Until just a few months ago, Argus Brewery occupied a comfortable niche in Chicago’s beer scene. The South Side brewhouse, known for its raucous tours and award-winning beers, churned out scores of ales and lagers, approaching the threshold where a microbrewery morphs into a more significant operation. It won multiple World Beer Cup medals; President Barack Obama famously stopped in for a few pints during his presidency. Its beer flowed in taps across the city.
By late May, the entire brewery was up for sale on Craigslist.
The proximate body blow to Argus Brewery was the pandemic-related economic shutdown. Without bars and restaurants to sell kegs to, it just couldn’t keep its doors open, owner Bob Jensen says. But long before the pandemic, Argus struggled with the infrastructure of an industry that is set up largely to benefit big beer producers as well as the many ostensibly small producers now owned by Big Beer. Those breweries proved able to withstand a sudden economic catastrophe. Argus didn’t.
Throughout the economy, the coronavirus outbreak has underlined the power of consolidation in industry. Our highly concentrated meatpacking industry buckled under the pressure of the pandemic, putting our national food supply at risk. COVID-19 has exposed that just one health care company controls nearly every lifesaving drug in America’s strategic national stockpile. Even Amazon struggled with the sudden reordering of consumer needs—but now, nearly four months later, its stock has never been more valuable, and its influence never greater.
But beer—beer was supposed to be different.
Countless industries have consolidated over the past few decades, but the number of companies brewing beer in the U.S. grew from about 100 in 1987 to more than 8,000 today. The democratization of beer, the story goes, happened because of a state-by-state regulatory system that clamped down on monopoly power in an industry where anyone with a little cash and a love for beer could join.
To most beer drinkers, small businesses have triumphed. Bars teem with interesting ales and stouts, and retail beer aisles seem as diverse as ever.
But the reality is not what it appears to be. Call it the illusion of choice—or the illusion of competition. Beer drinkers might see plenty of options, but in the multibillion-dollar beer industry, Big Beer companies, and distributors that are beholden to their power, use an unseen network of influence to restrain new, independent brewers and recapture profits that were lost in the craft boom.
Today, two powerful brewers continue to dominate the American beer market. Combined, Anheuser-Busch InBev and Molson Coors (called MillerCoors until this year) sell around 65 percent of all beer in the U.S. That’s about as powerful a duopoly as exists in American industry—but it’s still less than what it was 15 years ago, when 80 percent of the industry sat in the hands of the two big brewers. Myriad factors contributed to the duopoly’s slump, perhaps in particular the rise of independent craft breweries, which now account for around 12 percent of the industry.
Despite the popularity of craft beer, the two global beer titans have managed to maintain their grip on the industry largely by influencing how beer is distributed and what is found on store shelves. Almost 90 percent of beer sold in most places in America is handled by distributors whose primary customer is one of the two big brewers, giving AB InBev and Molson Coors outsize control over which beers appear on bar taps and in retail coolers. Meanwhile, the two companies have purchased about 20 smaller “craft” beer brands—brands that then fill taps and shelves where independent brews might otherwise appear.
The pandemic has bludgeoned the beer industry overall. As of May, sales at craft breweries were down 30 percent—nearly identical to the 32 percent drop in sales AB InBev reported for April. The difference: AB InBev says it is dealing with the shortfall by cutting its investor dividends, which were nearly $1 billion last year, and freezing corporate travel and facility renovations. Meanwhile, craft brewers report feeling anxious about their future and, in some cases, preparing to close for good.
The precarious position of smaller brewers weathering the pandemic is in part the outcome of their long fight against America’s beer duopoly. While lawmakers and presidential candidates call for enforcers to dust off the antitrust laws and break up monopolies in tech, agriculture, and health care, American beer drinkers deserve their own trustbusting: It’s time to break up Big Beer.
Why haven’t all those thousands of small breweries toppled AB InBev and Molson Coors? The problem isn’t starting a brewery. The barriers to entry are sufficiently low that every American city now has a busy craft-beer scene. Indeed, there are over 4,500 beer companies brewing fewer than 7,500 barrels a year. Despite the rapid growth of craft brewing, however, little about the fundamental structure of the industry has changed.
Since the middle of the 20th century, almost every state has passed laws establishing a three-tiered system in which beer production, distribution, and sales are all handled by distinctly separate entities responsible for selling beer to the tier below. Brewers contract to sell beer to distribution companies, which sell beer to stores and bars, which then sell beer to you and me. Because of a byzantine regulatory system and historical relationships, many parts of America are served by just two major distributors—one that contracts with AB InBev to sell Budweiser, and another that contracts with Molson Coors to sell the Miller and Coors brands.
These are often the distributors that small brewers must use to reach stores and bars, particularly in places with few or no independent distributors. The deals they strike are considered franchise agreements, and it typically costs hundreds of thousands if not millions of dollars to break those contracts. When a brewer chooses a distributor, it’s a permanent relationship.
It is through this system that Big Beer, but particularly AB InBev, has created bottlenecks that have kept craft rivals away from beer drinkers. Around the same time craft beer rose in both consumer demand and brewers’ supply, AB InBev began using incentive programs to encourage its hundreds of franchisee distributors to almost exclusively stock and distribute Anheuser-Busch brands, which included the core Budweiser products along with Shock Top and a few others. The company would paint distributors’ trucks, install new racks, or just hand out stacks of cash to the distributors if Anheuser-Busch products accounted for 90 percent or more of the beer they distributed. In one iteration of the program, distributors would get AB InBev cash and handouts if they agreed to only stock craft beers that brewed fewer than 15,000 barrels a year—about the size of a brewer that only sold in one state. If AB InBev’s rivals got too big, in other words, the monopolist would do all it could to stop them from reaching customers.
Neither AB InBev nor Molson Coors responded to questions about their past or existing distributor incentive programs. Federal antitrust enforcers began looking into AB InBev’s programs in 2016 and the company ended them. But at the same time, the brewery was buying its own distribution houses outright in states that would allow it, including beer meccas in California and Colorado, crushing the traditional three-tiered structure of the industry. By 2015, the company owned 21 distributors nationwide; as the company consolidated its control over distribution, craft brewers feared getting cut out of AB InBev’s national distribution network altogether.
Smaller brewers continue to share horror stories about their relationship with distributors franchised with AB InBev or Molson Coors. A former brewmaster at a small Midwestern brewery, who requested anonymity to protect his former company’s relationships in the industry, recalls signing a distribution agreement with a “red” distributor in Nebraska—in industry parlance, Anheuser-Busch–affiliated distributors are “red,” while ones affiliated with Molson are “blue.” The small brewery was promised placement in a few stores and given a few taps at local bars to introduce the brand to drinkers. But when it checked back to see how the beer was doing, it found that the promised six-packs were never delivered to the stores, and the taps were quickly replaced by IPAs from Goose Island, a craft label owned by AB InBev.
It’s called “sitting on brands,” says Bart Watson, chief economist for the Brewers Association, the independent craft beer industry group. This occurrence—distributors being affiliated with one of the two big brewers stifling smaller craft brands—happens often enough that independent brewers see it as just another obstacle they face in getting to market, particularly in the nearly 20 states that still do not allow self-distribution. “That’s a challenge for our members,” Watson says. To win broader distribution, he says, craft brewers often must use either an AB InBev or Molson Coors distributor. AB InBev distributors typically offer less space to independent brewers, because distributors can simply stock AB-owned “craft” brands. That leads to bottlenecks at Molson Coors distributors, where independent brewers cluster in hopes of reaching shelves and taps. If those Big Beer distributors decide to sit on your brand, Watson says, “then you have no options.”
Jensen, from Argus Brewery, tells a similar story. Argus was approached early on by Chicago Beverage Systems, the local subsidiary of Molson Coors–affiliated Reyes Holdings, the largest beer distributor in America and the country’s eighth-largest privately held company. Jensen says he was flattered that such a major player would be interested in his brewery—but he quickly realized the distributor was not actually interested in trying to get his beer into more bars and stores. Sales languished, and when Jensen tried to leave to find a new distributor, he learned it would cost a multiple of the brewery’s total sales to do so. Argus and Chicago Beverage Systems eventually parted ways, but the brewery struggled to recover. By the time Argus found a distributor that would actively sell its beer—Louis Glunz, a Chicagoland-based operation—it was too late, Jensen says.
Ideally, a craft brewer that wants to grow outside of its home market would join a bigger, independent distributor that operates without a relationship to Budweiser or Miller. An unbeholden distributor focused on smaller brands can embrace its role as both a wholesaler to bars and restaurants and as a promoter of small-batch beer makers that don’t have a marketing budget of their own. While independent distributors exist and are praised by craft brewers, most are local in scale and struggle to place beers in the same retail and restaurants that the big distributors do.
“They don’t care about us,” Jensen says of distributors aligned with the two major brewers. “What they care about is selling Miller or Budweiser. Because that’s their most profitable product. Craft beer was just a necessary evil, because craft was growing and taking over sales.”
The retail industry, like so many others, has itself undergone drastic consolidation over the past 20 years. Today, Big Beer buyers like Costco, Kroger, Walmart, and Target require distributors to carry the variety customers want, from American light lagers to Mexican imports to a host of IPAs, porters, and sours. But Big Beer had an answer for that demand: If you can’t beat craft, buy it.
Since AB InBev acquired Chicago craft beer mainstay Goose Island in 2011, both AB and Molson Coors have collectively spent hundreds of millions buying scores of craft breweries, including some brands deeply ingrained in the craft scene, such as Wicked Weed in Asheville, North Carolina—now owned by AB InBev. The corporations’ plan, according to economists studying the industry, was to exploit their power in production and control of the distribution system to sell beer that customers would identify as “craft” at the expense of their truly independent rivals.
The wholly owned AB InBev “craft” brands such as Goose Island, 10 Barrel, and Elysian, as well as Molson Coors’ Blue Moon and others, can brew more beer and secure nationwide distribution. They can afford to brew new, strange beers and generally expand the kinds of beer they offer. In that sense, being owned by a major producer benefits their admirers. But this comes at a cost to independent rivals.
The AB-owned brands are flush with capital and can use that cash to dominate the beer supply chain. They rely on AB InBev’s incredible power as a buyer of ingredients to cut their cost below what their rivals could hope for. They can sell a six-pack of IPA or pale ale below what their independent rivals charge. They can step into places like farmers markets or brewpubs that state laws intended to house independent brewers and pretend like they’re just another local beer maker.
Faced with all this, some craft brewers have stopped trying to maintain independence and instead have made themselves targets for takeover.
Three years ago, the owners of Atwater Brewing, Michigan’s fifth-largest beer maker, switched distributors from Kalamazoo’s Imperial Beverage to the Michigan-based M1 Beer Distribution Network, a collection of distributors contracted with Molson Coors. Atwater switched in order to take advantage of that network’s access to larger stores and restaurant chains around the Midwest.
Fast forward to this January, and Atwater’s reach and size had grown. Production was up from 2015, and drinkers could find its beers around the Midwest and beyond. That month, Molson Coors said it would buy Atwater. Brewbound, the industry publication, wrote that the change in distributors had “positioned Atwater as a potential acquiree of Molson Coors.” As Atwater owner Mark Reith said in the announcement of the deal, “For Atwater to continue to grow, it will require both capital and brewing expertise.” It got both.
AB InBev and Molson Coors also flex their muscle in the raw materials needed to make beer—particularly for malting barley and hops, two core beer ingredients. In South Africa, farmers have filed an antitrust complaint against AB InBev for abusing its power by pushing the price it would pay for barley below competitive levels. Before AB InBev successfully merged with SABMiller in 2017, its rivals and farmers feared that the combined brewer would use its outsize buyer power to crush its smaller competitors and producers. And in the months after AB InBev’s megamerger with SABMiller closed, AB InBev was accused of withholding a sought-after South African strain of hops it acquired in the merger from rival craft brewers.
The barriers for craft brewers stretch all the way to the store shelves. In a nearly unbelievable agreement between megaretailers and the beer industry, nearly every chain supermarket, drug store, liquor store, and big box in America relies on representatives or wholesalers for either AB InBev or Molson Coors to design and stock their beer aisles. This system, called “category captains” in the retail industry, ensures that any small craft brewer that wants shelf space must first pitch its product to the beer duopoly, which might, out of maybe some sense of generosity, recommend that retailers stock it.
It’s a preposterous system. And in a world where AB InBev and Molson Coors themselves own multiple craft brands, those category captains can simply recommend to retailers their own brands—providing customers with the illusion, but certainly not the reality, of choice. In a memo to its members, the Brewers Association lamented that “many breweries must operate knowing that a person employed by a direct competitor will substantially or entirely determine the outcome of these critical decisions.”
Some cracks in the wall have formed. First, beer as a whole is declining in popularity, challenged by White Claw and other hard seltzers, the most popular of which are owned by companies other than AB InBev and Moson Coors. The growing popularity of Mexican imports, owned almost entirely by Constellation Brands, has taken market share away from everyone including the megabrewers. And the use of category captains may finally be falling out of favor, as Kroger and other retailers have begun to rely on their own data to stock shelves—mainly for food, but sometimes for beer as well.
And yet. AB InBev and Molson Coors still sell the five most popular beers in America. Seltzer accounts for less than 3 percent of the total beer and cider market, and AB InBev seltzer brands are gaining traction there. With its megamerger with SABMiller complete, its control over distribution, and its host of in-house craft brands, AB InBev continues to wield vast power over the beer business.
Rather than block the AB InBev merger with SABMiller outright in 2017, the Department of Justice instead imposed some restraints on the company that have largely failed to quell the consolidated company’s power and control of the industry. Incentive programs for beer distributors remain common, both from AB InBev and other big brewers. And the beer titan has continued acquiring its competition. In August 2019, it bought out Platform Beer Company, a fast-growing craft beer maker. And earlier this year, it agreed to buy the ninth-largest beer maker in the country, Craft Brew Alliance, which is itself a rollup of eight independent craft breweries. The Justice Department is now reviewing the deal, and Craft Brew Alliance plans to sell off its stake in the Kona beer brand in Hawaii to quell antitrust concerns. The agencies, under their current lax enforcement standards—supported by both Democratic and Republican administrations for the past 40 years—will likely shrug at further concentration.
The beer industry, like so many others, demonstrates the failure of modern antitrust to prevent monopolies from both growing and abusing their power. The solution, then, must be structural. The antitrust agencies should stop any further consolidation in the industry. Smaller brewers should be allowed to compete freely, rather than simply angling for a Big Beer buyout because it is the only way to expand beyond their narrow confines.
That AB InBev can own even one beer distributor feels wrongheaded; it goes against the intent of many state systems to block vertical ownership as a way to resist monopoly power. Enforcers should force AB InBev to divest itself of its wholly owned distributors, and they should end the system of exclusivity and franchise relationships that limit the number of distributors and the ability for independent brewers to switch if they’re getting a bad deal. And the category captain system is wildly inappropriate; regulators should step in to ensure retailers and distributors unbeholden to the major breweries are responsible for choosing which beers customers find on store shelves.
While the pandemic has hurt the beer industry, COVID-19 certainly hasn’t stopped anyone who wants to drink a beer from doing so. The pandemic won’t last forever, but all over the economy small businesses like breweries are on the brink of closure. If, for the past decades, small-scale breweries had better access to the market, lower-cost supplies like hops and malt, and a national regulatory system that supported small brewers’ ability to sell beer themselves, maybe they’d be better able to withstand the storm they currently face..
Beer is supposed to be a bastion of economic democracy, and it truly could be. It’s long past time that regulators made the industry one we all want to toast—preferably with a dry-hopped sour, bohemian-style pilsner, or coffee stout made by the American little guy.
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