FTC Staff Comment to the Hon. Tom Alley Concerning Michigan H.B. 5236 to Allow Beer Manufacturers to Sell Beer at Retail in Limited Instances

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
CLEVELAND REGIONAL OFFICE
Suite 520-A
Atrium Office Plaza
668 Euclid A venue
Cleveland, Ohio 44114
(216) 522-4210
Telecopier: 522-7239
February 20, 1989
The Honorable Tom Alley
Michigan House of Represen ta tives
State Capitol Building
Lansing, Michigan 48913
Dear Representative Alley:
V900013
COMMISSION AUTHORIZED
The staff of the Federal Trade Commission's Cleveland Regional Office and
Bureau of Competition are pleased to respond to your letter of November 16, 1989,
requesting 	our 	comments on House Bill 5236.1 This 	bill would 	amend 	existing
Michigan 	law 	by 	allowing 	beer 	manufacturers 	to 	sell 	beer 	at 	reta.il 	in 	limited
instances? 	If passed, the bill would tend to provide consumers with a wider choice
of specialty beers and to permit more efficient forms of distribution. 	For these
reasons we believe that passage of the bill would enhance competition.
INTEREST AND EXPERIENCE OF THE FEDERAL TRADE COMMISSION STAFF.
Congress has charged the Federal Trade Commission with enforcing the nation's
antitrust 	and 	consumer 	protection 	laws. 3 The 	Commission 	is 	responsible 	for
protecting 	consumers 	from 	unfair 	methods 	of 	competition 	and 	from 	unfair 	or
deceptive acts or practices. 	In discharging this responsibility, the Commission staff
has gained substantial experience in analyzing the impact of various restraints on
competition. 	Pursuant to the Federal Trade Commission Act, the Commission staff
also submits comments to other governmental bodies, upon request, to help them
assess the competitive and consumer welfare implications of pending issues.
.,
1 	These comments are the views of the staff of the Cleveland Regional Office
and 	the 	Bureau 	of 	Competition. 	They 	are 	not 	necessarily 	the 	views 	of 	the
Commission or any individual Commissioner.
2 	H.B. 5236 amends Sections 436.19, 436.24 and 43631a of the Michigan Compiled
Laws and adds Section 31b.
3 	See 15 U.s.c. §§ 41 et seq.

The Honorable Tom Alley
February 20, 1990 	2.
The Commission staff has 	been specifically involved during recent 	years in
competition issues affecting the distribution of alcoholic beverages.4 Recent staff
comments have addressed regulation of the distribution and sale of wine coolers,
liquor, beer, wine, and other alcoholic beverages.s
MICHIGAN'S PRESENT REGULATORY SCHEME.
The Michigan Liquor Control Act 6 requires strict separation of the manufacture,
wholesale distribution, and retail sale in the beer industry. 	The Act requires that
beer manufacturers give wholesale distributors exclusive territories, and it prohibits
them from terminating a wholesale distributor except for sufficient cause, such as loss
of license, insolvency, or a felony conviction. 	This regulatory scheme is enforced by
the Michigan Liquor Control Commission.
.
Under the current law the only type of license a Michigan beer manufacturer
may hold is a brewery license. 7 Brewers are prohibited by the Act from selling beer
at retail and from selling directly to retailers. 	All cross-tier interests are strictly
prohibited.
4 	We recognize the important role played by the state in promoting the well
being of its citizens and do not contend that a state should not regulate the sale of
alcoholic beverages to promote temperance. 	Our comments are intended to address
only the economic ramifications of the distribution regulations on the competitive
marketplace. 	In 	this 	regard, 	we 	note 	that 	there 	may 	be 	means 	to 	promote
temperance 	that 	do 	not 	limit 	the 	benefits 	of 	competition. 	For 	example, 	one
alternative method of promoting temperance that might not have an adverse effect
on competition would involve using tax revenues from the sale of alcoholic beverages
for educational programs, such as alcohol abuse prevention programs.
, 	S 	See e.g., Comments of the Federal Trade Commission's Bureaus of Competition,
Consumer Protection, and Economics on the Maryland Wine Cooler Fair Dealing Act
(Mar. 11, 1987); Comments of the Federal Trade Commission's Buteaus of Competition,
Consumer Protection, and Economics on the California Beer Distribution Bill, S.B. No.
1211 (Jul. 2, 1985); Malt Beverage Interbrand Competition Act: Hearings on S. 1215
Before the Senate Comm. on the Judiciary, 97th Cong., 2nd Sess. 266-90 (1982) (oral and
written statements).
6 	Mich. Com p. Laws Ann. § 436.19 (West 1978) et seq.
7 	Mich. Compo Laws Ann. § 436.l9(lXb) (West 1978).

The Honorable Tom Alley
February 20, 1990
THE PROPOSED LEGISLATION - HOUSE BILL 5236.
3.
Under proposed House Bill 5236 beer manufacturers would be permitted to sell
beer at retail in limited circumstances. 	The extent of the permissible sales would
vary depending on the size of the manufacturer.
Under the proposed bill, large beer manufacturers, which produce more than
10,000 barrels annually, would continue to operate under brewery licenses. 	These
licenses would continue to confine such firms primarily to manufacturing, but would
also allow the brewer to operate a single retail establishment where its own beer may
be sold. 	This establishment may be located on the premises of the brewery or at
another location approved by the Michigan Liquor Control Commission.
The bill would also introduce a new class of "brewery public house" licenses,
which could be obtained only by small brewers that produce no more than 10,000
barrels of beer annually. 	Holders of these licenses could manufacture and sell beer
at retail on the licensed premises. 	In addition, the brewery public houses could act
as their own wholesalers for sales to certain types of off-premises outlets. 8
EFFECTS OF HOUSE BILL 5236 ON COMPETITION AND CONSUMER WELFARE.
Enactment of House Bill 5236 may tend to produce a wider choice of specialty
beers and more efficient channels of distribution. 	The first and perhaps the most
important effect of the proposed bill could be an increase in the number and variety
of beers that are available to consumers. 	The current statutory plan deters the
operation of small breweries that may not be able to support the administrative
overhead 	and 	the 	transportation 	costs 	involved 	in 	conducting 	business 	through
independent wholesalers and retailers. 	The plan contemplated by the new bill, by
allowing a small integrated operation to brew beer and sell it through a pub located
under the same roof, may, however, enable such a business to lower overhead costs
and operate profitably. 	These businesses may be especially well suited to producing
local or specialty beers.9 Faced with the new challenge from the micro-breweries, the
large beer manufacturers may respond by offering new lines or specialty beers of
. their own. 	The bill, therefore, may result in a greater variety of choices in the
-marketplace.
8 	The licensee may sell to "specially designa ted merchants,'" and can itself be
licensed as a "specially designated merchant." 	A specially designated merchant may
sell beer or wine for consumption off the premises only, but not at wholesale.
9 	This effect has already become apparent in a number of areas. See "New Kinds
of Beer to Tap a Flat Market," Wall Street Journal, April 20, 1989, at B-1

The Honorable Tom Alley
February 20, 1990 	4.
Another effect of House Bill 5236 may be some enhanced efficiency iIi beer
distribution systems. 	In general, a distribution system is most likely to be efficient
when it is designed by the participants in the distribution process. The manufacturer
in 	particular 	has 	an 	interest in ensuring 	that its product 	reaches consumers as
efficiently as possible, since unnecessary costs in the distribution system will have the
effect 	of 	depressing 	consumer 	demand. 	A 	statutory 	system 	that 	constrains 	a
manufacturer's choices may therefore produce adverse effects. The current state laws
are quite 	rigid in 	excluding brewers from 	wholesale and 	retail functions. 	The
proposed new law would loosen these restrictions to some extent, particularly in the
case of "brewery public houses" that are permitted to take on wholesale as well as in-
house retail functions. 	The proposed bill, therefore, may have at least a modest
beneficial effect on industry efficiency.
CONCLUSION.
The enactment of House Bill 5236 would allow beer manufacturers to begin
responding more flexibly to consumer demands. 	As part of the process, Michigan's
brewers 	will 	become 	more 	able 	and 	inclined 	to 	offer 	specialty 	brands 	and 	to
streamline their distribution systems. 	We believe that the bill, therefore, would
enhance competition.
Sincerely,
~~Mark D. Kindt
Regional Director
Cleveland Regional Office