Critics of Bill Claim Prices Would Rise : Beer Wholesalers Push for Monopoly

SACRAMENTO —  In theory at least, the network of businesses that make up California’s beer distribution system should be a textbook example of free competition.

Brewers large and small sell the product under a variety of brand names. An estimated 200 independent wholesalers distribute it to 60,000 retail stores and saloons throughout California. They, in turn, vie for a share of the beer-drinking public. The system has worked well, the industry contends, providing Californians with beer prices that are among the lowest in the nation.

A key segment of the industry--the middlemen who buy the beer form the brewers and deliver it to the retail market--is pushing legislation that would, however, fundamentally alter the equation by granting individual wholesalers monopoly territories and forbidding retailers from buying from anyone else.

Consumer groups and retailers, who have launched a heavy lobbying effort to defeat the bill, say the wholesalers’ intent is to establish control over the state’s beer distribution network, stymieing the ability of stores to shop for bargains and eventually raising beer prices for consumers.

“This is an outright power grab for a monopoly,” said Walter Zelman, executive director of California Common Cause. “They want any store in any area to be told that ‘This is it; you buy from me or you don’t sell at all.’ ”

The wholesalers, among the top contributors to political campaigns in California, acknowledge that they have seized control of 90% of beer sales in the state by carving out exclusive territories for themselves. Their agreements, however, do not have the force of law.

Their continuing complaint is with the remaining 10% of the market, in which a few distributors still compete with each other and big chain stores are able to shop around for the best deals or buy direct from the brewers.

Assemblyman Jim Costa (D-Fresno), who is carrying the bill for the wholesalers, maintains that “the consumer effects of the bill are positive and that prices will remain stable.” The aim of the measure, he said, is to help small stores and bars that might not be served if the big chains have their way and the current distribution system falters.

“I’m talking about mom-and-pop grocery stores and the individual neighborhood pubs,” Costa said. “This will ensure their livelihood is protected.”

Susan Romeo, a public relations executive hired to plead the case of the wholesalers, added, “I could see where the entire industry could be threatened, because there would no longer be any use for wholesalers.”

At least 28 states have adopted similar legislation, although Congress has repeatedly rejected efforts to allow monopoly territories nationwide.

The battle pits several powerful special interests against each other, but the stakes are equally high for consumers. According to industry figures, Californians drink nearly 640 million gallons of beer a year, an average of 24 gallons a person, pushing annual sales to $4 billion statewide. Beer wholesalers employ an estimated 10,000 workers.

The heavily lobbied legislation passed its first hurdle Tuesday night, when the Assembly Governmental Organization Committee approved the measure on a bipartisan 10-3 vote after more than an hour of sometimes angry testimony. Scores of lobbyists and industry representatives were on hand to witness the victory.

Although the committee’s swift approval underscored the political clout of the beer wholesalers, its vote may not be a true test of the measure’s viability.

Pro-Industry Reputation

The committee, which has jurisdiction over most alcohol-related bills, has a reputation for supporting legislation favored by the alcoholic beverage industry. The beer distributors gave more than $370,000 to legislative and statewide political campaigns over the last two years, enough to rank them eighth among contributors. More than $43,000 of that was specifically targeted for members of the Governmental Operations Committee. Retailers also contribute, but far less--about one-fourth as much in the last two years.

The wholesalers, by contrast, have far less clout in the Assembly Ways and Means Committee, where the bill goes next. Its members hear legislation with a potential financial impact, diluting the influence of any single special-interest group.

A bill almost identical to the current beer measure stalled in Ways and Means two years ago amid public controversy. This year’s version of the beer bill, however, bears striking resemblance to a measure approved by the Legislature in 1985 that would have created monopoly territories for wholesalers of fine wines. That legislation, intended to kill a flourishing market in cheap imports of prestige French champagne, was vetoed by Gov. George Deukmejian as anti-competitive.

This year’s beer bill would carve the state into a number of distribution territories and grant exclusive rights to individual wholesalers to operate within those areas. Retailers would be barred from shopping different wholesalers for the best price or from purchasing from any source outside their designated territory.

Particularly worrisome to chain stores is a prohibition on transferring beer from one store to another or even storing beer at a central warehouse.

‘Prices . . . Will Increase’

“Grocers like myself would be forced to accept whatever price a wholesaler wants for beer,” complained Manuel Campos, who owns four grocery stores in Northern California. “As a result, beer prices for my customers will increase. . . . I think all businessmen and women would love the luxury of being the only seller of a product in a defined territory, but that isn’t fair to consumers.”

Paul DeNio, lobbyist for the wholesalers, countered that the beer distributors “have a major investment” in their businesses and need protection of law so they can remain profitable and continue to serve small grocery stores and bars that otherwise might have difficulty finding anyone to sell to them.

“That’s where we create competition,” DeNio said.

Costa, the bill’s author, added that wholesalers perform other important functions, such as restocking shelves and rotating stock so that stale beer is not sold. And he indicated that the law could help discourage lawsuits between wholesalers and breweries over contractual arrangements.

Don Beaver, lobbyist for the California Retailers Assn., called those arguments “a whole bunch of senseless baloney,” adding, “This is all a smoke screen, and the real issue is they want exclusive territories. . . . It’s very anti-consumer and anti-competitive and anti-everything else.”

The major question looming over the debate is how much, if at all, beer prices would rise should this bill pass.

Debate Over Prices

Although wholesalers control about 90% of the beer market through exclusive contracts arranged with brewers, prices average about $2.09 for a six-pack, among the lowest in the nation. That would appear to weaken opponents’ arguments that exclusive territories automatically drive prices up.

Retailers and consumer advocates insist that prices have stayed low only because of the 10% of the business that remains competitive. Take that away, they say, and there is no telling what might happen.

Their argument is bolstered by a major study last year by the legislative analyst’s office that concluded that a bill like the current one would “place upward pressures on the prices” and would leave “California beer consumers as a whole . . . worse off than they would be without such a bill.”

Consumer groups, meanwhile, said that if necessary they will take their fight to communities, informing voters that their representatives are about to help raise prices on a favorite beverage, just before summer’s heavy beer-drinking season.

Harry Snyder, West Coast director of Consumers Union, warned members of the Governmental Organizations Committee during its hearing Tuesday night that the bill will hurt “everyone in your district that does not run or work for a beer wholesaler. . . . This is probably the most embarrassing bill this committee will see this year.”