Why do we ban exclusive alcohol sales agreements?

In May of this year, news reports indicated that a large beer company was facing a fine of $150,000 for violating Washington State’s ban on exclusive arrangements. After visiting two concert venues in Seattle, undercover officers determined that the venues had an agreement to only sell one company’s products. Anyone who wanted different products, even at a private event, was out of luck.

So what is wrong with exclusive agreements? After all they are a common practice for other commodities such as soda. And, other countries allow them for alcohol products.

We ban these arrangements because of our experience before Prohibition. Those agreements and other business practices led to aggressive sales that increased consumption and social problems. For potentially dangerous products, special regulations are intended to prevent sales to vulnerable populations such as youth or heavy drinkers. We also want to curtail inducements that promote high volume consumption. Such regulations are not considered necessary for other commodities which are not subject to abuse.

To help understand the problem, let’s see how an exclusive agreement works: In exchange for exclusivity, a retailer will get special prices or other benefits (cash payments, free equipment or labor, etc.) But the expectation is that the retailer will increase sales and profits for the wholesaler/manufacturer. And, of course with a reduced price, the retailer will need increased volume sales to make the same or greater profits. If these practices become widespread, you may see price wars and extreme competition that juice up sales. These are the kinds of things that led to huge social problems before Prohibition.

Because of this experience, exclusive agreements are illegal under the Federal Alcohol Administration Act and in most states.

Coincidentally, exclusive agreements are recognized in anti-trust law as an anticompetitive practice. Federal anti-trust laws such as the Sherman Antitrust Act, identify “exclusive dealing arrangements” as “impermissible activities.”

The ban on exclusive arrangements is designed to foster local alcohol markets that have a fair and even playing field. Without this ban, it is most unlikely that the craft beer business would have even started. In Europe and other developed countries, you find very little variety because of exclusive agreements. If exclusive agreements were to become widespread here, the diversity of products we have today from over 4,000 breweries could become a mirage. We could have a scenario where diverse products would only be available at the small brewpubs, but not at most of the thousands of bars, restaurants, taverns and stores. A review of the beer market in Mexico illustrates this issue. Until recently, almost all retailers had an exclusive agreement with one of the two large beer companies: FEMSA (owned by Heineken) and Grupo Modelo (owned by Anhueser-Busch).

For years, craft beer products were absent from Mexico due to these exclusive arrangements. In 2013, the Mexican Competition Commission ruled that the two large beer companies had to reduce their exclusive deals and could not exclude sales of “artisanal beer” brewed by small operators.

This has allowed some craft beer development in some areas, but as a visitor to Mexico last January, I had a hard time finding any craft or “artisanal beer” for sale. I finally found one, “El Terrible,” shown in the photo, and was told it had had only been available for the past 3 months. So there are good reasons to disallow exclusive arrangements that prevent healthy competition and discourage market practices which propel excess consumption.

Sources:

  • Toward Liquor Control, Raymond Fosdick and Albert L. Scott, originally published in 1933, republished by the Center for Alcohol Policy, 2011. * Federal Alcohol Administration Act, Title 27, United States Code and Title 27, Code of Federal Regulations
  • In 2013, Mexico’s Competition Commission ruled that both large companies had to reduce their exclusive deals over the next five years or face heavy fines. In addition, exclusive arrangements could not exclude sales of “artisanal beer” brewed by small operators. The two companies agreed to limiting exclusive arrangements to a maximum of 25% of points of sale in convenience stores and restaurants and eventually reducing this to 20%. See: “Mexico restricts brewers’ exclusive contracts” by Pallavi Guniganti, July 15, 2013.

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