On the surface, America’s market for beer has never looked healthier. Where fewer than a hundred companies brewed a generation ago, we can now count more than 2,000, producing a mind-boggling variety of beers. Yet just below this drinker’s paradise we find a market that has never been more concentrated. Two giants — Anheuser-Busch Inbev and MillerCoors — control some 90 percent of production.
To understand how we arrived at this seeming paradox, and what it portends for the brewer and drinker, our team at the New America Foundation took a look into the past and present structures of America’s markets for beer and alcohol. What we found surprised us. The great effervescence in America’s beer industry is largely the product of a market structure designed to ensure moral balances, one that relies on independent middlemen to limit the reach and power of the giants.
The story of this market traces back nearly a century, to 1919, when America’s citizens passed a constitutional amendment to outlaw the production and sale of alcohol. Americans soon decided, however, that the corruption and lawlessness created by the illegal trade in alcohol were worse than the mere drunkenness they had first targeted. And so in 1933 citizens repealed Prohibition.
Americans then had an opportunity to design an entirely new market system from scratch. The first task was to decide what they wanted from the market. Having concluded that “man can’t be made good by force,” citizens now aimed at a more traditionally American approach to governance — which was to seat responsibility in the community and in the individual. The new watchword was “self control.”
This line of thinking led citizens to give regulatory authority over this market to the state rather than the federal government. It then led voters in every one of America’s 48 states to divide the market into three distinct tiers of activity — brewing and distilling, wholesaling, and retailing — and to establish strict prohibitions against vertical integration. The practical goal was to ensure that no producer or seller of alcohol could become strong enough to force its products into the community or onto the individual, as had been the case before Prohibition when powerful “tied houses” were able to steamroll regulators.
For half a century this market structure proved a big success, simultaneously averting the chaos of Prohibition and the besottedness that prevailed before Prohibition. But this began to change in the early 1980s, as radical revisions to antitrust law unleashed extreme consolidation in two of the industry’s three tiers. In retail a few giants came to dominate; Costco, for instance, is now America’s dominant seller of wine. In brewing, a long series of mergers has reduced the field from more than 48 major brewers in 1981 to two.
Over these same 30 years, however, the middle tier of wholesalers and distributors proved largely able to resist consolidation. These smaller firms — usually with the strong backing of state regulators — also did a good job of keeping themselves independent of the super-brewers and super-retailers.
In most consumer goods markets in America today, two or three giants dominate — think toothpaste, eyeglasses, and soft drinks. New entrants—be it Tom’s toothpaste or Vitamin Water — can find it very hard to keep their independence for long. In large part, this is because most distribution systems — and even most shelving decisions inside the retailers — are managed by the giants.
In the beer market, by contrast, new entrants still find more than 3,000 small distributors that have both an interest in promoting new and better products and the means to do so. In this one instance at least, a market designed to yield a particular set of moral outcomes has also proved to be extremely effective at promoting innovation and variety.
Not that America’s craft brewers and drinkers should rest content. Our research also revealed that both big beer and big retail have in recent years unleashed a series of attacks on the independence of this middle tier of wholesalers and distributors. Anheuser-Busch, which controls well more than 50 percent of the market, especially has pushed hard for more direct control over distribution. Which means that, absent government action, this fragile marketplace that delivers us so much might soon vanish.
We should also keep in mind that the threat we face is not only to the variety and quality we all enjoy. As we have seen in countries such as the UK, where citizens have allowed big alcohol and big retailers to rule the business, consolidation can also threatens the primary outcome of this market — the ability of communities and individuals to manage for themselves this ever so extraordinary commodity.