U.S. antitrust officials are investigating Anheuser-Busch InBev (ahbif) over its new incentives that encourage independent distributors to sell more of its own beer brands at the expense of competing craft brews, two people with knowledge of the matter said.
Budweiser owner AB InBev has 45.8 percent of the U.S. beer market but has seen sales dwindle at least partially because of rising craft beer sales.
The U.S. Department of Justice last year probed AB InBev’s plan to buy distributors in response to craft brewers’ complaints that it aimed to curb competition. The purchases of two distributors in California, two in Colorado and one in New York have since closed.
The beer giant introduced the new incentive program at a distributors’ meeting in late 2015, and the U.S. authorities are looking into it as part of its antitrust review of AB InBev’s planned more than $100 billion takeover of global rival SABMiller PLC, the two people said.
AB InBev has offered to divest all of SABMiller’s U.S. assets, so there is little expectation that the deal could stumble over craft brewers’ complaints.
There is a precedent, however, for the Justice Department to put limits on incentive programs. When AB InBev bought Grupo Modelo in 2013, it required the Modelo beers in the United States to be divested and required AB InBev to refrain from offering incentives to distributors that would hurt Modelo for three years.
Investigators at the Justice Department have contacted beer distributors and craft brewers, asking about the incentive plan as well as AB InBev’s other steps aimed at curbing craft promotion by distributors, those people said.
The Justice Department declined to comment.
The independent distributors aligned with AB InBev are contractually required to spend a certain amount each year to advertise AB InBev beers. Those include products of breweries such as Blue Point or Goose Island, which used to be craft brewers, but are now part of AB InBev group.
Under the new incentive plan, AB InBev refunds 75 percent of this money if its beers make up 98 percent of the distributor’s sales, according to documents provided to lawmakers by AB InBev.
The greater the share of rival beers in a distributor’s sales, the less money it receives, according to the document.
Even if a distributor raised sales of AB InBev beers, it would still receive less money if craft sales rise faster.
That makes the incentives appear designed primarily to suppress craft sales rather than boost AB InBev sales, several people familiar with the plan told Reuters. They spoke on condition of anonymity to protect business relationships.
A distributor that would want to promote a craft beer would be also required to run an equal promotion for Budweiser, which becomes prohibitively expensive, the people said.
AB InBev said it continued to “cooperate fully” with the Justice Department’s review of the merger with SABMiller, which this week got cleared by the European authorities and which the group expected to complete in the second half of 2016.
Gemma Hart, an Anheuser-Bush spokesperson, defended the incentive program as a “reflection of just how competitive the U.S. beer industry has become.”
“Our voluntary incentive program clearly does not prevent or inhibit other brands from getting to market,” she said, noting that nearly all Anheuser-Busch distributors carried other brands.
Of the estimated 3,000 U.S. distributors, about 1,100 are aligned with legacy brewers like AB InBev or MillerCoors and serve big retailers and restaurant chains as well as small stores. The remaining distributors are much smaller and do not provide as much access to large-scale retailers.
AB InBev’s practices are not outright illegal, but could be deemed as such if AB InBev is found to be dominant and aiming primarily at shutting out rivals rather than building up their own sales, antitrust experts said.
Unlike most industries, which may have several distribution channels, beer in many states must be sold through independent distributors. Most cities have a distributor aligned with AB InBev, another with MillerCoors and may have a third that specializes in craft beer.
BIG BEER MARKET STAGNATING
AB InBev, the product of a 2008 merger between Anheuser-Bush and Belgian-Brazilian brewer InBev, tops the U.S. beer market followed by MillerCoors, with a 26 percent share.
But the two groups have been challenged by craft brewers, defined as independent operations make no more than 6 millions barrels a year. They offer everything from classics to oddball brews like Funky Buddha Brewery’s Banana Split Ale and captured 12.2 percent of the U.S. market last year compared with just 5 percent in 2010.
Antitrust experts said paying distributors to suppress craft sales could run afoul of antitrust law. “It’s the large manufacturers that are trying to narrow the channel of distribution that is most cost effective,” said Andrew Gavil, who teaches at the Howard University School of Law. “That’s the big story here.”
Gavil said that AB InBev would likely defend itself by saying its market share was hardly dominant.
Andre Barlow, an antitrust expert with the law firm Doyle, Barlow and Mazard PLLC, said, however, the group had enough of a clout to raise concerns.
“ABI has the power to limit the distributors’ ability to distribute the craft brews.”
It can be sometimes hard to prove in court that practices such as incentives that aim at reducing rivals’ sales violate antitrust law because a company could argue that the practices are good for consumers, other antitrust experts said.