That remark by President Joseph R. Biden should send chills down the spines of many top executives in the bev/al industry at all three levels, because the net effect of much of the merger and acquisition activity in the last 25 years or so has been to reduce competition.
Yes, we know. When Anheuser-Busch buys up craft breweries, it dramatically ramps up production, and then says this increases competition. But does it really increase competition or does it lay the groundwork to drive other craft breweries out of business?
Look at the wine and spirits wholesale sector: Thirty years ago, top spirits suppliers made it clear they wanted to simplify their route to market by dealing with one or two national wholesalers rather than a bunch of independent wholesalers. The result was that where it was common for a state to have five to 10 strong wholesalers, today there are typically just two. Yes, we know. In recent years several “boutique” wholesalers have popped up in various states, but when the brands they nurture get reasonably large, those brands run off to one of the two big national wholesalers. Those two national distributors account for more than half of what consumers spend on domestic wines.
We think the question trust-busters will ask when they look at the distribution sector — we’re thinking specifically of the bev/al business, but the question extends to the entire distribution business — is this: Why do you need a national company when the distribution business is essentially a warehouse-and-trucking business?
Turn to the wine sector, where we have seen a lot of M&A activity recently, a somewhat similar question arises: How large does a winery need to be to be an economically viable unit? And does E&J Gallo really plan to keep all those brands it recently bought from Constellation as separate entities, or will a number of them fade from the marketplace?
Our bet is that once the antitrust regulators develop the answer to those questions, they are going to deny an awful lot of applications for a merger, not just in bev/al, but also in other sectors of the economy.
Robert M. Tobiassen, the president of the National Association of Beverage Importers, notes that two specific parts of the executive order Biden signed on Friday apply to the bev/al industry. One directs the Treasury Secretary, Attorney General and chair of the Federal Trade Commission to examine the impact on small business from consolidations in all three tiers. The other directs Alcohol & Tobacco Tax & Trade Bureau to engage in new rulemaking on trade practices, rescind regulations that unnecessarily impede competition and reduce as much as possible within TTB’s authority and control barriers to market entry by smaller and independent distillers, wineries and breweries.
Biden is not talking just about preventing future mergers. He’s talking about breaking them up. He specifically cites the early 1900s when President Theodore Roosevelt “saw an economy dominated by giants like Standard Oil and JP Morgan’s railroads. He took them on, and he won. And he gave the little guy a fighting chance.
“Decades later, during the Great Depression, his cousin Franklin Roosevelt saw a wave of corporate mergers that wiped out sec- — scores of small businesses, crushing competition and innovation. So he ramped up antitrust enforcement eightfold in just two years, saving families billions in today’s dollars and helping to set the course for sustained economic growth after World War Two,” Biden said, adding:
“(FDR) also called for an economic bill of rights, including, quote, ‘the right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies.’ End of quote.”
So, you can expect Biden’s antitrust enforcers to seek to break up large corporations. We would not be surprised to see that include distributors; the argument would be that if you need a warehouse to service your customer, that could be — and should be — a separate business. In many cases, this is made easier by the national distributors themselves: They appoint a president for each state. Where you have a president, the antitrust people could argue, you should have a free-standing entity, not simply a state subsidiary.
The usual response by business is that once a merger is completed, the business operations are too intertwined to be divested easily. But that’s not going to fly: Not only can the feds cite the breakup of Rockefeller’s Standard Oil trust, but they can also cite the breakup of American Telephone & Telegraph Co. in the early 1980s.
Part of the investment case for mergers is the idea they can create new efficiencies, usually by letting workers go. That’s going to be a dangerous thing to say in Biden’s America. In his view, antitrust “is how we ensure that our economy isn’t about people working for capitalism; it’s about capitalism working for people.”
Biden also believes “We’re now 40 years into the experiment of letting giant corporations accumulate more and more power. And where- — what have we gotten from it? Less growth, weakened investment, fewer small businesses. Too many Americans who feel left behind. Too many people who are poorer than their parents.”
That certainly is the case in the media business. It is hard to make the case that what is essentially a local business benefits from being part of a media chain. In the radio-TV business, we would not be surprised to see a revival of the rules limiting the number of stations an owner can own, both in a specific market and nationwide.
We may be wrong, but we don’t think Biden’s antitrust theology will include breaking up companies that grew organically. For instance, we don’t think if a wholesaler established a branch in another state, and that branch acquired, say, 33% of the business in the state, Biden would seek to force its divestiture.
As for “the 40-year experiment of letting giant corporations accumulate more and more power,” Biden says:
“I believe the experiment failed. We have to get back to an economy that grows from the bottom up and the middle out.”
Biden has signaled a major change in the rules of the game. Ignore him at your peril.