This company controls much of the alcohol industry. Can a lawsuit and the feds break its grip?

[Erik Owens]

The Biden administration has identified consolidation among U.S. alcohol distributors as one of the greatest threats to the industry.

Source: https://www.sfchronicle.com/

January 29, 2024

The average American drinker wouldn’t know Southern Glazer’s Wine and Spirits by name. But chances are good that they’ve consumed its beverages, which include top-selling brands like Grey Goose, Smirnoff, Bacardi, Jameson, Patron, Josh Cellars and Meomi.

Southern Glazer’s doesn’t make these products; it distributes them, serving as the middleman between the maker and the seller. The company is not only the country’s largest alcohol distributor, but also the 10th-largest private company in the U.S., according to Forbes.

Critics of Southern Glazer’s have long argued that it’s too large and powerful for the good of the industry. But now, the company is facing a level of heat that appears unprecedented. The Biden administration has raised concerns about its dominance in the market. The Federal Trade Commission has said it’s investigating the company for possible violations of a federal law. The Internal Revenue Service and the Alcohol and Tobacco Tax and Trade Bureau descended on one of the company’s Bay Area offices in what officials described as an “official activity.”

And Southern Glazer’s is now battling an antitrust lawsuit that has the potential to threaten its command of the American alcohol industry, some experts say. If successful, this lawsuit could force Southern “to stop bullying potential competitors,” said Taylor Katzman, the founder and CEO of Provi, the company that brought the lawsuit. (Southern Glazer’s did not respond to a request for comment for this story.)

Provi is an online platform connecting alcohol suppliers, distributors and retailers. A liquor store owner, for example, can use Provi to order from multiple distributors at once, including Southern Glazer’s. Between 2016 and 2021, Southern Glazer’s fulfilled more than 120,000 orders via Provi, worth about $200 million, according to the lawsuit.

But then, Provi’s lawsuit alleges, Southern Glazer’s and its closest competitor, Republic National Distributing Co., began to boycott Provi. They each created online marketplaces similar to Provi, the lawsuit says, and forced their customers to use those proprietary platforms instead. Southern Glazer’s and Republic National “nearly simultaneously” announced that they would no longer accept orders that came through Provi, according to the complaint, and “even blocked emails from Provi” so that any orders placed through Provi would never be completed.

Because Southern Glazer’s controls the distribution of so many “must-have brands,” said Katzman, this boycott “significantly impaired” Provi’s business.

Both Southern Glazer’s and Republic National have denied the allegations in interviews with other publications and have filed a motion to dismiss. A decision on that motion is expected soon from a judge in the U.S. District Court for the Northern District of Illinois Eastern Division.

Legal challenges are nothing new for Southern Glazer’s. Some of the recent lawsuits against the company have alleged it engaged in a pay-to-play scheme in Pennsylvania (for which it paid a $5 million fine); that it processed fake orders in order to drive up sales numbers (that case was dismissed); that it charged customers higher late-payment fees than was legal (for which it paid a $5.5 million settlement).

But Provi’s lawsuit, filed in 2022, shocked Sean O’Leary, an alcohol lawyer in Chicago who is not involved in any litigation with Southern Glazer’s. Cases against Southern Glazer’s often fall apart, he said, because the company has so many resources. Provi’s challenge was unusually formidable: “This is a well-written brief by a well-funded company, and they have very good lawyers,” O’Leary said.

While that plays out in court, Southern Glazer’s is facing additional pressure from the federal government.

Last year, the Federal Trade Commission opened an investigation into Southern Glazer’s for potentially violating the Robinson-Patman Act, which prohibits discriminatory pricing. Essentially, under the 1936 law, “you can’t give a deal to Bob’s liquor store and not give it to Pete’s,” explained O’Leary. The commission has since sued Total Wine, one of the country’s largest alcohol retail chains, for records related to the investigation. (A commission spokesperson declined to comment on the investigation.)

That investigation is part of a larger effort by the Biden administration to increase competition in various industries. In 2021, the president issued an executive order on competitiveness; the following year, the U.S. Department of the Treasury published a report that raised concerns about consolidation in the alcohol industry, among other fields, noting that the country’s largest alcohol distributors may be able to “push out smaller competitors.”

The Federal Trade Commission may not be the only federal agency investigating Southern Glazer’s. In 2022, regulators from the IRS and the Alcohol and Tobacco Tax and Trade Bureau arrived at the Union City offices of Southern Glazer’s and were “engaged in an official activity” there “for most of the day,” a spokesperson told the Chronicle at the time. It’s not clear whether the agencies will take any official action against the distributor. (The IRS and the trade bureau declined to comment for this story.)

“The challenge is that the government hasn’t brought these big antitrust cases in quite some time,” said Rebecca Stamey-White, an alcohol lawyer with the San Francisco firm Hinman & Carmichael LLP. “So whether they can accomplish much is unproven.”

But Provi’s case could aid the government’s efforts, Stamey-White said. If the lawsuit is not dismissed, it will move into the discovery phase, which might reveal new evidence not currently available to the government.

 

O’Leary echoed her sentiment. “If anything gets past the motion to dismiss,” he said, “it’s game on.”