Corruption and Regulatory Capture in the Alcohol Industry
Anyone working long enough in the alcohol arena will recognize the system this phrase describes, even if they are unfamiliar with the phrase itself
“Regulatory capture is an economic theory that says regulatory agencies may come to be dominated by the industries or interests they are charged with regulating. The result is that an agency, charged with acting in the public interest, instead acts in ways that benefit incumbent firms in the industry it is supposed to be regulating.” — Investopedia
In the alcohol industry, Regulatory Capture is not a theory. It is a reality. Alcohol wholesalers, also known as the “middle tier” of the industry, have so thoroughly captured the regulatory apparatus of the alcohol industry that nearly every law and every rule and every regulation in place across the states works to the benefit of this wholesale tier. The consequence is that one of the elements of the alcohol industry the regulatory system is supposed to be regulating is actually given benefits and protection from competition at the expense of consumers and other members of the alcohol industry.
The process by which regulatory capture overtakes a system is not complex. In the end, it is a matter of corruption of authority, whether that authority is the lawmakers or the regulatory administrators themselves. Yet what is common to nearly every capture event in every industry is that the process and the capturing occurs behind closed doors, incrementally and out of sight of the consumers and others that are harmed by the occasion of the regulator working on behalf of the regulated.
“Jerry, how are you. It’s nice to have you back in our chambers,” says the committee chair of the House Regulatory Committee to the lobbyist for the state wine and spirits wholesalers association. Of course, what’s insidious here is not that Jerry is once again in the chambers of the Regulatory Committee to testify on the merits of a bill under consideration. What’s insidious is that Jerry is a regular visitor to the Committee Chairman’s and committee members’ offices. What’s insidious is that Jerry often hand delivers “campaign contributions” to the “Mr. Chairman.”
What almost never happens is the offering of the same warm welcome to the consumer or the small retailer or brewer or distiller living in the same state as Mr. Chairman. The brewer, distiller or consumer doesn’t have a fat checkbook that the well-healed wholesaler lobbyist possesses. Nor have they spent time with the Chairman, the other members of the Committee, their legislative aides or with the alcohol regulators discussing the industry and the schooling of their kids. So, instead, the distiller, brewer or retailer, when they are able to travel to the Committee hearing to testify on a bill written by wholesalers, for the wholesalers benefit, find themselves facing the Committee Chairman’s sternly offered, “Welcome, please sit, you have three minutes to give your testimony,” instead of a hearty, “hey how you been, welcome back, how are the kids?”
It’s almost always the case that rules and laws come into being outside the view of the consumer. The consumer almost never has any representatives speaking or advocating on their behalf. Moreover, the individual consumer has not nearly the kind of resources possessed by the wholesalers to advance their own interests. Once the wholesaler-approved laws and regulations or interpretations of rules or laws go into effect and disproportionately harm them while aiding the wholesaler, the deal is done and little can be done in response.
Some say the alcohol industry is the most regulated in America. It may be. But it’s also true that that the alcohol trade both needs and deserves regulation if for no other reason than the impact of the abuse of alcohol can be so devastating for individuals, families, and communities.
Yet consider these various laws that regulators are tasked with overseeing and tell me which ones protect the health and safety of a state’s community, which ones protect or enrich the wholesale tier, and which harm the retailer, producer and consumer:
–FRANCHISE LAWS…giving wholesalers the never-ending right to hold a brand in their portfolio whether they provide any value or not to the brand owner.
–A PRODUCER’S MANDATED USE OF A WHOLESALER TO SELL WITHIN A STATE…a circumstance that does not guarantee a producer located inside or outside a given state access to the shelves or retail establishments or tables of restaurants. Rather, it only guarantees wholesalers the right to represent whom they want and to not represent those they don’t want, which leaves those producers who can’t find a wholesaler without any option to sell their products in the state.
–A RETAILER’S MANDATED USE OF A WHOLESALER TO PROCURE INVENTORY FOR THEIR SHELVES OR WINE LISTS…a requirement that makes it nearly impossible to create a diverse and unique selection of products to set the retailer or restaurant apart from competitors and makes it nearly impossible to offer products that wholesalers won’t carry.
—STATE BANS ON CONSUMERS RECEIVING WINE SHIPMENTS FROM OUT-OF-STATE RETAILERS…can’t be justified on any health or safety grounds, particularly considering the state allow the exact same transaction and logistics and shipping from out, of-of-state wineries. Meanwhile, consumers in these states are deprived of access to, literally hundreds of thousands of wines from Internet retailers, wine stores, wine-of-the-month clubs, and auction houses. But who benefits? The wholesalers who are protected from competition and the retailers who support the wholesaler’s position.
—THE SWIFT LEGAL AND REGULATORY APPROVAL OF LOCAL ALCOHOL DELIVERY LAWS…that happened to face none of the years-long scrutiny over minors’ access to alcohol that winery and retailer shipping proposals have faced. Again, no surprise that local delivery isn’t just favored by the likes of the middle tier but in fact the middle tier is a significant investor in the Drizly (recently purchased by Uber Eats).
—THE INCREASING NUMBER OF BANS ON WINERIES AND RETAILERS SHIPPING WINE ACROSS STATE LINES FROM A FULFILLMENT HOUSE…is one more example of the effort to make DTC marketing by wineries and retailers more difficult and cut off consumers from the wines they want at the behest of wholesalers, while absolutely no health and safety challenge is associated with fulfillment houses picking wines, putting them in boxes and calling a common carrier to pick them up.
—REQUIREMENTS THAT RESTAURANTS AND RETAILERS PAY FOR WHOLESALER WINES AT THE TIME OF DELIVERY...is a law found in a number of states that looks striking when you compare it to laws in the very same states that do not require wholesalers to pay producers at the time of delivery for alcohol they purchase from those suppliers.
If anyone wants to claim any of the common alcohol regulations listed above serve the health and safety needs of American consumers they are either gaslighting or possess no understanding of what produces heightened health and safety outcomes. In most cases, the wholesalers and their very close friends and supporters in the alcohol regulatory and lawmaking communities are engaged in the former.
The first step in undoing the captured regulatory system in the alcohol or any other industry is to begin by acknowledging the corruption that runs through the entire system. That is to say, until proven otherwise, one must assume that the people and institutions that oversee alcohol regulations are corrupt; that they exist and persist in an ongoing atmosphere of disdain for their stated mission when it conflicts with the important task of promoting the interests of those that feed and feed off the corruption.
The second step involves taking any reasonable opportunity to speak publicly about or publicly acknowledge the corruption that has led to the captured alcohol regulatory structure. This effort can be as small as liking a Facebook post that aims to acknowledge this corruption. It might be as big as writing open letters to the industry or lawmaking bodies. It might be a simple matter of publicly denigrating the systems and regulations that keep wholesalers in charge of the regulators and the regulators’ efforts to keep wholesalers in charge.
The third step in pushing back against the regulatory capture that has overtaken the alcohol industry is to support, in every instance, any attempt to change the system in a way that extracts even the smallest amount of support for wholesalers’ industry-wide protection apparatus. Producer DTC? Support it. Expansion of producer self-distribution? Support it. Weakening of Franchise laws? Support it. Loosening of retailer/restaurant payment options? Support it. Any proposal that would in any way rescue the regulatory structure and process from wholesaler domination should be supported.
Finally, it’s important to note the practical impact when the regulatory system has been captured by special interests such as wholesalers. The primary impact is the walling off of competition and, with it, innovation. It should be no surprise that the greatest innovation within the alcohol industry in the past 30 years has been the rise of that which is most simple and least complicated: direct-to-consumer shipping. While other consumer industries have created new marketplaces, new tools to reach consumers, deployed technology that collapses and even eliminates a middle tier, the best the wine industry could do is back the UPS truck up to a loading dock. And even this most simple of innovations has been made complicated by a regulatory system that has bent over backward to take the advice of the wholesale tier and made producer and retailer DTC shipping as complicated and burdensome as possible.
It is naive to believe that the captured regulatory agencies in every state can be cleansed of their corruption entirely. However, it is not too bold to consider the smallest actions that can be taken to lessen corruption. Nor takes even less effort to acknowledged the Regulatory Capture that has overtaken the alcohol industry. In the end, however, the only way the capture and corruption can be slowed and innovation and competition brought out into the open is to expose the processes and people that engage in the corruption. That only happens when people speak up.