributed to the increasing popularity of craft beer.
Yesterday, Reuters broke the news that the United States Department of Justice has launched an investigation of Anheuser-Busch InBev. At the heart of the matter, incentive programs offered to beer distributors rewarding them for selling A-B brands over other products in their portfolios.
The real question, is A-B doing it to target and attack the booming craft beer industry and, if so, is it in violation of U.S. antitrust laws?
The Playing Field
In Washington, like some other states, we are fortunate that breweries may choose to self-distribute their beer. Many breweries opt to sign contracts with distributors, but it is not an obligation. Some states have laws requiring breweries to sell their beer through distributors.
Also, in Washington we have beer distributors like Odom, Click and others that are focused largely on craft beer. Some of these distributors are not at all aligned with Anheuser-Busch InBev, MillerCoors or any of the other huge beer companies. It is my understanding that many other states are not so fortunate.
In other states, the wholesale beer industry is something of a racket. Breweries must sell their beer through wholesale distributors. It’s not a matter of choice. In those states, the industry is dominated by large, powerful beer distributors, many of which are owned by, or tightly affiliated with, Anheuser-Busch InBev.
According to Reuters, of the estimated 3,000 U.S. distributors, about 1,100 are aligned with “legacy brewers” like AB InBev or MillerCoors. In recent years, while we’ve all been crying in our beers over things like the Elysian Brewing acquisition, Anheuser-Busch InBev has been acquiring more beer distributors.
Last December, in a tangentially related story, we reported on a Congressional hearing involving Anheuser-Busch InBev. In question, partially, the company’s ability to influence distributors in a way that harms craft breweries, providing incentives to reduce sales of what it calls “competing brands” within a distributor’s portfolio. That issue has now come to the forefront and is the focus of this new Department of Justice investigation.
According to the Reuters report, independent distributors aligned with AB InBev are contractually required to spend a certain amount of money each year to advertise AB InBev beers. Those include products form breweries such as Elysian, Golden Road, Four Peaks, Blue Point, Goose Island, and the other former-craft breweries that AB InBev acquired in recent years.
The AB InBev incentive program refunds 75 percent of the mandatory expenditures if its beers make up 98 percent of the distributor’s sales, according to documents provided to lawmakers by AB InBev. The greater the share of rival beers in a distributor’s sales, the less money it receives. Even if a distributor raised sales of AB InBev beers, it would still receive less money if craft beer sales rise faster.
Several people familiar with the plan told Reuters that it makes the incentives appear designed primarily to suppress craft sales rather than boost AB InBev sales. Those people spoke with Reuters on condition of anonymity to protect business relationships.
So, if you own a craft brewery and your beer is distributed by an Anheuser-Busch InBev distributor, something about which you may or may not have a realistic choice, that distributor is basically getting paid to not promote and sell your beer. In fact, they are incentivized to sell less of your beer.
Presumably, the Department of Justice investigation aims to find out if this is a violation of antitrust rules. Does this incentive program impede fair competition that benefits consumers? Are they incentivizing distributors to sell more A-B InBev products or to sell less other product? Are they using their dominant position in the industry to control and harm the consumer market?
At first blush, it seems that AB-InBev is not trying to bolster their own brands as much as they are trying to undermine other brands. If so, it is a violation of U.S. antitrust laws.
We would rather tell you stories about cool, new breweries opening and fun stuff related to the world of good beer, but news is news. We do not get to invent the stories we share. Instead, we report what is actually happening. So forgive us if it seems the Washington Beer Blog has become too focused on AB-InBev lately, but news is news.