Hi friends, I’m momentarily giving up on part 2 of stablemania because if I devote one more neuron to crypto I WILL go insane. See this LinkedIn conversation I had the other day with a normal person:
My quest to write about something fun and relaxing brought me to my favourite weekend activity: Prancing my pretentious prick self around local breweries. In the last 2 years, I’ve gone from only buying beer as a St. Patrick’s Day decoration to truly enjoying a cold one. Am I a bandwagoner who took up local brewery hopping in a quest to adopt the snobbiest hobbies known to mankind? Certainly. Curb your judgement for a breath to appreciate that the beer industry supports new entrants that are now booming against all known laws of capitalism. In seemingly every consumer retail industry, huge conglomerates snack on new entrants for afternoon tea by undercutting and out-advertising through economies of scale. That is, every industry except beer recently: where the top 4 beers have always been Bud Light, Coors Light, Miller Lite, and Budweiser:
Our storied new entrants, craft breweries, which are defined as producing fewer than 6 million barrels per year, have been cited as the reason for the decline in sales for big name brewers.
Trunzo estimated that sales of premium light beer have been down about 4 to 5 percent a year in his stores. Meanwhile, sales of wine, spirits and craft beer have increased. Customers who used to buy a 24-pack of Coors Light are now getting a 12-pack — along with a sixer of craft beer. — Chicago Tribune
This employment chart should give you a sense for how craft breweries have exploded onto the scene in recent years and are now a growing economic force:
Market conditions are so good for craft brewers that in New York State alone 440 craft brewers have set up shop. I started thinking about the ways in which people were incentivized to quit their jobs and start fermenting wheat. The simplest was just a matter of trends and tastes: The appeal of big brand beer is entirely that it tastes the same no matter what. Introducing funky sours, juicy hazy IPAs, flavourful saisons serve as new products to capture audiences that traditionally have never been beer drinkers, expanding the beer market in its entirety. This explanation is supported by the chief economist at Brewers Association, who says:
At the end of the day, the craft-beer movement was driven by consumer demand.
In a piece for the Atlantic, Derek Thompson identifies an ongoing consumer trend of paying more for higher quality products elsewhere: It’s common to see $5 cups of drip coffee, or $20 “healthy” takeout from Sweetgreen. These trends and the hype around craft beers may be enough to convince yet another entrepreneur to launch their own brewing operation, but why don’t big name brewers just create the same product diversity and undercut small brewers?
The 21st Amendment. That’s kind of a sexy answer. I learned that these new entrants are a unintended yet happy consequence of US liquor laws introduced almost a decade ago that were intentionally designed to prevent monopolies from forming and showering society with cheap beer achieved through economies of extreme scale. The story of how the 21st Amendment has allowed craft breweries to flourish today presents a compelling case for the government to intervene to prevent monopolies despite the losses from achieving absolute economies of scale. To relive this story, let’s go back to 1933, the year prohibition was repealed in the US.
The End of Prohibition
If there’s one legislative opinion I’ve developed in the short 23 years I’ve been alive, it’s that we should legalize all the stuff people sell if they’re not ultra wealthy. After years of watching Al Capone invent the concept of organized crime, the US was tired of not seeing a cent of that tax money and passed the impressively intelligent 21st Amendment. The standout element of this legislation was the introduction of a 3-tier, which was separated as follows:
The major caveat of this tiered system was that no single body could own players in other tiers; For example, if you were a beer producer, you couldn’t also be a wholesaler and you couldn’t buy a wholesaler either. Organizations in every one of these tiers had to be independent from one another, and to take it a step further, producers and retailers were not allowed to cut the wholesaler out and work directly together instead.
The tiered system was designed this way in an effort to control rampant booze consumption that was present in America pre-prohibition, and even in the UK today. In the UK, every aspect of the beer supply chain can be verticalized, or owned by a single controlling power. In B-school this is often touted as a silver bullet to becoming competitive in especially low margin businesses, but in essence one company can decide which products it wants to sell in its retail stores and also sell its product at dirt cheap prices without any independent players in between.
We only have to look at the UK to understand what we’d be seeing if this tiered system wasn’t implemented: We would likely see cheaper prices for our booze, but everything sold at the largest retailers would exclusively be from producers owned by a parent conglomerate. Take a look at the drinking habits of Americans and Britons, by the numbers:
Positive externalities
21st Amendment lawmakers likely didn’t foresee the explosion of craft breweries that their legislation would allow, but 2 elements of the legislation made it a perfect storm for new entrants:
Retailers who are independent from wholesalers and producers are going to pick products that their customers want to buy, and not just carry products that are owned by the same conglomerate. This leaves shelf space in liquor stores for new craft beers.
The legislation forbade producers from setting a minimum price their beer could be sold for, which meant that retailers could mark up mass produced beers and sell them for nearly the same price as local craft beers.
There are nearly 9,000 craft breweries in the US- To give you some perspective, there are just 6,090 hospitals.
ABL: Always be lobbying
This wouldn’t be a story about American industry if I didn’t detail a mega-corporation’s efforts to be as wealthy as possible. In order to monopolize in spite of 21st Amendment legislation, US beer companies had to eat each other up horizontally instead of vertically.
That meant producers buying other producers, wholesalers buying other wholesalers, retailers buying other retailers, until all of it could effectively be controlled by three dudes chilling and dictating all the beer any American would ever see.
In 2012, an article in the Washington Monthly cried out the alarming trend of American beer monopolization, stating that the 2 largest beer companies Anheuser-Busch InBev and MillerCoors produced 80% of the beer sold in the states leaving all other independents, including national independents, just 6% of the pie. MillerCoors was a joint venture between SABMiller, the world’s second largest beer producer, and Molson Coors. As you can see from the above timeline, those parent companies have further consolidated.
In 2016, Anheuser-Busch acquired SABMiller for $107 Billion dollars, and SABMiller sold its stake in MillerCoors entirely to Molson Coors. This could mean that today, 80% of the beer that is sold in the states is produced by the monster that is AB InBev. These international brewing companies will likely continue to consume each other if left unchecked, completing the process of horizontally owning most of the world’s beer production.
The size of these producers allows them to bully or even circumvent the influence of individual wholesalers almost entirely. Producers are allowed to set the prices that they sell the same product to each wholesaler, meaning that they can provide lower prices and better margins to those who do their bidding. These contract terms often involve exclusively stocking their products or even selling their business to a larger wholesaler that is aligned with the producer. Large producers also own distribution fleets, which can save costs for wholesalers who are typically responsible for distribution. Ultimately, firms like AB can dictate the exact amount of inventory and price which wholesalers sell to retailers, negating the independence of wholesalers.
Aside from bullying wholesalers, there’s also an effort being made to legislate them away. In 2011, Costco spent $22 million on a legislative initiative in Washington state that would allow them to cut a deal directly with brewers when selling booze in store. In response, citizens were greatly in favour of this initiative, with 58% of voters electing to pass it and abolish the 3 tier system. Citizen cited opportunities to purchase cheaper booze as the reason for voting in favour of this legislation.
The takeaways
Wholesalers get a lot of hate as the picture of profiting from a system in which they provide very little value, but I’m convinced now that introducing inefficiencies for companies to monopolize can have outsized impact in creating small business jobs elsewhere and can’t help but think if other industries would have more interesting new entrants if the big names were barred from verticalizing or monopolizing in another way. The race to the bottom hasn’t worked for people or the planet time and time again, yet global human rights violations, climate impact, and antitrust regulations are difficult to prosecute.
Capitalism is the greatest economic system we’ll see in our lifetimes, but we haven’t figured out a good way to introduce humanity into the balance. As a proxy, I’ll drink to more inefficient market regulation. Cheers.