WITHER MY CRAFT IPA. Why are antitrust regulators asleep at the wheel?

Good people drink good beer. ~ Hunter S. Thompson

Beer is proof that God loves us and wants us to be happy. ~ Benjamin Franklin

I’m getting nervous, very nervous. Last week Anheuser-Busch InBev and SABMiller, the 2 largest beer producers in the world, announced their proposed $104.2 billion merger. How long will it be until the behemoth new Bud heavyweight will drown out wonderful craft brewers that offer tasty brews like Hop Head or 400 Pound Monkey IPA’s or Pliny the Elder ales? Why have we heard not a drop of concern from the 2 American regulators of antitrust law about this anti-competitive effort? After all, AB InBev sells over 200 individual brands of beer and is already the world’s largest brewer.

The Department of Justice’s Antitrust Division (DOJ) and the Federal Trade Commission (FTC) have enforcement responsibilities to insure that businesses operating in the US adhere to the 1890 Sherman and 1914 Clayton Acts. These laws specify anti-competitive actions that are per se illegal, such as price-fixing, price-discrimination and mergers and acquisitions (M&A) that substantially reduce market competition. This last area remains especially relevant today as firms’ M&A activity proceeds apace. According to one source, there was $1.53 trillion in US announced M&A activity in 2014 that strongly contributed to an almost 50% increase in M&A activity worldwide. With proposed megamergers like last week’s AB InBev and SABMiller fusion, M&A activity in 2015 will end up being even larger. As corporate earnings are sliding companies are revving up their M&A activity to increase growth, a strategy that in the past hasn’t always worked.

The DOJ’s and FTC’s passive, unaggressive inaction seems to corroborate their mistaken idea that our economy’s economic structure no longer requires their active and critical review. They falsely liken the economy as a Google over-hyped “self-driving” car, where they placidly “drive” gazing at the scenery without having to view the actual roadway’s twists and turns. Besides tinkering with driverless cars, Google itself has acquired 185 firms during the past 14 years and controls 89% of the worldwide search market. These 2 agencies’ passivity during this age of alarming and expanding market power of an ever-smaller number of ever-larger firms is threatening consumers’ well-being.

Actions by the FTC or DOJ to break-up existing, giant oligopolies – let alone prohibit gargantuan proposed mergers – are now as frequent as sightings of Black Rhinos or Sumatran Tigers. [FYI, these magnificent animals are on the IUCN’s “critically endangered” list, just like US antitrust enforcement.] It wasn’t always like this.

In bygone eras antitrust law was actively enforced. Standard Oil (the trust headed by John D Rockefeller) was deemed an illegal monopoly in 1911 and split into several individual (but very large) companies, including what’s now Exxon/Mobil and Chevron. In 2000, Microsoft was found to violate antitrust law in its efforts to gain market share against Netscape’s Navigator, the first widely-available internet browser. A later court settlement and consent decree spared Microsoft from being dismantled.

Instead of the DOJ or FTC taking action, it’s the European Union’s Commissioner for Competition, Ms Margrethe Vestager. Her office has filed antitrust charges against several American firms including Google. We’ve apparently exported public review and enforcement of anti-competitive threats to the EU.

Many markets in the US beyond beer and online search are facing increased concentration of power exercised by the largest firms. According to the Wall Street Journal, almost two-thirds of all publicly-traded firms operate in more highly-concentrated markets in which the top 3 businesses unambiguously dominate than they did over 15 years ago. Examples include retail food/staples [Safeway, Rite Aid, Walmart], Internet software [Facebook, Twitter, Google], airlines [Southwest, United Continental, American] and media [Live Nation Entertainment, Clear Channel Outdoor, DreamWorks Automation].

Market concentration is commonly measured either by market share (the percent of a market that a firm controls) and/or the Herfindahl-Herschman Index (HHI). The higher this index’s value, the more concentrated is the market power in the industry. In 2010 the DOJ raised the threshold for what it considers a “highly concentrated” industry to 2500 from 1800 (the maximum value is 10000). The table below shows HHI’s for several fairly concentrated industries, whose HHI’s have been growing over the past several decades.

Industry	Herfindahl-Hershman Index
Food/Staples Retail	3047
Internet Software	2440
Airlines	2003
Media	2275

Source:  Wall Street Journal, Oct 18, 2015.

With higher concentration and more market power dominant firms can enjoy greater economies of scale and potentially more profit. The former benefit may help consumers if these scale economies trickle-down into lower product prices. If the larger firms realize these scale economies it may also make the remaining, and usually smaller, firms in the market less able to compete. This is what’s now happening in the retail food industry, where many minor “independent” grocers are struggling to stay open.

But greater market control often can create more pricing power, leading to higher consumer prices and obstructed competitors. This is the source of fear by distributors, pubs and consumers alike in the US beer market if AB InBev and SABMiller are allowed to merge. The merged behemoth can make imbibing beer even more costly, reduce the selection of beers in pubs and bars and create barriers to smaller breweries’ growth.

It has been suggested that as part of their merger AB InBev and SABMiller could sell off SABMiller’s 58% stake in MillerCoors to assuage the possible concerns of the DOJ and FTC. But MillerCoors accounts for just 26% of beer sold in the US, about equal to SABMiller’s 23% share and half of AB InBev’s 50% share. Furthermore, AB InBev’s and SABMiller’s beverage distributors already exercise strong control in many local markets throughout the US. This vertical control of distributors often creates significant problems for smaller brewers – including virtually all craft brewers – in their market expansion efforts.

The US craft beer “movement” has no definitive birthdate, but Fritz Maytag’s purchase and revival of Anchor Brewing Co. in San Francisco in 1965 together with President Carter’s deregulation of the beer market in 1979 serve as decisive early events. Craft breweries now account for 19% of all beer sold and 99% of all breweries in the US.[1] That’s right, 99% because they’re truly microbreweries, compared to the likes of Budweiser, Miller and Coors. Reflecting changed tastes of consumers in the US and elsewhere, Craft beer consumption grew 17.6% in 2014, compared with only 0.5% for overall beer sales growth. This hasn’t been good news for Bud, Miller and Coors.
 Allowing AB InBev and SABMiller to merge will create a monstrous giant that controls almost 75% of US beer sales (even if the new company spins off MillerCoors) and 36% of the global beer market. This colossal degree of market control should be enough to arouse the DOJ and FTC antitrust enforcers, or have they already been drinking the Kool-Aid let alone Bud? If so, where’s my next Pliny the Elder or Hop Head coming from?

May 2016 ADDENDUM:  Is This America for You?   

Displaying chauvinism and perhaps crypto-desperation, the venerable beer behemoth Budweiser (which is a big cog in the Belgian-Brazilian beverage colossus AB InBev) has decided to rebrand its Budweiser beer to “America.” From now through Nov 8th (election day) you’ll no longer be able to buy a Bud, only an “America” beer. 
Because this Bud's for you is no longer, is this America for you? AB InBev hopes so. Nevertheless, not all people are happy with Bud’s new name. Bill Maher for one mentioned that this confirms in one more unneeded fashion that “America has no taste.”

Adding more incredulity to this effort, Donald Trump has taken credit for AB InBev making America beer and temporarily burying Bud. Is he hoping to brew a heretofore unexplored connection between leadership and lager?

It will be a very cold day when America shows up inside my refrigerator. AB InBev will have to wait much lager for many of us to believe its swill (or Donald’s) is great. I’ll continue to enjoy the craft beers mentioned in this blog.  

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[1] I know, when you add up each of the market shares I’ve shown in this and the preceding paragraph you get a total of more than 100%, which doesn’t make any sense [19% (craft) + 50% (InBev) + 23% (SABMiller) + 26% (MillerCoors) = 118%]. My suspicion is each percentage market share is based on different total market values. BTW, after coiffing a few, it makes a bit more sense.