Bottleneckers. William Mellor
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in House committees.
Bottleneckers don’t merely play defense, however. They also go on the offensive to strengthen their already-substantial positions. For example, the Wholesale Distributors of Texas decided its privileged place within the three-tier system was not enough and successfully pushed for a law to pad profits in 2013. The new law made it illegal for producers like craft breweries to charge distributors money for territorial distribution rights. For years, Texas producers and distributors had entered into agreements under which the distributor bought the right to sell the producer’s product in a particular geographic territory. Although producers were, and are, required under the three-tier system to distribute their products through a distributor, they could choose the distributor they wanted to do business with and enter into contracts granting it exclusive territorial rights. For example, if a craft brewer based in Austin wanted to sell beer in Dallas, it could enter into an agreement with a Dallas-based distributor. The brewer would then receive a supply chain (warehouses, trucks, and staff), and the distributor would receive exclusive geographic rights to distribute that particular beer in the Dallas area.
In such a scheme, if the product is popular with consumers, gaining the exclusive rights to distribute it is valuable. The distributor enjoys the exclusive right to sell the product within a territory and can move enormous volumes of an in-demand commodity free from competition. Not surprisingly, then, distributors would traditionally pay anywhere from a few hundred thousand to a few million dollars in exchange for the exclusive right to distribute in a territory. The distributor would then own the rights to the product in that territory and could resell them to another distributor in the future.
The 2013 law made it illegal for producers to charge money for territorial rights; instead forcing them to give these valuable rights to distributors for free.105 Even worse, even though distributors would be able to acquire those rights at no cost, they could sell them to other distributors for a profit. In a state with a booming craft-brew industry, the economic advantage to distributors was therefore considerable. The Texas bottleneckers worked hard to achieve this provision, partnering with state senator John Carona, who introduced the language at the end of a long and hectic session.106 The distributors testified in favor of the provision in legislative hearings and relied on already-cultivated relationships with legislators to overcome strong resistance.107 Like their bottlenecker brethren nationally and in other states, Texas distributors have invested heavily in state politics. From 2009 to 2012, distributors in the Lone Star State gave $7 million to legislators, dwarfing the $17,924 given to them by craft brewers. Carona alone received $135,000 from alcohol distributors during that period, the second-highest payment received by any Texas lawmaker.108
Meanwhile, in the same year, more than 1,700 miles away, some New York distributors were on the verge of realizing their own beneficial scheme, even sacrificing some fellow bottleneckers in order to strengthen their position. In February 2013, New York legislators introduced similar bills in the Assembly109 and Senate110 to require that all alcoholic beverages sold by distributors in New York remain “at rest” in warehouses in the state for twenty-four hours prior to delivery to retailers. The target of the bill was at least 150 New York distributors that had warehouses in New Jersey, where space was vastly cheaper than in New York, and that delivered directly to New York City restaurants and retailers.111 The main beneficiaries of the legislation were New York’s two largest distributors, Southern Wine and Spirits and Empire Merchants. Because the law would have required those distributors with warehouses in New Jersey to spend enormous sums of money to rent or build climate-controlled warehouses in property located among some of the most expensive real estate in the world, as many as one hundred of these distributors might have been forced to close.112
If these bills had passed, they would have left more of the field open for Southern Wine and Spirits and Empire Merchants, both of which made significant contributions to New York politicians. Southern contributed almost $30,000 to New York lawmakers during the 2012 election year, while Empire contributed more than $330,000 to New York politicians during the same time.113 The bill’s Senate sponsor, Jeff Klein, received $53,000 in campaign contributions between 2009 and 2014 from Empire Merchants and some of its senior leadership.114
THE REAL EFFECTS OF BOTTLENECKING
In their efforts at self-protection, the distributors in the alcohol industry—like bottleneckers of all industries—have defended their government-enforced monopoly interests, and continue to do so, by using claims that they are protecting the public and serving a civic good. On the heels of the 2005 Supreme Court decision to overturn the direct sales ban, for example, Nida Samona, chairwoman of the Michigan Liquor Control Commission, said the decision was a setback for efforts to battle underage drinking. Her commission successfully urged lawmakers to ban direct shipments for both local and out-of-state wineries. “[This] protects the class we are fighting for—to make sure minors cannot purchase and consume alcohol before they are of age,” she said.115 Moreover, according to Craig Purser, president of the NBWA, the three-tier system aids in tax collection, maintains an orderly marketplace, and prevents overconsumption and related problems, such as underage drinking and drunk driving.116
Evidence of such benefits, however, simply does not exist. In fact, when pressed to substantiate their claims, three-tier proponents are forced to concede the truth. In legislative testimony, John Peirce, chief counsel for California’s Department of Alcoholic Beverage Control, admitted,
I haven’t specifically studied or have any data to back me up. . . . [I]s there a cause and effect relationship here? I don’t know. . . . You know, we are happy with what we see out there by and large.117
Even when stakes were at their highest, three-tier advocates could not cobble together enough convincing evidence to support the benefits. In Juanita and David’s case before the US Supreme Court, attorneys for the states asserted the aforementioned benefits of regulatory systems but could not substantiate their claims in any way that proved compelling to the court.118
On the other hand, there is plenty of evidence for the negative economic effects of alcohol bottlenecking. For consumers, the three-tier system restricts the diversity of available products and forces them to pay more.119 Conservative estimates put the distributor markup on alcohol at somewhere between 15 and 25 percent,120 with some appraising it as high as 30 percent, earning wholesalers the title of “fat cats” from small alcohol producers.121 As Deb Carey of Wisconsin’s New Glarus Brewing put it, “This debate boils down to the fact that the wholesalers do not want a drop of beer going to market . . . without them making their 30 percent profit from it. That’s it.”122
In fact, as analysts cited by the Federal Trade Commission concluded, the alcoholic beverage industry in the United States has “the most expensive distribution system of any packaged-goods industry by far, with margins more than twice those in the food business.”123 Additionally, by limiting the number of businesses that are issued permits at each tier and prohibiting out-of-state producers like Juanita and David from selling within their borders, states can control the types and amounts of alcohol sold. Bottleneckers assert that these burdens to the market are outweighed by the benefits to public health and safety, but, as discussed, little evidence exists to suggest that the three-tier system promotes such benefits.124
Small family producers like Juanita and David feel the harm caused by the bottleneckers. Despite the increased demand for a greater diversity of products, small producers struggle to place their products on the shelves.125 Burdensome state laws continue to make interstate commerce difficult, and distributors have little incentive to expend efforts and resources to distribute products with comparatively small returns on investment. Although Internet wine sales and microbreweries have expanded options for some consumers, these products represent a tiny fraction of the alcohol market and pose little threat to the dominant position of distributors, which continue to wield their considerable clout to maintain that dominance.126
BOTTLENECKERS OF A DIFFERENT BRAND
As will be demonstrated in the chapters that follow, distributors are not alone in their use of government levers for personal gain. Although our