Antitrust Lawyer Blog
Antitrust enforcement has become front and center in the American political economic debate. The Democratic Platform included a plank for greater antitrust enforcement for the first time since 1968. There is increasing evidence that large mega-mergers have cost consumers dearly in the pocket book, increased economic inequality and dampened economic opportunity. In a recent speech Senator Elizabeth Warren highlighted the perils to industries in which companies have grown so large and markets become so concentrated that monopolists can crush their competitors and lock out new entrants.
The beer industry readily falls into this category, with the United States market dominated by two players, Anheuser-Busch InBev (ABI), and MillerCoors, a joint venture between South African controlled SABMiller and Molson Coors. The pending merger between ABI the largest global beer company, and SABMiller, the second largest global beer company, will truly leave ABI in a position in which it can crush its competitors and stifle new entry. The Justice Department has been examining the merger but only tough comprehensive action by DOJ can prevent the significant threat of Brazilian owned ABI becoming the kingpin of the market.
Using the best lawyers, economists and lobbyists money can buy, ABI has tried to engage in a slight of hand with Congress and the DOJ. It claims that there are simply no competitive issues from this merger because it plans to divest all of SABMiller’s U.S. operations, which are held by the MillerCoors joint venture, to Molson Coors. And, while that may appear to be correct at first glance, one doesn’t have to dig too deep to pierce this façade and see major competitive problems looming in the future for the beer industry.
ABI says that they can simply sell SABMiller’s share to Molson Coors to resolve any competitive concerns raised by the transaction as the divestiture would maintain the status quo in the United States. But that is not enough under the law. As Judge Amit Mehta said in rejecting a proposed settlement and enjoining the Sysco-US Foods Merger, “Restoring competition requires replacing the competitive intensity lost as a result of the merger rather than focusing narrowly on returning to premerger HHI levels.”
Clearly, simply changing names won’t do that. Molson Coors, while a staple in the American beer industry, is a substantially smaller company than SABMiller, and it simply lacks the financial support of a large international conglomerate. The new MillerCoors will not be as strong once it is solely owned by Molson Coors, especially considering the massive debt Molson Coors will have to take on to pay for this purchase. It will also likely have to rely on ABI in order to import foreign brands that will remain owned by SABMiller but sold by MillerCoors. This means that Molson Coors’ incentives and ability to compete won’t be the same and consumers will lose.
ABI knows how to use its dominant position to make consumers pay a mighty price. Economic studies have demonstrated that ABI and MillerCoors tacitly collude already to increase prices in lock step fashion. But, the greatest competition threat for this cozy duopoly comes from craft beer and imports.
To stifle their opportunities, ABI has turned to a playbook of anticompetitive conduct John D Rockefeller would be proud of, marshalling a multipronged attack – cut off avenues to distribution, acquire craft beers, and limit access to outlets. To be successful and grow, craft brewers need cost effective access to retail outlets. Independent and open distribution has been the safety valve that keeps beer markets competitive and is key to the thriving craft beer industry because it provides craft brewers access to retailers. But, ABI is the fastest growing distributor in the United States and ABI is pursuing strategies such as acquiring distributors and craft brands and implementing distributor incentive programs designed to cut off many avenues for craft brewers to get their products to retailers. Reportedly, ABI’s distributor incentive programs discourage distributors who sell ABI’s beer from selling other brewer’s beer.
Part of the purpose of enacting the Clayton Act 102 years ago was to prevent anticompetitive conduct in its incipiency – before the conduct created substantial competitive harm. Congress recognized that attacking conduct after the fact would require long drawn out litigation that would take tremendous resources and cost. This is a problem Elizabeth Warren identified, stating that antitrust regulators “are very unlikely to force the companies to break up after the fact.” This is true “even if the companies blow off the conditions” they agreed to in order to get the deal through. The Clayton Act sought to provide tools to prevent this harm before it was fully developed in part by giving the DOJ broad powers to enjoin mergers or severely restrict anticompetitive conduct through consent decrees.
That is precisely the problem in this merger. Even, if ABI changes the nameplate on the U.S. headquarters of SABMiller, opportunities for rivals will weaken significantly. Once combined with SABMiller, ABI will add control of almost a third of global beer production to its over 45% market share domestic dominance, enabling it to impose additional substantial hardships on independent distributors and small craft brewers to reach consumers in the market. Worse, once the beer market becomes more cozy, Molson Coors might start to follow ABI’s lead in its distribution strategies. The reality is that the ABI/SABMiller combination with increased global size and scale and post-merger Molson Coors with the control of a broader portfolio of beers, will both have a greater ability and incentive to restrict smaller rivals’ access to the market through acquisitions of distributors and craft brews and implementation of distributor incentive programs that make it financially unattractive for distributors to carry rival brands. Accordingly, the increased ability and incentive to foreclose smaller and new rivals are merger specific concerns that should be weighed by the Justice Department.
ABI has already secured approval of the merger in all the major jurisdictions except the United States and China. Other jurisdictions, like the E.U. and South Africa, placed extensive conditions on the companies, and forced them to agree to much more than ABI originally intended. For example, the E.U. secured divestitures of $8 billion in assets over ABI’s initial $2 billion proposal and South Africa required a number of remedies to specifically protect the South African craft brewer industry.
American antitrust enforcers need to be just as tough. DOJ needs to impose remedies to keep the market functioning and competition flourishing. Here, the Justice Department should not simply accept ABI’s divestiture proposal as a remedy when vertical foreclosure concerns exist. Thoughtful remedies would include a requirement for ABI to divest its ownership of distributors, so that distribution can continue to be run by independent companies who sell what consumers want, not what big brewers tell them to sell. The Justice Department should also seek remedies that would prohibit or limit ABI’s and MillerCoors’ ability: to terminate or acquire distributors; to acquire craft brewers; to use distributor incentive programs that create economic disadvantages or make it financially unattractive for them to distribute rival brewers’ beer; to retaliate or discriminate against distributors for distributing rival brewers’ beers; and to engage in other conduct that would foreclose rival brewers’ ability to distribute their products to retailers.
As the Justice Departments works toward a settlement agreement with ABI, it needs to heed Senator Warren’s warnings on large monopolists and their ability to crush competitors and lock out small rivals and new entrants. This deal must be remedied correctly to protect beer customers because as Senator Warren understands, a merger is forever.
Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com