Inherent Vice and Vertical IntegrationMay. 18, 2017
If you’ve read Thomas Pynchon’s Inherent Vice or seen the Paul Thomas Anderson film based on the novel, you know a little bit about vertical integration. In the novel, the Golden Fang – a shady conglomerate – imports and sells heroin to users, operates a massive dental operation to help heroin and other drug addicts fix tooth decay problems associated with the drugs, and operates a full drug rehabilitation center. In short, Golden Fang controls importation, distribution, retail, ancillary services, and rehabilitation, creating a constant cycle of revenue. This is known as “vertical integration.”
Well beer lovers, news has come out recently that breweries now have their own Golden Fang to compete with – AB InBev. Let me be clear, I am not saying that AB InBev is a heroin cartel or anything of the sort. What I am saying, however, is that we are starting to see real-life vertical integration on a larger scale than we have seen in recent times in the brewing industry.
This comes about as a result of AB InBev’s purchase of SAB Miller. SAB’s holdings included a large portion of hop farms in South Africa, and those farms are now under AB InBev’s control. Because AB InBev controls the hop farms (and as a result, many of South Africa’s hop varieties), it also controls the distribution of those hops. This is not a violation of law, nor is it anything “new.” The consequences of a recent AB InBev decision related to South African hops, however, appear to be unprecedented, or have at least led to an unprecedented outcry among craft breweries and craft beer drinkers.
While these South African hop farms had previously supplied hops to American craft brewers, AB InBev has stated that it will not sell any of these South African hops to American craft brewers. It is worth noting though that, presumably, its American craft beer brands, such as Elysian, Goose Island, and Wicked Weed will be able to purchase them. In fact, in a statement, AB InBev said that it will allocate some of these hops to “other [AB InBev] breweries outside of South Africa.” This means, in essence, that unless you are a craft brewery that has sold to AB InBev, you will not be seeing any of these hops.
The large brewery conglomerates have always been vertically integrated to a degree (although the three tier system has prevented it in some respects), controlling hop farms, certain parts of the distribution chain, etc. This is the largest outcry, however, that we have seen about access to hops. AB InBev claims that the refusal to sell to non-AB InBev craft brewers is a result of low yield this year, and pointed out in its public statement that the only reason hops are grown in South Africa is a result of SAB’s research and development.
One of our favorite California breweries, Modern Times, tweeted: “Don’t think macro brew acquisitions matter? Today we learned AB InBev is cutting-off all indie breweries from buying South African hops.” They raise a good point. As large conglomerates consolidate, there should be greater concern among craft breweries, craft beer drinkers, and regulators. The last thing we need is a beer version of the Golden Fang.
As craft beer attorneys, we can do our best to help negotiate long-term hops contracts. It may also be time for independent craft breweries to consider working with craft beer attorneys to establish buying cooperatives among groups of craft breweries to help alleviate some of the problems that will continue to arise as consolidation among large conglomerates continues.