Last Call - Industry giants are threatening to swallow up America's carefully regulated alcohol industry, and remake America in the image of booze-soaked Britain.
England has a drinking problem. Since 1990, teenage alcohol consumption has doubled. Since World War II, alcohol intake for the population as a whole has doubled, with a third of that increase occurring since just 1995. The United Kingdom has very high rates of binge and heavy drinking, with the average Brit consuming the equivalent of nearly ten liters of pure ethanol per year.
It's apparent in their hospitals, where since the 1970s rates of cirrhosis and other liver diseases among the middle-aged have increased by eightfold for men and sevenfold for women. And it's apparent in their streets, where the carousing, violent "lager lout" is as much a symbol of modern Britain as Adele, Andy Murray, and the London Eye. Busting a bottle across someone's face in a bar is a bona fide cultural phenomenon-so notorious that it has its own slang term, "glassing," and so common that at one point the Manchester police called for bottles and beer mugs to be replaced with more shatter-resistant material. In every detail but the style of dress, the alleys of London on a typical Saturday night look like the scenes in William Hogarth's famous pro-temperance print Gin Lane. It was released in 1751.
The United States, although no stranger to alcohol abuse problems, is in comparatively better shape. A third of the country does not drink, and teenage drinking is at a historic low. The rate of alcohol use among seniors in high school has fallen 25 percentage points since 1980. Glassing is something that happens in movies, not at the corner bar.
Why has the United States, so similar to Great Britain in everything from language to pop culture trends, managed to avoid the huge spike of alcohol abuse that has gripped the UK? The reasons are many, but one stands out above all: the market in Great Britain is rigged to foster excessive alcohol consumption in ways it is not in the United States-at least not yet.
Monopolistic enterprises control the flow of drink in England at every step-starting with the breweries and distilleries where it's produced and down the channels through which it reaches consumers in pubs and supermarkets. These vertically integrated monopolies are very "efficient" in the economist's sense, in that they do a very good job of minimizing the price and thereby maximizing the consumption of alcohol.
The United States, too, has seen vast consolidation of its alcohol industry, but as of yet, not the kind of complete vertical integration seen in the UK. One big reason is a little-known legacy of our experience with Prohibition. From civics class, you may remember that the 21st Amendment to the Constitution formally ended Prohibition in 1933. But while the amendment made it once again legal to sell and produce alcohol, it also contained a measure designed to ensure that America would never again have the horrible drinking problem it had before, which led to the passage of Prohibition in the first place.
Specifically, the 21st Amendment grants state and local governments express power to regulate liquor sales within their own borders. Thus, the existence of dry counties and blue laws; of states where liquor is only retailed in government-run stores, as in New Hampshire; and of states like Arkansas where you can buy booze in drive-through liquor marts. More significantly, state and local regulation also extends to the wholesale distribution of liquor, creating a further barrier to the kind of vertical monopolies that dominated the United States before Prohibition and are now wreaking havoc in Britain.
Since the repeal of Prohibition, such constraints on vertical integration in the liquor business have also been backed by federal law, which, as it's interpreted by most states, requires that the alcohol industry be organized according to the so-called three-tier system. The idea is that brewers and distillers, the first tier, have to distribute their product through independent wholesalers, the second tier. And wholesalers, in turn, have to sell only to retailers, the third tier, and not directly to the public. By deliberately hindering economies of scale and protecting middlemen in the booze business, America's system of regulation was designed to be willfully inefficient, thereby making the cost of producing, distributing, and retailing alcohol higher than it would otherwise be and checking the political power of the industry.
When these laws were passed, America was a century closer to its English roots, and lawmakers remembered very clearly the effects that a vertically integrated alcohol industry had on pre-Prohibition America (and that it still has in the UK today). In the 1920s, Americans had learned the hard way that flat out banning drinking empowered the likes of Al Capone and was, on balance, unworkable. But it made no sense either to go back to the world of pre-Prohibition America, in which big, politically powerful liquor producers owned their own saloons and were therefore free to pour cheap booze into communities coast to coast, sweetening the doses with enticements ranging from rebates on drinks to cash loans, and frequently tolerating in-bar gambling and prostitution.
And so, for eighty years, the kind of vertical integration seen in pre-Prohibition America has not existed in the U.S. But now, that's beginning to change. The careful balance that has governed liquor laws in the U.S. since the repeal of Prohibition is under assault in ways few Americans are remotely aware of. Over the last few years, two giant companies-Anheuser-Busch InBev and MillerCoors, which together control 80 percent of beer sales in the United States-have been working, along with giant retailers, led by Costco, to undermine the existing system in the name of efficiency and low prices. If they succeed, America's alcohol market will begin to look a lot more like England's: a vertically integrated pipeline for cheap drink, flooding the gutters of our own Gin Lane.
A moment's thought makes it obvious that alcohol is different from, say, apples. Apples don't form addicts. Apples don't foster disease. Society doesn't bear the cost of excessive apple consumption. Society does bear the cost of alcoholism, drink-related illness, and drunken violence and crime. The fact that alcohol is habit forming and life threatening among a substantial share of those who use it (and kills or damages the lives of many who don't) means that a market for it inevitably imposes steep costs on society.
It was the recognition of this plain truth that led post-Prohibition America to regulate the alcohol market as a rancher might fetter a horse-letting it roam freely within certain confines, neither as far nor as fast as it might choose.
The UK, by contrast, spent most of the last eighty years fussing with the barn door while the beast ran wild. It made sure that every pub closed at the appointed hour, that every glass of ale contained a full Queen's pint, that every dram of whiskey was doled out in increments precise to the milliliter-and simultaneously allowed the industry to adopt virtually any tactic that could get more young people to start drinking and keep at it throughout their lives. It is no coincidence that one of the first major studies to prompt a shift in Britain's approach to liquor regulation, published in 2003, is titled Alcohol: No Ordinary Commodity.
The UK's modern drinking problem started appearing in the years following World War II. Some of the developments were natural. Peace reigned; people wanted to have fun again; there was an understandable push toward relaxing wartime restrictions and loosening puritan attitudes left over from the more temperance-minded prewar years.
But other changes were happening that deserved, but did not get, a dose of caution. As the nation shifted to a service and banking economy, and from agricultural and industrial towns to modern cities and suburbs, social life moved from pubs to private homes and shopping moved from the local grocer, butcher, and fishmonger to the all-in-one supermarket. In the 1960s, loosened regulations led to a boom in the off-license sale of alcohol-that is, store-based sale for private consumption, as opposed to on-license sale in public drinking establishments. But whereas pubs were required to meet certain responsibilities (such as refusing to serve the inebriated), and had their hours of operation strictly regulated (for example, having to close their doors temporarily in the afternoon, to prevent all-day drinking), few limits were placed on off-licenses.
Supermarkets, in particular, profited from the new regime. They were free to stock wine, beer, and liquor alongside other consumables, making alcohol as convenient to purchase as marmalade. They were free, also, to offer discounts on bulk sales, and to use alcoholic beverages as so-called loss leaders, selling them below cost to lure customers into their stores and recouping the losses through increased overall sales. Very quickly, cheap booze became little more than a force multiplier for groceries.
When the supermarkets themselves subsequently underwent a wave of consolidation, the multiplier only increased. Four major chains-Tesco, Sainsbury's, Asda, and Morrisons-now enjoy near-total dominance in the UK, and their vast purchasing power lets them cut alcohol prices even further. Relative to disposable income, alcohol today costs 40 percent less than it did in 1980. The country is awash in a river of cheap drink, available on seemingly every corner.
Part of the problem, too, was that Britain's "tied houses"-drinking establishments that are owned by liquor producers-have remained, in one form or another, a dominant part of the country's drinking landscape. From the time brewing industrialized in the late 1700s, brewers were permitted to operate their own pubs, which they owned outright or whose owners signed exclusive retail agreements with them in exchange for inventory discounts, no-interest loans, and other assistance. The result of this system, which also existed in the U.S. before Prohibition, was a glut of pubs, since each brewer needed its own tied house in a given neighborhood, and a race to the bottom ensued, with each pub competing to offer lower prices and lure customers in with extras like gambling and prostitutes. The problem of this beer-fueled mayhem-of the lager louts smashing up storefronts, beating up foreigners, and glassing one another-became so acute in the 1980s that Parliament finally acted to break up the tied houses, passing legislation in 1991 known as the Beer Orders.
But intense industry lobbying quickly watered down these reforms, and the result was a bitter farce. In the end, brewers were allowed to keep many of their tied houses, and wound up effectively controlling the rest through exclusive retail agreements and other corporate maneuvers. Some brewers simply split in two, with one side retaining the brewing operations and the other responsible for sales. Many other brewers instead sold off their brewing operations and repurposed themselves as giant landlords-cum-barkeepers, while continuing to enjoy exclusive-and lucrative-relations with their former partners. The Beer Orders thus had the unintended consequence of actually catalyzing comprehensive conglomeration and vertical integration, as a handful of giant firms snapped up thousands of independent pubs. This "rationalization" of the industry delivered economies of scale previously unknown, and soon drinkers in England found that booze was even easier to come by than it had been before. Far from vanquished, the lager lout had entered his heyday.
In the United States, the problem so far has not been one of vertical integration like that found in the UK. Here, the story so far has been mostly about horizontal integration-of one brewer buying another.
To be sure, the typical American beer drinker might have a hard time realizing the extent of horizontal consolidation that has already occurred. The shelves of your average gas-station convenience store offer not just Bud and Busch and Miller and Coors but Stella and Hoegaarden and Shock Top and Rolling Rock. At any decent grocery, Kirin of Japan sits beside Boddingtons of Ireland, Peroni of Italy beside Pilsner Urquell of the Czech Republic. Basses shadow Red Hooks in the lea of Goose Islands. Blue Moon shines down on it all.
But all is not as it appears. Two giant companies- Anheuser-Busch InBev and MillerCoors-own, bankroll, produce, control, or have distribution rights to all of these brands and hundreds more. The truly independent brewers in the nation-there are about 2,000 of them, from tiny local outfits to national brands like Samuel Adams-account for just 6 percent of the market.
Almost all the rest belongs to Anheuser-Busch InBev and MillerCoors, which now together capture nearly 80 percent of beer sales in this country. Smaller conglomerates including Pabst, Heineken, and Diageo (owner of Guinness) take up much of the remainder, but even this doesn't capture how consolidated the market has become. Pabst, for example, does not brew its own beer: that process is contracted out to Miller.
The market forces that eventually led to this massive consolidation among American brewers took root in the mid-1970s with the passage of the Consumer Goods Pricing Act of 1975, which made it illegal for producers to set minimum prices for their goods at retail. This was ostensibly "pro-consumer" legislation: the practice of allowing producers to set their own prices limited certain types of price competition, and so could be viewed as "hurting" consumers in an economic sense. But, of course, in this case we're talking about consumers of alcohol and not apples, and when it comes to alcohol, cheaper is not necessarily better.
Link: http://www.washingtonmonthly.com/magazine/november_december_2012/features/last_call041131.php?page=3
