Budding Empire

We have commented on the anti-competitive nature of the beer distribution system in NY State; and, in particular, the fact that one of the world's largest brewers Anheuser-Busch/Inbev operates a branch distributor in three NYC countires-Manhattan, the Bronx, and Queens. In effect, in these three boroughs we have, courtesy of the territorial monoploy contracts that franchise wholesalers have maintained, a foreign company dictating to the locally owned independent wholesalers and their retail customers.

The arguments by the franchise wholesalers against a beer distribution bill (A-5001) sponsored by the Empire State Beer Distributors-the association of the independents-is that the legislation would disrupt the three-tiered distribution system that has been designed to protect local franchises against the predations of out-of-state brewers.

But if these brewers start to absorb the locally owned companies, how sacred is the three tiered system? And why should NY State go out of its way to protect a system that is being undermined from within? And, according to Beer Business Daily, this is what's about to happen on a very large scale: "There are ill-winds blowing from Europe. In a shocking revelation from across the pond, London-based UBS beverage analyst Melissa Earlam (via UBS analyst Kaumil Gajrawala in the U.S.) writes in a note to investors early today that AB InBev may be looking into shipping beer "direct" through expanding company-owned branches, to retailers in certain markets in the United States, up to 50% of its volume. This revelation was delivered to UBS analysts and investors last week in Belgium by ABI chief Carlos Brito and other top execs."

So now, if this trend continues and is mimicked by the other multi-national brewers, as we believe it will since AB has always been the industry leader, we will see the elimination of both franchise as well as independent wholesalers in New York. As BBD reports:

"While there is a "wide variance in application of regulation on alcohol on a State by State basis," writes Mel, "some States allow brewers to own wholesalers. ABI is currently reviewing the potential for direct distribution in the US. A-B already has 13 company-owned distribution companies, and 7% of its volume is done through direct distribution, though this ownership is more accidental than due to a deliberate strategy." It turns out that A-B's "accidental" strategy of buying up branches provided the number crunchers in Belgium with enough fodder to move forward. Melissa writes that when InBev purchased A-B in summer 2008, "ABI had thought that 20% direct distribution was possible in the US market. ABI now believes in theory 50% of volumes could ultimately be sold through direct distribution (not necessarily in 50% of States - some States such as California could do 100% and other States zero)."

If this comes to pass-and other brewer stakes already exist in some local franchises-then we will be looking at a monopolistic distribution system run exclusively for the benefit of multi-national conglomerates. It thus appears to us, that franchise wholesalers may have more in common with the independents than they would, perhaps, like to believe.