Does Proposed Acquisition Raise Three-Tier Integration Concerns?

Generally speaking, and with some notable exceptions, the production, distribution and sale of alcoholic beverages in the United States are divided among three tiers, with ownership of producers, distributors and retailers required to remain separate.  For example, in Maryland, where my firm has its primary practice, anyone with an ownership interest in an entity with a manufacturer’s or wholesaler’s license is prohibited from holding a retail liquor license.  Although the 21st Amendment to the U.S. Constitution, which ended Prohibition, leaves it to the individual states to regulate the sale of alcoholic beverages, nearly every state has traditionally mandated this division among the three tiers.

Because the three-tier system is such an integral and widespread element of liquor regulation in the United States, it was with great interest (and some puzzlement) that I read this press release announcing the acquisition by a North Carolina craft brewery of a publicly traded beer, wine & liquor wholesaler.  (Read more here)  I was furthermore surprised to see that a substantial shareholder in the wholesaler was itself a company that owned several large, prominent restaurant chains, and that this company would remain a shareholder of the combined brewery/distributor.  Thus, it would seem that the proposed sale would lead just the sort of vertical integration between producer, wholesaler and retailer that the three-tier system was intended to thwart.  Illustrating this fact is a telling quote from the CEO of the chain restaurant company:

“We look forward to showcasing [the brewery]’s craft beers in our restaurants and assisting with its regional distribution.”

There you go:  brewery owns distributor, which will be assisted in such distribution by a restaurant chain which is a large shareholder in the combined brewery/distributor, all in an effort to promote that brewery’s beers in those same restaurants.  While not a true “tied house” situation, it could have similar effects.

Given this stated intention to use the vertical integration of the three tiers to its competitive advantage, it will be interesting to see how North Carolina liquor regulators view the combination of and cooperation between these companies.  Moreover, as the combined brewery/wholesaler company expands into other states, it will also bear watching whether it is met with resistance from other state and local alcoholic beverage licensing boards, either on applications for wholesaler’s licenses by the combined brewery/distributor, or on retail liquor license applications by new outlets of the associated restaurant chains.