As whiskey market consolidates, a skirmish in Tennessee

March 28, 2014, 12:45 AM UTC
Jack Daniel’s whiskey

FORTUNE — Happy International Whiskey Day — a day with a name that gets more appropriate with each passing year as multinational corporations continue to strengthen their collective hold on the whiskey market around the world and in the United States.

In his book Cornered: The New Monopoly Capitalism and The Economics of Destruction, Barry C. Lynn relates in a short aside his experience trying to buy a bottle of bourbon in Tennessee a few years ago. At the liquor store, he normally would have had just two choices: Jack Daniel’s (owned by Brown-Forman) or George Dickel (owned by Diageo PLC). But there was no George Dickel on the shelf because the distillery had been shut down for a few years due to an oversupply at the time. “Not that, frankly, this mattered all that much to the financiers, as the duopoly of Diageo and Brown-Forman still maintained sufficient control over the distribution of whiskey in America to keep most would-be newcomers locked out of our stores.”

This happened just as the American bourbon renaissance was getting under way, as related by Fortune‘s Feb. 24 cover story by Clay Risen. A big part of that renaissance is a new proliferation of craft distillers. Furthermore, Lynn somewhat exaggerated the hold on the whiskey market by those two companies — Beam Inc. (BEAM) (then owned by Fortune Brands), Constellation Brands (STZ), and Pernod Ricard all have top-selling whiskeys in the United States.

MORE: The billion-dollar bourbon boom

But the American whiskey market is in fact dominated by a handful of huge players, and that handful is getting smaller all the time. Six of the top 10 best-selling whiskey brands in 2013 were owned by three companies: Brown-Forman (BFB), Diageo (DEO), and (then) Fortune Brands’ Beam Inc. And now, Japan’s food-and-beverage giant Suntory Holdings is buying Beam, further consolidating the industry. Beam went solo for just six months after being spun out from Fortune Brands last year.

Diageo considered buying Beam last year, though it never made an offer — perhaps because of the antitrust scrutiny it would have drawn. The deal would have given it about 44% of the U.S. whiskey market. As it is, Diageo has a volume market share of about 22%, according to Euromonitor International, with two of the top five U.S. brands: Crown Royal and Seagram’s 7.

The international flavor of all this dealmaking is brought into sharp relief by what otherwise seems like a local skirmish in Tennessee. State lawmakers this week put on hold proposed legislation to rewrite the legal definition of “Tennessee Whiskey.” The main contention is the existing rule that to earn the phrase, a whiskey must be aged in a fresh oak barrel, each of which costs about $600. (Tennessee whiskey is basically bourbon that’s made in Tennessee and meets the state’s rules.)

While the proposed changes to the rules are supposedly meant to allow the new craft distillers around the state to use the term and give them a leg up, Jack Daniel’s owner Brown-Forman alleges that Diageo is behind the effort. Even though that company already adheres to the rules and its bottles of George Dickel bear the term “Tennessee Whiskey,” many people around the country and around the world equate the term with Jack Daniel’s.

Though the two companies’ distilleries are only 18 miles apart, Brown-Forman is headquartered in Louisville, Ky. Diageo is headquartered in London. This is much bigger than a family feud.