US Government Takes Aim at Liquor's Big Gun | Wine-Searcher News & Features (2024)

After filing a huge antitrust lawsuit last year against her nemesis Amazon, Federal Trade Commission chair Lina Khan appears to be queuing up an antitrust lawsuit against Southern Glazer's, the nation's largest wine and spirits distributor.

The imminence of the FTC suit against Southern Glazer's was reported first by Politico, and then was confirmed by CNBC, which added the juicy tidbit that "one source said the commission is likely to allege that Southern Glazer's has been providing 'secret kickbacks' to large retail customers."

This news came just before the death on Sunday of Harvey Chaplin, who founded Southern Wine & Spirits in Miami in 1968. Chaplin led Southern on a massive period of expansion that culminated in 2016 with its merger with Texas-based Glazer's to create the $26 billion juggernaut that dominates wine distribution today in 44 states. Chaplin, who was chairman of Southern Glazer's, died of natural causes at age 95.

The legal theory of the FTC suit against Southern Glazer's appears, before filing, to be almost diametrically opposed to the one used against Amazon. Amazon is accused by the FTC of using its monopoly power to inflate prices. Southern Glazer's, according to Politico and CNBC, may be about to be accused of using its monopoly powers to sell some wines and spirits more cheaply to big retailers – thus, potentially, making those products cheaper.

Let's be clear: lowering prices today to drive out competitors and thus jack up prices later, for railroads in the 1800s, is what got the US started on antitrust law in the first place.

But the 1936 law that the FTC is reportedly planning to use to sue Southern Glazer's, called the Robinson-Patman Act, has not been used in more than 20 years. In 2000, the FTC got a settlement from McCormick, maker of Old Bay (the world's best seafood spice), that would prevent it from charging different prices to different retailers – thus keeping the price of Old Bay higher. The Robinson-Patman Act is still on the books, and it's still the law, and this is not a novel interpretation of it. We just haven't seen it used since Bill Clinton was President.

We shouldn't be surprised, though, because when Joe Biden became president, he promised more antitrust enforcement, and appointing Khan as FTC chair showed he was serious.

Khan, now 35 years old, was still a student at Yale Law School in 2017 when she published an article titled "Amazon's Antitrust Paradox" in the Yale Law Journal. Khan argued that the way antitrust law was being enforced was not effective for Internet companies, especially market-dominating Amazon. The New York Times called the article "a runaway best-seller in the world of legal treatises".

Southern Glazer's has plenty of detractors in the industry. Southern Glazer's operates in 44 states and has a dominant position in most of them. If I wanted to fill up the rest of this article with quotes from people who hate Southern, it wouldn't be hard.

The devil in the detail

That said, the use of Robinson-Patman may make a lawsuit controversial in legal circles.

"Believe this or not, I actually for once in my life side with Southern," said Chicago beverage alcohol attorney Sean O'Leary. "Although I think they are terrible for the industry, I think the FTC is overstepping its bounds and it will lead to bad results."

San Francisco beverage alcohol attorney John Hinman said that if the FTC wins its lawsuit, it won't really solve the problem of Southern Glazer's monopolistic behaviors; it would likely only result in an injunction preventing price discrimination. In other words, Southern Glazer's could no longer offer big retailers a discount.

"What is intriguing is the FTC hasn’t started noticing that Southern Glazer's' market power to fix prices, lock out competitive brands and keep prices high exists independently in multiple state markets through affiliate distributors that are part of the Southern Glazer's network," Hinman told Wine-Searcher. "They have been expanding nationally via acquisition of small state wholesalers. Once they have their networks in place the ability of a small brand to access a state market is foreclosed unless the brands are willing to pay an oligopolistic premium."

To prove that, let me present the example of Vivác Winery, one of the best wineries in New Mexico.

"I was with a small distributor," said Vivác co-owner/winemaker Jesse Padberg. "I thought it would be great, but they couldn't service all the accounts. Restaurant accounts would say 'We can't buy your wine because we only have one wine buyer and we don't have time to do tastings all day. We only buy from Southern for wine.' We thought, we'll go with Southern."

Padberg said the relationship went well for five years, with Southern field reps selling Vivác wine to restaurants and retail shops.

"Then they decided 'We're not going to work to sell your wine. You get your own contracts'," Padberg said. "Sales went down and down and down. We went from selling $100,000 a year down to $5000 a year."

When Vivác decided to switch to another distributor, the Padbergs learned that because of New Mexico's franchise laws, Southern – not Vivác – owned the local rights to Vivác's wines.

"We had to pay them to buy our brands back from them," Padberg said. "They decided we had to pay them $20,000. The previous year, they only sold $5000. We ended up having to drop our four most popular wines, and bought the rest for $3000."

Vivác had been successful making blends called Red Hot Mama red and Red Hot Mama white; the winery no longer has the right to sell those in New Mexico. The Padbergs also couldn't afford to buy back their most popular varietal wines, Vivác Dolcetto and Vivác Sauvignon Blanc. Nobody makes those now.

"That $3000 check was the most painful thing I've ever done, but also the happiest thing I've ever done," Padberg said. But Vivác has never been able to get back into most of the accounts that could buy its wine from Southern Glazer's.

"You go into a grocery store anywhere in the US and you find the same 100 wine brands everywhere," Padberg said. "This is why. It's really hard for a small winery to call Albertson's or call Walmart. The three-tier system is so anti-capitalism, and so anti-business."

That brings us back to the FTC, whose function is to be pro-capitalism, especially when it comes to competition. It shouldn't be surprising to see the FTC go after Southern Glazer's.

The Biden Administration issued an executive order in the first year of his presidency directing the FTC, Treasury Department and the Department of Justice to collaborate on a report assessing "threats to competition and barriers to new entrants" in beer, wine and spirits, specifically including looking at any "discriminatory or anticompetitive distribution practices" as well as any "unlawful trade practices that hinder smaller and independent businesses or new entrants from distributing their products."

An FTC lawsuit would be a result of that order.

"I'm not convinced an FTC lawsuit against Southern Glazer's will significantly impact business practices," said Tom Wark, executive director of the National Association of Wine Retailers.

"I'm more interested and hopeful that such a lawsuit will draw attention to the decades of anti-competitive behavior carried out by Southern. Southern supports discriminatory wine shipping laws. They support franchise laws. They support restrictions on expanded self-distribution laws. All these things harm both domestic and imported wines. All these positions keep wine sales funneled through wholesalers. The harm hasn’t been calculated on a financial basis. It should be, as we would notice billions of dollars funneled through Southern as a result of these kinds of anti-competitive schemes staying in place."

Southern Glazer's did not respond to requests for comment.