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Why the DOJ is investigating AB InBev

And what it means for you.
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Amid the meganews that AB InBev plans to buy SABMiller and form a global beer company too large to comprehend, another story surfaced more quietly this week, and ultimately it might have more impact on our choices when we visit the bar or the beer aisle.

Reuters reported Monday that the U.S. Department of Justice was investigating AB InBev. The allegation is that the company is buying up wholesalers in part to stifle competition from independent brewers.

The upshot of this, if true, is that AB InBev is using its massive weight to limit the variety of beers we find when we go out to drink or to shop.

When the merger happens, Miller will likely spin off into a different company that will still compete with AB InBev. Buying and influencing wholesalers “on the other hand is far more scary,” one manager from an independent distributor told me.

“Seeing inside the belly of the beast, I can tell you that AB InBev is actively trying to stop wholesalers from carrying craft beer that isn’t made by AB InBev,” the manager said. “They’re trying to get wholesalers to dump all regional craft brands (you can keep locals) and go back to being exclusively AB.”

An AB spokesperson also responded with a statement: “It is a misconception that craft growth is being inhibited in the marketplace.  That could not be further from the truth, and it is very evident that craft brands are prospering in California and have been for years.  The Los Angeles Times reports that, in California alone, there are nearly 600 craft breweries, the most of any state, according to the California Craft Brewers Association.  So the suggestion that their access to market is somehow encumbered or blocked is not supported by the facts.”

Obviously, the issues involved are complex and deserve some explanation.

Beer distributors—also known as wholesalers—play a critical role in influencing beer variety in any given locale. The so-called “three-tier” distribution system is what makes this possible in the United States.

Virtually every state has laws that restrict suppliers—that is, brewers—from selling their beer directly to stores or bars. Instead, they must sell the beer to a local distributor. Each distributor has a portfolio of brands from various breweries that they can sell to the places where we buy beer.

There are various pros and cons to this system—Mike Reis at Serious Eats did a superb job of explaining them here. One con is that any middleman takes a cut, and that means higher prices for us. One plus is that independent distributors are theoretically free from the influence of large brewing concerns and can stock what they choose—including stuff from smaller breweries. And bars are theoretically free of the same influence and able to sell you what they like—which, ideally, is what you like too.

Confusingly, some states allow beer makers to operate distributorships. When that happens, they tend to favor—go figure—the company’s own products.

It’s unclear whether buying distributors is part of a wide-ranging strategy on the part of AB InBev, perhaps hand-in-hand with buying smaller breweries. Some brewers fear that InBev is pressuring independent distributors to carry only their own products, and after the brewery acquisitions the company can offer a wider variety of its own “craft” products.

The Wall Street Journal reported that the Department of Justice investigation was related to the pending purchase of two distributors in Oakland and San Jose, California—two neighboring markets. But that’s not the only place where such purchases have taken place recently.

The Fort Collins Coloradoan published an article in August raising similar questions about AB’s purchase of two wholesalers in that area. And in 2014 in Oregon, AB bought and merged distributorships in Portland and Eugene. Some independent brewers there were dropped from the portfolio or else chose to switch to other, smaller distributors.

Such moves have “rattled the craft beer world,” according to the Reuters report, because “once AB InBev buys a distributor, craft companies say they find that they can’t distribute their beer as easily and sales growth stalls.”

It’s worth noting that distributors influence more than variety; they also influence price. The big merger might also lead to higher beer prices.

The Wall Street Journal reported that the merger would form a company that controls 30 percent of the global beer market—and we should expect more expensive beer: “AB InBev has a history of using acquisitions to boost profitability by cutting costs and steering consumers toward more expensive beers.”

Some perspective: Demand for variety continues to grow unabated. The market share of “craft”—as defined by the Brewers Association—is still just 11 percent of all beer sold in America, but it’s growing at an 18 percent clip annually. And the United States now has more than 4,000 breweries for the first time since the 19th century.

Meanwhile, the price of a Bud sixer in some places has risen to be as much as—or more than—IPAs from local independents.

It may well be what we are not seeing—with acquisitions, consolidations, and price increases—is more of the same: It’s less diabolical than it is desperate.

Editor’s note, Oct. 14, 2015: This story has been updated to include comments from an independent distributor.

Editor’s note, Oct. 15, 2015: This story has been updated to include comments from an AB InBev spokesperson.

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