DtC Shipping Is One Reform Among Many Suggested in Treasury Report

Alex Koral | February 11, 2022

On February 9, the Treasury Department issued a report on competition in the beverage alcohol industry, identifying several areas where possible reforms could foster a more level playing field for small businesses, craft producers and new market entrants. The report was part of Executive Order 14036, initiated by the Biden Administration to investigate ways to promote competition and support small businesses broadly in the U.S..

As might have been expected, the report does not itself resolve the many concerns that small businesses and consumers raised in their comments to Treasury; and some more extreme suggestions, like abolishing the three-tier system, were largely ignored. However, the report does address a number of concerns in the modern beverage alcohol industry and provides a variety of reforms that taken together could be a major benefit for the industry.

What does the report recommend?

Direct-to-Consumer Shipping

On one of the more anticipated areas, direct-to-consumer (DtC) shipping of alcohol, the report was largely bullish. While it was far-fetched to believe that the Treasury would establish a national DtC shipping system in their report (as some commenters pleaded for), the positive stance on DtC shipping taken in the report should be seen as an overall win for its proponents and the industry at large.

As the report notes, the DtC market “offers distinct distribution opportunities for small producers, opportunities for innovation, and the possibility of serving small niches.” (Page 17.) This reflects a long-established view in the industry that small producers are often unable to capture the attention of distributors and so are prevented from accessing large parts of the national market. The report notes the ill-effects this has on consumers, citing a 2003 survey by the FTC that found that 15% of sample wine products for sale online were unavailable to consumers in McLean, Virginia in their local retail stores. The report adds that expanding DtC permissions provides the ability for small producers to engage with consumers where distributor indifference currently prevents that.

While the report does encourage state legislators to actively investigate expanding DtC permissions as a boon for small producers, it does stipulate that some commenters continue to have reservations about DtC shipping, particularly as it relates to increased availability of alcohol to minors.

Even though the report notes that there has been little to no credible findings of failures in the DtC wine shipping market related to sales to minors, it does accept that it’s possible that might change as DtC shipping expands to include beer and spirits products. However, increased vigilance by carriers and shippers regarding sales to minors does seem like a more effective path forward than continued prohibitions on legal DtC shipping of beer and spirits, which only pushes such sales into black markets.

Go to market and product parity concerns

One of the issues brought up by the report that could actually be addressed relatively soon by the Trade and Tax Bureau (TTB) is the complex processes new and small businesses need to go through to get their products to market, namely in preapproval of labels and permitting. The report recommends that the TTB reexamine its current practices in these areas to focus more on steps that protect consumer health and safety, while removing burdensome requirements that large businesses, with fleets of attorneys and compliance experts can manage, but hamper small producers.

Interestingly, the report also recommends reviewing federal alcohol taxes, and removing many of the discrepancies that exist between different product types and between domestic versus foreign products. Again, large businesses may be able to navigate the tangle of tax rates, reports, and other requirements, but this is an area where smaller producers continue to struggle.

Trade practice enforcement and industry consolidation

Many of the recommendations in the report, from expanding DtC shipping and reviewing regulatory barriers to market entry, are ultimately more in the province of states to address and correct through legislation and rulemaking. But there are several long-lasting concerns the report mentions that federal agencies should take the reins on.

The report brings up trade practice enforcement as a key arena for the TTB to take action. Trade practice rules include a wide range of restrictions on how different tiers of the beverage alcohol industry—suppliers, distributors and retailers—can interact and were originally designed to prevent collusion and improper influence in the industry.

The report states, though, that many large businesses continue to act with impunity when it comes to trade practice violations. As such, the report recommends that the TTB moves forward with new rulemaking to modernize their approach on activity like category management (i.e., when suppliers as distributors can support retailers in stocking products) and to establish clear methods for enforcing existing rules. The report also recommends that the TTB use discretion in its enforcement authority and move to apply greater scrutiny on major players in the industry rather than on small producers who lack market power.

The trend towards market consolidation, with large producers and distributors engaging in a near free-for-all of mergers and acquisitions, also came up in the report. This trend has been a major concern in the industry for many years now, and despite lots of talk about its pernicious effect on smaller businesses, little has been done to address those concerns. As such, the report recommends that the TTB and the Department of Justice cooperate more closely to establish guidelines on consolidation and review more closely future mergers for their impact on the industry.

In all, the report is heartening to read and a welcome sign of the current Administration’s interest in expanding opportunities for small businesses to grow and compete in highly competitive markets like the beverage alcohol industry. Many of the concerns and recommendations the report addresses have been frequent talking points among alcohol producers and sellers for years, so to see the federal government taking a similar position and offering possible solutions is overall positive.

However, the report itself is just words, and while they are pleasant and welcome to read, as they say, the proof is in the eating of the pudding. Final judgment of its effect should wait until the TTB, state legislatures and other agencies actually dig their teeth into it.

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