Some of the most powerful retail sales practices for alcohol are getting a closer look from federal regulators, with the potential to upend decades of precedent that shape the way beer, wine, and liquor appear on store shelves. Chief among the sales practices under scrutiny are what’s known as category management and shelf schematics. These are strategies by which an alcohol wholesaler or manufacturer provides a retailer with guidance—often in the form of visual plans—on how to stock, display, price, and promote products within a certain alcohol category, such as beer or wine.
Greater scrutiny—or outright repeal—of category management would be a sea change to the U.S. alcohol landscape. Reducing or repealing category-management practices has the potential to shift sales in the combined $250 billion wine, beer, and spirits market in the U.S. in ways that may not be entirely predictable. Changes to these practices could also mean a physical difference in the beer, wine, and spirits selections that U.S. shoppers see on shelves at large chain stores like groceries, BevMos, Total Wines, and Walmarts.
“If you think about the amount of booze sold through chain stores, category management completely affects what Americans see on the shelves,” says Donn Bichsel Jr., an alcohol sales and marketing specialist and founder of consultancy 3 Tier Beverages.
Federal agencies could, within just a few months, issue rulemaking notices on the topic of category management. It’s spurred by a July 2021 executive order from President Biden meant to promote competition within the U.S. economy broadly, and within alcohol-beverage specifically.
As part of that order, Biden directed regulatory agencies—the Alcohol and Tobacco Tax and Trade Bureau (TTB), The Treasury Department, and the Department of Justice—to take a closer look at trade practices that make it more difficult for small producers to compete with Goliaths.
Category management is an aspect of alcohol sales hidden in plain sight. It’s an area of competitive concern that, if changed, could alter the way shoppers literally see their options. Think of it like a blueprint:
A wholesaler or beer company (generally one of the country’s largest) provides a retailer with suggested shelf layouts that show where specific brands should be stocked and how they should be priced and promoted.
These shelf schematics debuted in the mid-1980s with large distributors; the TTB (then under the umbrella of the Bureau of Alcohol, Tobacco, Firearms, and Explosives) initially began to regulate them in 1986.
Category management became more widespread in the early 1990s and has been legal since 1995. Shelf schematics and category management also occur in most other consumer packaged goods, from frozen food to beauty products. What’s different about alcohol, however, is that suppliers and wholesalers cannot pay for shelf placements as other categories of products are allowed to. (For this reason, changes to category management are not expected to dramatically affect alcohol pricing.)
In the course of about 30 years, these strategies have collectively become a powerful tool that many small alcohol makers and wholesalers feel excludes their products to the benefit of the industry’s largest players.
Small companies argue that such strategies are an example of the “tied house” practices that the three-tier system of alcohol sales was designed to prevent. “Tied house” refers to a producer or wholesaler persuading a retailer to purchase its brands at the expense of others, a common practice pre-Prohibition.
Large alcohol companies and wholesalers say category management and shelf schematics are merely guidance, and that retailers have the ultimate say in what ends up on their shelves. Furthermore, staff at a Target or Kroger may not have the time or data resources to focus on designing shelves for beer, meaning that without shelf schematics, customers might encounter confusing or poorly organized retail displays.
Bichsel notes that neither retail staff nor small alcohol brands today generally have the robust data that larger companies do, and which they use to present well-researched shelf schematics.
The Brewers Association (BA), the trade group representing what it defines as “small and independent” breweries in the U.S., criticized these practices several times during May’s Craft Brewers Conference (CBC). BA representatives say the executive order means federal regulators have this issue in their crosshairs. Indeed, the Treasury Department’s February report on competition within alcohol calls out category management twice in its executive summary, recommending “additional enforcement efforts … on category management schemes.” In the past, complaints about tied-house violations related to shelf schematics have resulted in wholesalers’ permits being temporarily revoked. Fines are also a potential outcome.
Greg Heltzer, a partner at the law firm McDermott Will & Emery who specializes in antitrust, said in a February webinar that the executive order should be “a red alert” to wholesalers and large producers that scrutiny of category management is underway. He said such investigations will impact alcohol’s largest players “if not already, then soon,” adding that active federal agency investigations are likely already going on with regard to category management.
The Beer Institute (BI), which represents the country’s largest beer companies, did not respond to a request for comment for this story. But in written remarks to the TTB, the BI stated that the number of small breweries today is evidence that the current system of beer distribution and sales (including category management) works for breweries of all sizes.
“This vibrant, competitive industry has not only deconcentrated over the previous several years, with the largest brewers experiencing a decline in share and small or mid-sized brewers (including craft brewers) commanding more significant share, but the amount of innovation in the US beer market is staggering and shows no signs of slowing,” the BI’s outgoing president and CEO Jim McGreevy wrote.
Marc Sorini, general counsel for the BA, says he expects rulemaking guidance from regulators to come within months.
Defenders of category management (alcohol’s largest players) have something of a trump card: The practice has been legal since its inception.
The TTB, which regulates and collects taxes on beer, has ruled that category management and shelf schematics are an exception to tied-house laws. The TTB has long ruled that these schematics are essentially guidance akin to a verbal recommendation, and that retailers are free to use or disregard them as they see fit.
Critics like Sorini say that’s not what happens in the real world. The BA argues that shelf schematics are often adopted whole cloth by a retailer, favoring some brands at the expense of others. Sorini says this has become “a centerpiece of retailer merchandising.” The work of laying out a retailer’s shelves for them is obviously a “thing of value,” he adds, when given by a beer company or wholesaler to a store owner. If it found shelf schematics to be “a thing of value,” the TTB could then consider it as an illegal act known as “inducement,” which is defined as when a company provides items or services of value—like suggestions of how to set a store shelf—that encourage a retailer to buy their products and exclude others.
Furthermore, he says, category managers or captains are always from the industry’s largest companies. Anheuser-Busch InBev, for example, has an entire program—called IGNITE—that unifies and promotes its category managers with the goal of “help[ing] consumers navigate the [grocery] aisle.” Companies including Molson Coors Beverage Company, Constellation Brands, Boston Beer Company, and Diageo also employ category managers or captains.
“To the best of my knowledge, no small supplier or wholesaler acts as a category captain for a retail chain,” Sorini says. (Small producers could do this; it’s a matter of whether they have the staff, financial resources, and data assets to do so.) “As a result, limiting or eliminating the current practice of outsourcing shelf stocking and merchandising decisions would put [control] back in the hands of the retailer, which would make decisions independent of the largest suppliers or wholesalers.”
Some programs already exist to try to give new beer brands a leg up at retail. These include Chicago-based Pilot Program’s incubator program; Boston Beer’s Brewing the American Dream program; and Target stores’ Takeoff and Forward Founders programs. Last year, Walmart began carrying Black Is Beautiful, a collaboration beer made to support racial justice, which Walmart sourced from 13 BA-defined craft breweries. The beer appeared in 600 stores, an unusually large national launch for what had until then been a diffuse, charitable brewing project.
Category management isn’t all to the detriment of small producers, either, says Bichsel. He says that without category management, retailers would rely exclusively on scan data about what products sell now, meaning they’d be less likely to roll the dice on new or smaller brands. They’d also likely reevaluate their offerings less frequently; more chain retail stores currently “reset” their selections twice per year, in the spring and fall. Less frequent resets and fewer new products would result in what Bichsel calls “homogenized stores.”
“[Resets] being left to the individual chains or stores that don’t have the bandwidth to manage them could lead to new innovations missing their chance at chain distribution,” Bichsel says. “Are category managers going to take care of their [company’s] brands? Of course they are. But not having these experts could lead to hundreds of products never getting their shot.”
He urges small producers who are critical of category management to consider what the alternative could look like. Currently, small alcohol brands already have to fight for attention from their distribution or retailers. He believes this would only get worse if category managers weren’t there to vouch for them.
“If you only built shelves based on what currently is selling, based on what is scanning in the marketplace, then the smaller brands … would get killed,” Bichsel says. “Be very, very careful what you wish for.”
There’s evidence to suggest the TTB is listening to concerns about category management. But there’s also 30 years of precedent to suggest that the agency doesn’t consider these concerns valid enough to do away with category management altogether.
In a 2016 ruling, the TTB pointed to category management as a potential locus for tied-house violations. While maintaining that the agency does not object to shelf schematics, no matter how complex, its review found that “some industry members do not offer a mere shelving plan alone but also include additional services, sometimes of significant value, that exceed … the [tied-house] exemption.” These might include giving the retailer expensive third-party data, or assuming the role of a decision-maker about competitors’ products.
Yet even after the TTB flagged this issue, the agency has not announced any enforcement action in connection with category-management practices. For six years, the agency appears to have had concerns about these tied-house violations, but hasn’t yet cracked the whip.
The TTB’s recent quiet may change. Biden’s executive order gives the agency, as well as the Department of Justice and the Treasury Department, a broad mandate to crack down on anti-competitive practices within alcohol. This is a function of Democrats’ political inclinations toward economic regulation. In signing the executive order, Biden said, “Capitalism without competition isn’t capitalism; it’s exploitation.”
The law firm of Davis Wright Tremaine identifies “exclusionary conduct by companies with significant market positions”—naming category management specifically—as one of the two main antitrust issues likely to be top of mind for regulators focusing on alcohol.
A July 2021 analysis of the order from law firm Norton Rose Fulbright states: “Dominant players, particularly in the supplier and distributor sectors, should prepare to respond to … potentially justify their business practices.” For small producers who feel targeted by such practices, however, “the executive order presents a unique opportunity to engage in advocacy.”
The BA is certainly engaging in that advocacy. The group invited Tim Wu, the special assistant to the White House for technology and competition, to virtually address the audience at CBC and explain how the administration sees small brewers as an example of healthy economic competition in action.
During that address, Wu directly appealed to small brewers to report violations of existing trade laws and to make clear to the administration how those laws need to change, either through the BA’s lobbying or by contacting their legislators. (The former is where the BA sees an opportunity to assert its belief that category management should be repealed altogether.) Wu singled out “violations of existing trade practice rules” in alcohol as an area of concern for the administration, and said that the White House is “on the lookout” for regulations at all levels that may disproportionately burden small- and mid-size businesses.
Sorini does acknowledge that these types of trade-practice laws can “languish for years.” For however long the interim period is, category management will continue to stand as acceptable and widespread business practice. If that precedent is upended, it may be one of the most significant, yet quiet, changes to U.S. beer shelves in decades.
Words by Kate Bernot