Understanding Regulatory Capture and its impact on beverage alcohol
A quick overview of the concept, how it’s influencing the beverage alcohol industry, and examples to show how dangerous and engrained it really is.
My last article introduced the concept of Regulatory Capture, but I feel it needs more explanation so that folks in the industry can spot it in action and hopefully, for transparency purposes, start to call out instances where it is happening.
A recent article on the subject published by The Craft Wine Association provides a very clear explanation of Regulatory Capture and its impact. “Regulatory capture, where agencies prioritize the interests of a select few over the public.”
In summarized terms, this is how it shows itself in the market:
Lobbying and legislation - Large alcohol producers and wholesale distributors contribute millions to state legislatures with substantial lobbying power.
State-level variability - The regulatory environment heavily favors local distributors and large producers.
Licensing and compliance costs - High licensing fees and complex state compliance requirements act as barriers for smaller businesses.
Influence on regulatory bodies - Individuals with close ties to the alcohol industry end up in regulatory roles.
Public safety and control arguments - The argument that strict regulations are necessary for public safety and control over alcohol distribution is often leveraged by large players to maintain restrictive DTC laws.
There are many examples of these in the market today. It is something both regulators and legislators should look at and check themselves and those around them to make sure that they have not inadvertently slipped into this behavior, because in a modern economy transparency quickly starts to show these issues are happening and who is participating.
It is ironic that due to tied house rules the word “free” is a dirty word, yet many in the legislative and regulatory roles are drawn into free or sponsored events by large players directly covered by the regulatory capture structure. They may not even realize they themselves are participating. More states should enact mandated ethical training, the same that lawyers participate in annually.
You see examples of the “Influence on Regulatory Bodies” most specifically when an agency appoints a leader who was formerly a leader in the wholesale tier. It is hard to think that there is not a built-in bias towards the wholesale channel and a closed mind to modernization. For example, Dale Farino has just been appointed as CEO of the Virginia Alcoholic Beverage Control Authority. Previously he worked at Breakthru Beverage Virginia in various roles culminating as the EVP/president prior to his retirement. Farino also served as president of the Virginia Wine Wholesalers Association from 2019-2023. Awesome career and he understands the industry exceptionally well, but clearly only from a wholesaler's perspective.
There are instances where public servants within regulatory organizations receive awards for their services to the industry. However, those funding the awards are the ones that are routinely lobbying to protect the current landscape to be in their benefit, see regulatory capture. I agree people should gain recognition for their hard work in this field, and it is very hard, but maybe it should not come from the companies they are supposed to be regulating. Great examples are the awards given out by the The Center for Alcohol Policy, a non-profit who hides it contributors, but its sole paid employee is Craig Purser who is also the President/CEO of National Beer Wholesalers Association. Past recipients can be seen here.
Clearly the most obvious area is the amount of funds spent by the large members of the wholesale channel making direct contributions to candidates. If a legislator is receiving contributions both directly and indirectly, they should recuse themselves from voting on certain legislation due to their conflict of interest. It is pretty common practice to recuse oneself where conflicts of interest occur. An interesting article by Tom Wark on this subject was recently published: Wholesalers – 100 Million Investment.
I am not naive about how US politics works, but let’s say it as it is, these practices are hurting an industry.
The work the Craft Wine Association is doing in this space is great. They continue to foster support for the Direct Shipping Bill of Rights along with the concepts of modernizing the industry to allow virtual wholesalers and the acknowledgement that we are no longer operating with just a three-tier system but actually a three-channel system, that being Direct to Consumer (DTC), Direct to Trade (DTC), and Wholesale.
Happening right now is the annual National Conference of State Liquor Administrators (NCSLA) and I feel these modern topics and business models that are shaping the industry are what should be discussed with members. Panels should include those in the industry that are shaping it, and not just those that are holding it back. So often we see the topics reflecting what is today and yesterday, but we need to be thinking of what is coming next, and rather than starting with a “no, we cannot change”, start with a “what would be good for the producers and consumers” because without those two, we have no industry to regulate.
In the meantime I’m Oregon :(
https://www.koin.com/news/oregon/olcc-bourbon-scandal-investigation-findings-liquor-criminal-charges/