Jandos Rothstein
This story is part of a new Prospect series called Rollups, looking at obscure markets that have been rolled up by under-the-radar monopolies. If you know of a rollup like this, contact us at rollups(at)prospect.org.
In late January, Lisa Bueno-Loverin sent a regulatory letter informing the California Department of Labor that her company, beer distributor Bueno Beverage, planned to lay off about a third of its nearly 150 employees. The layoffs weren’t the company’s idea; business was good. But days earlier, one of Bueno’s two beer suppliers, mega-brewer Constellation Brands, backed out of its contract with the distributor, ending a two-decade relationship. Constellation holds sway in the Golden State, where its major imported Mexican lagers Corona, Modelo, and Pacifico flow like water. The abrupt departure would cost Bueno 40 percent of its sales, the letter said, threatening one of the few independent beer distributors left in the state.
Bueno-Loverin’s letter didn’t say where Constellation would be moving its market-leading Mexican brews. The answer, however, was obvious to anyone involved in the state’s multibillion-dollar beer industry. Constellation was ditching small distributors for Reyes Holding Company, the massive food and beverage conglomerate that, critics allege, has muscled its way into becoming the largest and most powerful beer distributor in America.
Beer is often held up as an oasis of competition and innovation in an economy dominated by corporate behemoths. The massive beer conglomerates AB InBev—parent company of Budweiser—and Molson Coors still sell nearly two-thirds of all beer domestically. But for the last two decades, hundreds of craft brewers have sprung up in every corner of America, offering a dizzying selection of ales, porters, and pilsners to taps and store shelves. Even Tim Wu, a Biden administration official and ardent opponent of monopoly power, said recently that the beer industry “is a model for what we can do and what we can expect from the U.S. economy.”
Yet today, the beer industry in America is in the midst of an unprecedented transformation in ways most drinkers do not recognize. Reyes has used its unmatched resources and the country’s nearly nonexistent oversight of corporate mergers to cement control over the market in ways little seen since Prohibition. While Reyes has established beachheads in swaths of the East Coast and upper Midwest, this domination is so far most acute in California, which accounts for one-tenth of all brewing in America. Its takeovers and other tactics there have spurred a slew of lawsuits and a statewide antitrust investigation.
Reyes did not respond to a detailed email seeking comment for this article. But it has said publicly that allegations of what have been termed by smaller distributors and brewers as “strong-arm tactics” to increase its market power “are filled with inflammatory rhetoric about forced sales but ignore the fact that brewers make individual choices to move their beer distribution rights to a distributor that provides the most efficient and effective service.”
Reyes’s emergence has illuminated deep cracks in beer brewing’s otherwise sparkling entrepreneurial reputation. Rapid consolidation in beer distribution exposes the true threat of monopoly power to the industry, from the Big Beer brewers and importers to a retail market dominated by powerful supermarket chains and big-box stores. Suddenly, craft brewers and mom-and-pop distributors alike believe they are threatened by corporate power on all sides.
For beer drinkers, rising corporate power in the industry threatens their opportunity to taste a more diverse set of innovative brews. The byzantine, fractured nature of the beer market makes solutions elusive, but those fighting to preserve independence in the industry say things must change if beer is ever going to be the bastion of competition and innovation that people think it is.
BEER IS ORGANIZED AND REGULATED like no other industry in America. The structure was established after Prohibition ended, when states were given the power to regulate alcohol as they saw fit. With some exceptions, most chose a tiered system, in which brewers, distributors, and retailers couldn’t be owned or controlled by the same company. Then as now, large brewers like Budweiser and Miller wielded incredible power over the thousands of mom-and-pop distributors that helped get their beer on shelves and in taps, and most state lawmakers wanted that power constrained as much as possible.
To help further tamp down brewer power, many state regulations have made contracts between brewers and distributors nearly unbreakable. This way, small distributors could take chances on smaller craft brands, without fear of losing larger competitors. Eventually, craft beer popularity soared, and brands like Sierra Nevada and Sam Adams rose to prominence on the backs of networks of small, independent distributors.
Just as quickly, monopoly power returned to reclaim its throne. Big brewers began buying up scores of craft brands—particularly AB InBev, which has taken over more than a dozen rival brewers, including Goose Island, Breckenridge, Elysian, Golden Road, and others. AB InBev’s purchase of Goose Island in 2011 was widely viewed as a watershed moment of Big Beer buying its competition, rather than going head-to-head with them. Today, most bars and stores need only to stock a few local independent brands; the big brewers and the “craft” brands they control can supply the rest.
For distributors, the need to carry dozens of different craft beers from small brewers faded, as Big Beer grew its stable of once-independent brands. The business gradually required far less of the regional knowledge, intensive salesmanship, and marketing efforts that small craft brewers needed distributors to provide. Big producers like Molson Coors and Constellation have their own marketing and sales departments; what they crave is efficiency and scale.
Reyes fits the bill.
REYES IS THE SIXTH-LARGEST PRIVATE COMPANY in America, with $30 billion in annual revenue from its massive stakes in distribution, Coca-Cola bottling, and food packaging. Flush with cash, Reyes has gone on an unprecedented shopping spree over the past five years, acquiring smaller beer distributors and distribution contracts with brewers around the country. In California, Reyes has completed at least 17 acquisitions of smaller distributors and beer distribution contracts since 2018, including this April’s buyout of Columbia Distributing, which added another four million cases to its roster. Reyes today controls at least 55 percent of all beer distribution in California.
As Reyes has grown, the number of independent beer distributors in the state has shrunk, from 51 three years ago to 37 today. Even that number can be deceiving, as the vast majority of the state’s beer is distributed by either Reyes or Budweiser owner AB InBev, which is allowed to own distributors under California’s unique liquor laws. After Constellation left Bueno Beverage, for example, Bueno was left distributing only Bud products, giving AB InBev total control over the company and its fortunes.
Meanwhile, Reyes’s dominance has led small distributors to lay off hundreds of workers around the state. Before Bueno announced its likely job cuts, for example, independent distributor Saccani Distributing—which has served the Sacramento market since Prohibition ended—announced it would lay off 130 workers, after Reyes bought out its beer brands. Most of those layoffs were permanent. When independent distributor Elyxir sold out to Reyes in 2020, it told the state it would lay off all of its 113 employees and shutter permanently.
While some workers, like delivery drivers, get hired back after Reyes’s buyouts, Kevin Luckey, head of the California Family Beer Distributors, says that permanent job losses due to Reyes’s consolidation of the industry conservatively number in the “hundreds.”
Small distributors that haven’t sold out to Reyes are increasingly struggling to survive, advocates say. “It’s hard to see your future as an independent beer distributor when there’s been no opportunity to grow and it’s an industry you’re going to get forced out of,” says Luckey, whose advocacy group was established in part to push back against Reyes’s consolidation of the state.
Lawsuits and wholesaler statements allege that major beer brands began abandoning long-term relationships with independents so they could partner with Reyes and its expanding California empire. One common tactic left mom-and-pop distributors both without their top sellers, and without the cash to make up for the loss.
As Reyes has grown, the number of independent beer distributors in California has shrunk, from 51 three years ago to 37 today.
For years, independent distributor Classic Beverage has stocked bars and stores in Southern California with major imports from Diageo, the importer of Guinness, Harp, and other popular brands. But in June 2020, Diageo abruptly told executives at Classic that it would break its distribution contract and look for a new wholesaler in the south of the state. Through reports in industry publications, Classic found out for whom Diageo was absconding: Harbor Distribution, a major California subsidiary of Reyes. For the trouble of breaking the contract, Reyes offered Classic a one-time cash payment that Classic claimed in a court filing was “a small fraction of the fair market value of Classic’s rights.”
Knowing Diageo was leaving Classic one way or the other, Classic struck a deal with another local distributor that would have paid Classic millions of dollars more for the rights to distribute Diageo’s beers and other products. Classic went to Diageo with the richer deal, stressing that the new distributor had a 60-year history in the area and a track record of success for its brands. But Diageo refused, saying that the Reyes offer was the only offer Diageo would accept.
“Diageo connived with Reyes to strong-arm Classic into accepting a ‘fire sale’ price for Classic’s rights so Diageo could avoid paying fair market value compensation,” lawyers for Classic say in a lawsuit against Diageo. The case has since been settled privately.
Even some craft brewers that grew up alongside family-run distributors have begun pulling out of their old distribution deals. In March of this year, a local San Mateo County distributor named Matagrano got a letter from Sierra Nevada, the third-largest craft brewer in America, saying that it was ending its two-decade partnership. The distributor says Sierra Nevada gave no reason for the abrupt breakup; days later, the brewer then dropped a sum of money in Matagrano’s bank account. Matagrano sued, claiming that the breakup not only violated their long-standing contract, but that the unsolicited payment was far less than what the Sierra Nevada distribution rights were worth on the open market. A month after sending the letter to Matagrano, Sierra Nevada joined the roster of Golden Brands, the Reyes subsidiary in the Bay Area.
The Matagrano case settled privately and was dismissed last year.
MEANWHILE, SMALLER CRAFT BREWERS BELIEVE that as Reyes expands, it will only strengthen its alliances with major brewers like Molson Coors and Constellation Brands, making it harder to find a pathway to bars and stores. “The current state of the market has created a situation where brewers and retailers must deal with entrenched duopolies in most geographic territories,” Robert Pease, head of the Brewers Association, said in a letter to federal investigators last year.
In most places around the country, bars and stores are also served by the other half of the distribution duopoly: the so-called “red houses” that sell Budweiser and other brands owned by AB InBev. California permits brewers to own distributors, which AB InBev had done in many cases. Elsewhere, in order to get around prohibitions on cross-ownership in state law, the Big Beer duopoly has often required its contracted distributors to preference their products through carrots and sticks—incentivizing brand loyalty or imposing penalties such as revoking credit when they don’t give the big companies reports on smaller rivals’ sales.
For various reasons, “blue houses,” or distributors that carry Miller and Coors products, have traditionally been more willing to carry and promote up-and-coming craft brands. But small brewers say Reyes has little interest in them.
Eight years ago, Arizona’s SanTan Brewing partnered with Reyes to expand the brewery’s footprint into the popular Southern California market. But in a submission to federal investigators last year, SanTan said Reyes took over the rights to their beers, then did little to actually distribute them to bars and stores. “Reyes Beverage Group … sign[s] unbreakable contracts with Suppliers and then do not order any product.” SanTan said. “This effectively ‘shelves’ the brand and does not allow the supplier to use another Distributor.”
The practice of shelving smaller brands that are trapped in nearly unbreakable contracts is commonplace with Reyes, industry sources say. It’s a perverse use of a rule intended to prevent brewers from bullying small distributors, but is today being used to cement the joint dominance of the big brewers and the growing Reyes empire.
After receiving more than 840 comments from industry players, the Treasury Department released a comprehensive report in February that singled out Reyes by name.
When Reyes bought out independent California distributor DBI in 2019, it took over DBI’s relationships with dozens of brands, including Sonoma County craft brewer Seismic Brewing. In a legal action filed the following year, Seismic claimed that Reyes scrapped the favorable deal it had with DBI and instead pressured Seismic to sign a boilerplate distribution deal, which included far fewer protections. Reyes did the same a year later, when it acquired mom-and-pop distributor Elyxir, which distributed Seismic in the Bay Area.
A state judge dismissed that case. But in a new federal lawsuit filed in April, Seismic claims that after they refused to “submit to Reyes’ anticompetitive contract,” the distributor arranged “bounties” in which salespeople from DBI and Elyxir pushed bars to remove Seismic from its permanent tap-handle placements, “to punish Seismic for refusing to agree to Reyes’ form contract.” They add that these strong-arm tactics extend across the state. “By controlling access to retailers, Reyes can and does pick winners and losers throughout the brewing industry,” the lawsuit claims.
One brewery owner from a different state, who requested anonymity to discuss Reyes’s behavior freely, says that they also declined to sign Reyes’s one-sided distribution contract after the company bought out the brewer’s formerly independent distributor. After they refused to sign the deal, the owner says, Reyes offered its sales reps bonuses for every time it replaced one of the brewer’s tap handles from a bar.
Other than lawsuits and industry association statements, smaller players in California have been reluctant to speak publicly about Reyes’s impact on the beer industry. Nearly a dozen different brewers and distributors contacted by the Prospect for this story either declined to speak publicly about Reyes or did not respond to requests for comment.
Several small companies that operate in the shadow of Reyes and its Big Beer partners say privately that they fear retribution from the conglomerates. One San Diego–based craft brewer declined to discuss Reyes because “the prospect of—even inadvertently—creating tension with our distributors isn’t something we can realistically risk at the moment.” Another family-owned distributor in California didn’t want to step into the fracas surrounding Reyes. “I worry about myself, my distributor, my employees,” they said. “I don’t want to be out of business.”
CONSOLIDATION AMONG BEER DISTRIBUTORS in California and elsewhere hasn’t gone unnoticed. Last July, the Biden administration issued a sweeping executive order intended to examine and address concentration across the economy. The beer and alcohol industry got special mention. The order instructed three federal agencies to examine predatory practices in the industry, including “exclusionary, discriminatory, or anticompetitive distribution practices, that hinder smaller and independent businesses or new entrants from distributing their products.”
After receiving more than 840 comments from industry players, the Treasury Department released a comprehensive report in February that singled out Reyes by name, noting that the company continued to expand its national footprint in 2021. While a big distributor’s expansion might not specifically kill competition in any one particular market, the report found, a buying spree “can still raise concerns about conduct that reduces competition from smaller distributors by creating barriers to entry or expansion.”
Treasury’s recommendations to the antitrust agencies focused mostly on consolidation among brewers, particularly Big Beer’s continuing acquisitions of small craft brands and how that can damage the ability of smaller brewers to find consistent and effective distribution. But Treasury also asked the feds to take into account “markets that are already highly concentrated” when considering revisions to their guidelines on when and why they would challenge mergers.
That process is now under way. The agencies in January announced that they planned to update their guidelines, and have asked for comments on what they should include. The guidelines could, for example, recommend the agencies sue to stop companies with some level of dominance from buying out smaller firms, which could preemptively stop Bud or Miller from acquiring smaller brewers, or Reyes from expanding its footprint any further in California, Chicago, the Washington, D.C., area, or other parts of the country where it controls a major stake.
The Treasury report also suggested changes to state regulatory systems that could help bolster competition in the industry. One example involved allowing small brewers to distribute their own beer without limit, or to more easily move from one distributor to another. But attempted regulatory fixes are rife with pitfalls. Give too much power to beer producers, and Big Beer will bully small distributors and craft brew rivals. Give too much power to distributors, and craft brewers are further exposed to the whims of Reyes and AB InBev. Without action to deconcentrate the beer industry, competition and beer drinkers suffer under the thumb of monopolies.
Meanwhile, Reyes’s dominance in California faces a more immediate threat. In a court filing, craft brewer Seismic revealed that last September, the antitrust division of the California attorney general’s office sent Reyes a subpoena as part of its investigation of “potential anticompetitive activity in relation to beer distribution and pricing in California.” According to that filing, Seismic believes Reyes and its subsidiaries have been questioned in the investigation as well, and sources confirmed that the office has contacted brewers and distributors around the state as part of the investigation. The state AG’s office declined to officially comment.
Whether or not the investigation eventually targets Reyes’s dominance in California, Luckey, from the family distributors association, says something needs to change. Reyes is now bigger than even its largest beer suppliers in the state. The company has tremendous leverage in its dealings with small distributors and craft brewers, which have relied on fairness in the system to survive. When one company wields power like Reyes does, Luckey says, “the system doesn’t really work as designed.”
