Biden administration focuses on Big Beer as North Coast craft breweries compete for their share of the market

A good case study on the complexities and convolutions of the American alcohol beverage market can be seen through the lens of a beloved brewery in Mendocino County.

At Anderson Valley Brewing Co. in Boonville, brewmaster Fal Allen is overseeing the canning of the craft brewery’s newest offering: a rotating series of different flavored India pale ales designed to help capture younger consumers who favor such hoppy brews.

Chief Executive Officer Kevin McGee said he has heard great feedback on the beers ― ranging in recipes from crisp to juicy tastes ― as he attempts to revamp the brand that was a pioneer in the craft sector.

“It’s been taking off like crazy,” said McGee, a lawyer and homebrewer whose family bought the brewery in late 2019.

But the real challenge will be getting those beers into the hands of consumers in the 40 states where it is distributed.

Anderson Valley relies on more than 40 beer wholesalers across the country to get its cases and kegs of beer to retailers. Some of them are delightful to work with such as Eagle Distributing Co. in Santa Rosa that serves its home market, McGee said.

Others are not and don’t really care about the brand compared to their more lucrative contracts with big-name breweries, McGee specifically noting it took him nine months of bitter wrangling to be released from a contract from one out-of-state wholesaler. Another wanted $2 million to exit from their wholesaling deal.

“The big problem is that there's so much friction in the system on allowing suppliers to go and find who's a good fit.” “It works really only to the advantage of large brewers who can really kind of do whatever they want, because they've got market power,” McGee said.

This month the Biden administration released details on the president’s goal to reduce consolidation in the alcohol beverage market for the benefit of smaller producers and consumers. The effort notably has placed a target on the back of Big Beer.

The 63-page report by the Treasury Department serves as an opening volley on policy ideas to promote better competition in the industry in which nationwide sales were $250 billion in 2018.

The debate is especially important to the North Coast, which is home to America’s prime wine region, a bastion of top craft beer producers, as well as smaller distillers and cidermakers ― all with a significant role in the local economy from production to sales to tourism.

The report covered a vast number of issues for businesses still governed under a structure left over from the Prohibition and the 21st Amendment.

The Biden Administration viewed a major area of concern: the dominance of Anheuser-Busch InBev and Molson Coors in the American beer market.

The two companies ― which in past years had been aggressive in swallowing up smaller craft brewers ― represent about two-thirds of overall sales dollars in the U.S. beer market, which would make the market “highly concentrated” under the federal antitrust guidelines.

“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 statement.

The focus on Anheuser-Busch InBev and Molson Coors was criticized by the Beer Institute, the major trade organization with members of the two companies on its board of directors. “We are disappointed by the administration’s mischaracterization of the thriving American beer industry,” said CEO Jim McGreevy in a statement.

The next question is whether the administration will follow through on more scrutiny in the $94 billion beer sector.

The Federal Trade Commission and the Department of Justice, the two agencies that oversee mergers and monitor anticompetitive conduct, could step up enforcement. And Biden has appointed officials that have a much more antagonistic view toward anticompetitive behavior than in past administrations, most notably FTC Chairwoman Lina Khan.

“The distributor industry is very well connected in most states,” Robert Tobiassen, president of the National Association of Beverage Importers said. “The FTC probably has sufficient regulatory power now to take a harder line.”

McGee said he would have preferred the Treasury department shine a greater light on the effects that the duopoly of Anheuser-Busch InBev (ABI) and Molson Coors has had at the wholesale level beyond the two’s massive production numbers.

In contrast, his mid-size brewery produced 17,000 barrels of beer in 2021 and has set a goal for more than 20,000 this year. Only 284 breweries out of 6,406 federally permitted ones in the United States make more than 15,000 barrels annually.

Some states like California allow breweries to own wholesalers or self-distribute their beer. But even independent beer distributors tend to be affiliated with either ABI or Molson Coors and they are typically the only two options in a regional market save for a handful of smaller boutique carriers.

The report also noted two long-standing regulations at the state level where more deregulation could increase competition. It cited “post and hold” rules where wholesalers set their prices with the state and can’t lower them for a period of time.

California has a post requirement but not a hold rule. Those rules, however, do not apply for either wine or spirits sales in the Golden State.

The administration also cited franchise laws that “often restrain competition” by barring a producer from terminating a contract with a distributor without just cause.

Anderson Valley pulled out of its deal with wholesaler Harbor Distributing because of poor sales. Harbor is an arm of the Reyes Beer Division, the biggest beer distributor in the United States. Reyes has an estimated 55% market share of all beer sold in the state. Harbor later sued Anderson Valley’s parent company and the two are battling in court.

In another case, a Reyes subsidiary sued Seismic Brewing Co. of Santa Rosa for breach of contract after the brewery pulled out of its deal, complaining that Reyes wanted to impose more terms that would make it “virtually impossible” to switch distributors.

In response, Seismic filed a cross complaint alleging anticompetitive practices by Reyes. Last week, Seismic made an additional filing specifically citing the Biden administration report and noted that it helps “rebut Reyes’ arguments denying its extreme market power.”

The case has drawn the interest of state Attorney General Rob Bonta who is conducting his own antitrust investigation of the industry, according to a legal filing.

“The consolidation that's happening with distributors and Reyes is a great example … where there is basically two large distributors in the market and there's no other alternatives,” McGee said.

“I would jump in a moment if there is a viable alternative,” he added. “But switching distributors ― even after fighting about that for a while ― to go to the only really other viable opportunity is just sort of trading one problem for the same problem with a different name.”

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.

Editor’s note: The story has been updated to reflect the plaintiffs in the Seismic lawsuit.