What Serious Wine Lovers Need To Know—The Truth

The Myth:
The Three Tier System benefits consumers.

The Truth:
The Three-Tier System provides no benefit to the consumer that they would not otherwise possess from a marketplace without a three tier system.

I believe the truth about this three tier myth is so obvious as to not even deserve mention. Yet the myth is so often passed off as truth that in many quarters it is taken as holy writ. Those quarters usually end up being at beer, wine and wholesaler rallies and in the halls of government where lawmakers regularly visit with the wholesalers the pass them bank checks.

For anyone still unsure, let me explain the very simple three tier system. That so-called system consists of two elements:

1) the three tiers (alcohol producers, wholesaler and retailer) may not possess financial interest or formal control over the other. For example, a retailer may not own a winery. A winery may not own a wholesaler. A wholesaler may not own a retailer.

2) It is mandated by LAW that wholesalers are used to funnel product from producers to retailers in a given state.

That’s it. That’s all. Anything else is an addendum to the regulatory policy of a state and not a basic part of a so-called “three tier system”.

This is all on my mind after reading a press release associated with the most recent annual convention of the National Beer Wholesalers Association that included this nugget:

“the American [three tier] system sets the standard for delivering variety and choice for the consumer like no other system in the world.”

I don’t know about other system in the world, but I do know this about the system used in most states:

1. The three tier system is one that explicitly chooses the middleman over the producer or retailer by forcing both to use a wholesaler in most cases.

2. Whenever it is mandated that a producer of alcohol use a wholesaler to get their product to a retailer in a given state, that state’s consumers has far less variety and choice than it otherwise would have simply because wholesalers have no interest in representing anything more than a small number of producers.

3. If there were no mandate for alcohol producers to use middlemen wholesalers, the wholesalers service would still be available to producers…IF they wanted to use it, thereby forcing middlemen wholesalers to prove their value, rather than having a false value imposed upon the marketplace.

4. In the corrupt, anti-free trade three tier system that mandates the use of a middleman wholesaler, it’s the wholesalers and not the marketplace that gets to pick the winners and losers.

It is no coincidence that when wholesalers tout the benefits that the three tier system gives to the consumer, they don’t explain how the benefits result from the system, nor do they address whether alternatives to the three tier system would give consumers more benefits. Believe me when I tell you that these things are not addressed for one reason: these claims can’t be rationally or logically explained or defended

The problem lies in the fact that wholesaler profits are dependent upon a marketplace system that was put in place to serve a world that no longer exists. To sustain this fantasy world, beer, wine and spirit wholesalers concoct indefensible arguments. What’s further true is that there are those willing to live in this delusional, long-gone world promoted by the middlemen as long as they tangibly benefit from believing the fantasy. But consumers know better. More importantly and more repugnantly, the wholesalers themselves know that the claims they make about the three tier system are untrue. And yet, they make the claims. There is a word criminal psychologists use for this condition.

 

Posted In: Uncategorized

Tags:


10 Responses

  1. Z - October 23, 2012

    Tom – preachin’ the gospel…next you’ll rat out the tooth fairy and Santa Claus…

    The 3-tier system is a vestigal apparati from post-Prohibition days, serving the interests of a chosen few families in amazingly frutiful ways. I know of no other instance in American commerce where free enterprise is so compromised, and competition is so restrained. Where success isn’t a function of competitive advantage or superior services or even great marketing, but rather back-room deals and graft…

    So why do we all tolerate it? That’s the primo question. That begs another column and analysis…sure there are the investments in politicos that grease the skids – but that has rarely lasted the test of time and opportunity. So why does this system – which benefits a few families – continue to endure? And more importantly, what socio-economic (and then legal/legislative) changes are needed to right the ship and restore free enterprise, competition, and sanity?

    Z

  2. Randy Caparoso - October 23, 2012

    Although the three-tier system is antiquated, many states recognize it and allow direct shipments to consumers from wineries. However, it’s only the day when states can figure out how to make up for the huge loss of revenue that the three-tier system conveniently provides (taxation on at least two levels, on wholesale shipments and at retail sales end) that this custom will finally end. Something I doubt will happen soon. And since it won’t, it might be better to expend energy grousing over states that still aren’t allowing direct to consumer shipments…

  3. Tom Wark - October 23, 2012

    Randy,

    Interesting thoughts. Here’s the thing. Among the more repugnant aspects of the three tier system is the mandate of using a wholesaler. If that mandate were eliminated, wholesalers would still be used, and would still collect taxes on the wines they brought in. However, they would have to earn the right to serve producers and retailers. Taxes would not be a problem since retailers and producers are quite adept at writing checks.

    As for direct shipping, I couldn’t agree more. Winery and retailer direct to consumer is critical for today’s consumer. But we can’t forget about issues like wine in grocery stores, legal corkage, Sunday sales and even privatization.

  4. Tone Kelly - October 23, 2012

    Tom, I like your thoughts. One key question to ask is: “if the 3 tier system is so advantageous why doesn’t every retail operation such as groceries, electronics, automobiles, dishwashers, etc. use it?” The answer of course is that they don’t. The 3-tier proponents should answer the question. And state legislators should also answer this question.

  5. Jack Jelenko - October 24, 2012

    Tom, While I have no disagreement with the MANDATE element of your argument, I would caution against painting the canvas with too broad a stroke. I have a feeling if you polled a certain number of medium-small producers around the world, you might discover the vast majority rely heavily on the 3 tiered system, and not because it is mandated. If you are a small (less than 2,00 case producer and have the ability to sell out by yourself to a handful of retailers, you should have that opportunity without intervention from the government or wholesaler network. But if you have more cases than that, and don’t have the direct sale ability, the 3 tiered system is your life line. I have 8 smallish (5,000-20,000 case) family producers from all over the world in our national portfolio, and neither they nor we would survive without the valuable service of the 3 tiered structure. And, as more than 80% of our business in 38 states is on-premise (restaurants), we need and rely on the 3 tiered system for our logistical success as well as selling success. And there are many quality, service-focused fine wine distributors who recognize their value and work diligently to preserve their integrity.

    The three-tiered system, in its pure form, whether in wine, hardware, food products (groceries), electronics etc. provides an economy of scale distribution avenue that smaller producers would not otherwise have the opportunity to enjoy. Almost every industry uses wholesalers. It only goes astray when the fate of many is put in the hands of few. It is the behemoth, multi-state dominators who warp the system, and that is where the energy should be focused to bring reform.

    Thanks for the forum

  6. Tom Wark - October 24, 2012

    Jack,
    As I hope I made clear, the wholesaler (middle part of the tier) serves a purpose and that purpose is exactly as you describe. However, my point is that you would make use of those services whether the it was mandated you use a wholesaler or not.

    The mandate in many states that a wholesaler must be used to import the wine into the state is without merit, as are a number of other restrictive laws that really only serve to protect the wholesaler, while harming the overall wine marketplace, not to mention the interests of consumers.

  7. Rich Reader - October 24, 2012

    The next to last word in first sentence of the final paragraph needs clarification: “The problem lies in the fact that wholesaler profits are dependent upon a marketplace system that was put in place to serve a world that no exists.” Is it “no longer exists”, or perhaps “never existed”?

  8. Debbie Work - October 25, 2012

    One interesting set of information is there are 11 states that do allow wineries to do “self-distribution” which means selling directly to retailers and restraurants. There are 34 states that allows brewers to do “self-distribution”. As a small winery it is really hard to get any attention from the distributors because they have lots of pressure from the large wineries who can hire sales reps to stay on top of the distributors.

  9. 5th tier - October 26, 2012

    Tom,

    This is a very touchy subject for many of my friends and associates. Alas no name.

    Thanks for continued beating of this drum.
    I have always believed that power is the issue at hand. Right now certain people in the wine business have far too much power, and they do not have any competition. By competition I refer to the direct business. Legally wine in most states can not be purchased in any other manner besides the 3-tier system. In the case of most other industries, there is choice of buying the product direct (which can be cumbersome) or using a wholesaler (much more convenient). In those industries the “up-charge” for convenience must be reasonable otherwise the buyer will buy direct. The mandated 3-tier system does not have such a “relief valve” to keep pricing in check.
    In this scenario I am not talking about direct as in direct to the consumer, I am talking about the retail and restaurant tier buying direct from the producers… or rather, just having the option. Not many will, but all you need is that threat and a couple of savvy buyers buying direct to keep the big Middlemen in check.

  10. “Liberate i vigneti”. O no? « Diobacco - January 9, 2013

    [...] Esiste in America un movimento che si chiama Free the grapes : il suo obiettivo dichiarato è quello di garantire al consumatore finale la scelta dei vini migliori, grazie alla libera circolazione degli stessi, finalmente privi dei molti vincoli, fardelli e balzelli che i diversi Stati si sono inventati nel tempo (compreso il famoso three tier system, di cui il wine blogger Tom Wark fa un'interessante disamina qui). [...]


Leave a Reply


+ five = ten