The Coming Repeal of the Three Tier System for Wine, Beer, and Spirits

RepealWhen bribes are described as “the process” and when lawmakers admit they are happily in the pockets of alcohol wholesalers, it’s clear it’s time to change something. And everyone knows it:

For the majority of alcohol beverage producers, it has become abundantly clear that single most important impediment to their continued success is the existence of the State-Mandated Three-Tier System (SMTTS) in state after state across the country.

The artisan wine, beer and spirit producers know that a repeal of the SMTTS is as necessary today as Repeal of Prohibition was in the early 20th century. Just as Prohibition created the circumstances allowing for a small number of criminals to control alcohol distribution then, today the SMTTS has created the circumstances that allow a small cartel of middlemen to take over and control the alcohol distribution industry and they are willing to do whatever is necessary to keep it that way.

The SMTTS in place in most states prevents small wineries from supplying a select few restaurants and retailers with their unique products unless they agree to deliver what amounts to kickbacks to wholesalers, which are required for selling product to a specialty retail store or restaurants.

It’s true also that in the vast majority of states, wine and spirit retail shops find themselves at the mercy of the alcohol wholesaler cartel and benefit as well from repeal of the SMTTS. The SMTTS requires wine retailers to procure their inventory from this continually shrinking group of middlemen. As competition increase from internet sales and big box stores, these smaller, specialty retailers will need a way to differentiate themselves and add value that goes beyond discount pricing—a game they can’t win. The key to their success will be to offer their customers a more diverse and eclectic selection of artisan beers, wines and spirits. What they will, and now do, find, however, is a cartel of middlemen who can’t offer this kind of interesting and eclectic product inventory. But more important the SMTTS protects the cartel from competition by prohibiting the retailer from seeking products directly from the producers.

Finally, consider that the State-Mandated Three Tier System is today in no way necessary for the states to undertake their most important tasks with regard to alcohol: collect taxes, prevent underage drinking and undermine abusive marketing and use of alcohol. It has become abundantly clear that wineries and retailers are perfectly capable of apply for licenses and remitting taxes (both state and excise) without the help of a wholesaler. Direct shippers successfully deliver these taxes to the states into which they ship. Retailers successfully deliver sales taxes to the states. There is no foundation for the argument that wholesalers are the necessary point of collection of state taxes on alcohol.

As for keeping ownership of the tiers separate, another defense of the SMTTS, this too is easily accomplished without mandating that all sales of alcohol in a state move from producers to wholesalers to retailers. No cross ownership of tiers comes into play when producers sell directly to consumers or directly to retailers.

It’s also untrue that requiring all sales of alcohol go through a wholesaler middleman prevents undue influence of the producer over the retailer. This isn’t 1914. It’s 2014 and this kind of “tied house”, industry corruption that helped create the problems that brought us Prohibition are unfathomable in an economy of hyper competition and, more importantly, efficient logistics that allows consumers to have products delivered to them over night from across the country.

Rather, the real source of corruption in the alcoholic beverage industry is a direct result of the existence of a State Mandated Three Tier System, the advantage it delivers to the only people who benefit (the wholesaler cartel), and the incentive it creates for wholesalers to do whatever is necessary to protect their government granted protection from competition. What else accounts for the tens of millions of dollars that wholesalers throw at politicians annually in the guise of “campaign contributions”?

In a political system where politicians are constantly campaigning and need money to do so, and where the wholesaler cartel are more than willing, and able due to their protected positions, to pony up the money, it should come as no surprise that lawmakers possess great incentive to take the payola the wholesaler cartel offers in exchange for more political protection from competition.

What else explains the now 25 year effort to merely allow wineries to ship wine directly to consumers that still is not allowed in all states? What else explains that in only 15 states are out-of-state wine shops allowed to ship wine to consumers? What else explains the altogether corrupt and ludicrous “Franchise Laws” in numerous states that defines wholesalers as “franchisees” when they don’t sell one brand, but rather hundreds of brands, and are protected against those brands changing to a different wholesaler? What else explains that in numerous states artisan distillers and craft brewers can’t ship their products, let alone sell them directly to retailers and restaurants, but must go pay kickbacks to wholesalers to get their wine to market? What else explains the fact that the SMTTS still exists?

During Prohibition the corruption of public officials was one of the primary problems that actually convinced the public to abandon Prohibition.  Paid off by the mob, bootleggers and gangsters (ancestors of today’s wholesaler cartel), public officials protected those who controlled the illicit alcohol trade. Today, lawmakers protect the State Mandated Three Tier System, despite it delivering no discernible benefit to the public, the consumer or the alcohol industry.

I don’t want to give the impression that I believe that alcohol wholesalers are merely protection-seeking cousins of gangsters who foment corruption, stifle innovation in the alcohol industry, boot consumer interests aside and provide no real benefit.

The fact is, putting boxes on trucks then taking the boxes off trucks is honest work. There will always been a need for unthinking brute force labor. However, the need to legally mandate the use of box-puter-on-ers and taker-off-ers has long outlived its usefulness. Today, the SMTTS has become a parody of the much more innovative crime syndicates of Prohibition days.

The demise the State Mandated Three tier System will come on a state-by-state basis. It will be driven by the rise of craft beer and craft distillers who today are feeling the brunt of the impact of corrupt, unnecessary legacy system that serves no purpose today. But as their numbers increase and as it becomes apparent that their legitimacy alone can’t force change, these artisan brewers and distillers will demand change. They’ll ask for the right to ship their products direct. They will ask for the right to bypass the box-picker-up-ers and sell their and deliver their beers and spirits themselves to retailers and restaurants and pubs. But they’ll find that the wholesaler cartel and lawmakers stand in their way presenting the same old tired arguments that the wine producers and progressive retailers have heard all these years.

That won’t be enough. Because what’s coming is this: A coalition of brewers, distillers, wineries, progressive retailers and their consumer fans who will start making demands. The demands will make sense. The old wholesaler cartels and their defenders in government will begin to look silly. Lawsuits will be filed. The exposure of political payoffs from wholesalers will be highlighted at every turn by a media that knows perfectly well what’s going on and will become more and more willing to showcase the corruption.

Mark my word, a second Repeal is coming with the end of the State Mandated Three Tier System. It’s only a matter of time and effort.


82 Responses

  1. Laura Leet - March 18, 2014

    Big, big, big money against a righteous few with no money. Sounds like a battle…david and Goliath . I hope they win. I am not for the destruction of wine and spirit wholesalers, just think there is room enough to change with the times.

    • David Pergl - March 20, 2014

      I have been preaching this for over 20 years. I work in the Industry and others and understand all styles and methods of Distribution. Our company in 1993 defeated the system in CA. However, we did as a licensed wholesaler. Best, David

  2. Tom Joe Finnin - March 18, 2014

    Well said.. we live in OK so hopefully sooner rather than later… FREE THE GRAPES! (http://freethegrapes.org/)

  3. Carl Giavanti - March 19, 2014

    Bravo Tom, incisiveness meets moxie!

    • Sam - March 20, 2014

      You people are nuts. People die every year around world. But does not happen in out country. The wholesale net work provides millions of jobs plus number two in taxes collected. Get off this bullshit you people side writing.

      • John - November 14, 2014

        The jobs will still be there, and the taxes will still be collected,nothing will change except the consumer will get better choices and the mom and pop will have an easier time competing with Walmart

  4. Gregg Burke - March 19, 2014

    I am in NJ and own a wine shop. I have very little trouble getting artisan wines, spirits or beers. Breweries in NY are allowed to self distribute. And getting someone excited enough about Ruche that they will hand sell it in their store is not brute work it takes finesse and knowledge. Part of the three tier system is the sales force. Men and women who love what they do and are passionate. They work as ambassadors for small wine brands. The system needs some tweeking without question, for example large multi-state distributors such as Southern, Charmer, Glazer…etc and the large drinks companies such as constellation, Diagio, Terlato… are the source of the real corruption. They are the ones who participate in kick backs and strong arm tactics. NJ has an amazing collection of small independent boutique distributors. Who promote and sell small wineries that have no press or marketing budget. If you want to attack the system attack those who are perpetuating it and those who it benefits most like Total Wines. Most of the wine drinking populace will never buy their wines on line. Why would a person pay shipping on KJ, J Lohr, or Yellowtail? We all know that brands of this ilk are the largest part of the business. As for brands like Schoum Project, Mouton Noir, Eglehof Wines…ect they rely on people like myself who take the time and educate customers and show them the beauty of small brands. As a business person I have a limited amount of time, the wine business is too dynamic to keep track of everything. And that is where my salespeople come in, they keep me abreast of things I may have missed. You are not only suggesting throwing out the baby with the bath water, but the tub and plumbing as well. Focus less on repeal and more on reform. Cheers.

    • Laurine - March 20, 2014

      Thank you Gregg!! I am one of the described ,no brained thugs (as so awfully described in the article.) I started my sales career in NJ 25 years ago at what was then the Baxter Group, I was sent to wine school, educated on the different aspects of the industry by the WONDERFUL owners of that wholesaler. When I married and relocated to RI and found employment with another Family owned wholesaler who again have proved to be exceptional people. My position to the trade brings understanding and resources to the restaurant industry. My customers, who I happen to passionately care about, get the opportunity to sample product, which helps them make better decisions on their choices. We also provide services which include designing menus, staff education, wine dinners to their consumer base, and more. Most of the boutique wineries do not have the resources to provide this level of service to the trade on their own, I found your article seriously one sided, with a cartoon and simplistic overview of what the Wholesaler does in the marketplace.

      • Brian - April 29, 2014

        Fantastic… I’m sure there are lots and lots of wholesalers who are family-owned by lovely people. And… if wholesalers are so incredibly fantastic, then why does the SMTTS need to exist?? Wouldn’t breweries simply utilize distributors since it is apparently such a smart business choice?

      • TOM MERLE - July 22, 2014

        Your litany of all the services you provide is very useful. But you don’t seem to understand the core issue. If a middle man offers value added services then a producer would utilize them, and any supplier of any product would. What is objected to is the violation of Capitalism 101: the need to have CHOICE. Let market transactions make the decision not a set of laws and regulations. If a small producer feels that they can sell out of the back of their RV, let them do it like here in California

    • Jeremy - March 20, 2014

      Champions of the small brands won’t go away with repeal, but it would allow the manufacturer to decide if they want a champion. In most states they are forced to be sold through a wholesaler that may or may not champion their brand.

      There is a place for the wholsaler and their value does not change without a mandate. What does change is the political influence that benefits only those with power guaranteed with a mandate.

  5. Thomas Cavanaugh - March 19, 2014

    It just isn’t practical to eliminate the wholesalers. My cousin owns a craft spirit brand. They self distributed for the first 3 years of being in business. They had 100+ accounts that they were selling to. It got to the point where they were driving 50+ miles to deliver 2 cases of gin and then driving back. Then collecting money from over 100 customers every month and some you had to chase down. In 2012 they went with a wholesaler. Yes, they gave up some profit for the convenience of not having to deliver to the 100+ customers (they are now in 350+ accounts) and instead of chasing down 100+ checks every month, the wholesaler pays in full in 30 days (one customer, one check). They can focus on what they do best which is marketing and distilling. The wholesaler focuses on what they do best: Selling.

    • John Morgan - March 19, 2014

      Thomas (and Gregg),

      I don’t see any suggestion of eliminating wholesalers. I see the suggestion of eliminating BS.

      I own a winery. So far (13 years) we have chosen to self distribute in a state that allows that. Many of my friends have chosen to work with distributors. Fine for them. The point is that in any other industry this is solely a business decision based on the factors mentioned (convenience, economics, the passion and knowledge of sales people). In the alcohol industry there is mandated separation (or in our case limitations on volume) that make it difficult, or impossible, to direct distribute. The justifications are euphemisms at best. The result is a coercive relationship that puts a margin squeeze on producers and yes, in the case of small brands, limits consumer choice.

      Wholesalers need to get over the fear that they will be recognized as nothing more than a delivery and sales channel and focus on the fact that they are a delivery and sales channel that adds a valuable service. This rising tide of new successful brands who find it too difficult to self distribute would float their boats just as surely as the deregulation of phone companies, trucking, etc. benefited those industries, and consumers as well.

  6. Tom Wark - March 19, 2014

    Greg,
    I’m not suggesting we rid the world of wholesalers. I’m suggesting we rid the world of the STATE MANDATE that wholesalers be used by producers. It serves no purpose other than to protect wholesalers from competition, degrade the success of the wine, beer and spirits industry and cause massive corruption.

  7. Tom Wark - March 19, 2014

    Thomas,

    As I pointed out to Greg, Im not suggesting that wholesalers be “eliminated”. I’m suggesting that the STATE-MANDATED used of the wholesaler be eliminated and let producers and retailers decide for themselves if they want to go through wholesalers to do business. What’s wrong with this? (That’s a rhetorical question).

  8. Tom N - March 19, 2014

    As a retailer, I agree wholeheartedly. But I have to defend wholesalers a little, even when the producer has done the legwork with the restaurant or retailer, the wholesaler is still more than just a box carrier. I’ve seen the paperwork required and it ain’t pretty. That doesn’t excuse kickbacks, but there’s more effort involved than you’ve portrayed.

    I also have to say you don’t go far enough for my taste. Sure, there are 15 states that allow retailers to ship, but the application requirements and fees vary tremendously, sometimes by orders of magnitude. (Same for winery shipping, I’m sure, but for example Louisiana is outrageously expensive, and Virginia requires a mountain of paperwork). And even services like Ship Compliant still require the retailers to get the state permits themselves before Ship Compliant will do the state compliance/tax payments. I’d love to see the equivalent of the common application for colleges and universities applied to direct shipping to the various states. Same permit requirements and same fee per state, easy renewal, and everything submitted electronically.

    I know, baby steps, right?

  9. Gregg Burke - March 19, 2014

    I apologize. I misunderstood. I would love to be able to get stuff directly from the wineries, simply because they have no representation in the state. NJ changed its laws involving wine shipping in to the state and people were all up in arms saying that it was going to kill the retailers. It did not of course. I am all for reform. What I saw in my 7 1/2 years as a sales person in the wine business taught me a lot about how corrupt things really can be. I do not post a lot but I always read the blog. keep up the good work

  10. Tom Wark - March 19, 2014

    Greg,

    You’re a good, honest man. Wholesalers will never go away where booze is concerned. But their days as the REQUIRED middleman must come to an end. It serves no purpose.

    As for retailer wine shipping, that fact that it only exists in 15 states is due entirely to he work of protection-seeking wholesalers and parochial retailers who oppose it and believe that consumers have no business buying wine other than what wholesalers think they should buy. The paper work can be changed…that’s a legislative fix. Wanna help? Check this out: http://www.nawr.org.

    Thanks, Greg.

  11. Tom Wark - March 19, 2014

    Tom:

    That “Wanna Help” comment addressed to Greg, was actually meant for you. I’m with you concerning the ridiculous paperwork it takes to simply comply with what should be a simple regulatory effort. Wanna Help? http://www.nawr.org

  12. Celebrating Corruption in the State-Mandated Three Tier System - Fermentation - March 19, 2014

    […] the idea of “Wholesaler Entitlement” and who had demonstrated the extraordinary need to Repeal The State Mandated Three Tier […]

  13. tom merle - March 19, 2014

    One has only to look at the experience of California where all modes of delivery are allowed, including winery direct. There are roles for all channels, including Third Party Providers who assist producers to sell to consumers. Wholesalers are stronger than ever. Choice is a primary American virtue.

    Many articles on the parallel Tesla fight with the auto dealers http://www.fool.com/investing/general/2014/03/18/auto-dealers-vs-tesla-and-almost-everyone-else.aspx

  14. John Hilliard - March 19, 2014

    Amen, and pass the ammunition!

  15. Tina Hazlitt - March 19, 2014

    Amen! Will raise a bottle to the end of SMTTS! I agree, it should be the producers choice to use a wholesaler, not mandatory. Thank you Tom!

  16. Kat McDonald - March 19, 2014

    “Wholesalers need to get over the fear that they will be recognized as nothing more than a delivery and sales channel and focus on the fact that they are a delivery and sales channel that adds a valuable service.” – this summons it up perfectly! – I agree…

  17. Phillip Anderson - March 19, 2014

    I agree with almost everything you wrote except the conclusion. Despite the fact that this is an inefficient, often corrupt, and generally socialist system, I don’t see it changing any time soon. State legislatures, even more than the national legislature tend to run on the golden rule. Whoever has the gold, makes the rules. The entrenched systems are entrenched because the people who benefit from them can afford to outspend the little guys who want to change the system. Maybe I am just feeling negative after a trip to Utah (home of state stores & a state government run by people who feel all alcohol is evil), but I don’t see change any time soon. I hope you are right! I enjoyed the article.

    • Gerald M - April 28, 2014

      Yes, reform, indeed. In our state not only are the distributors mandated, but the mandate extends to statewide payment terms: COD. The reform of the SMTTS laws in AZ, might bring us to retail parity, as well.

  18. Mike - March 20, 2014

    I’m sure all the boutique producers would fare better self distributing and selling their own products… Are you kidding!?! The fact they do have an avenue with which to broaden their reach to retail and on-sale accounts is thanks mostly to distributors. A winery producing, say under 10k cases most likely lacks the infrastructure to distribute beyond their area code. That is precisely where distributors are most effective. Given the rise (with no slow down foreseeable) in craft brewers, distillers and even smaller wineries, distributors are there precisely to enable them to expand their reach.

  19. Brad Sullivan - March 20, 2014

    You are wrong on several counts, but your glaring omission regards the state’s interest in controlling the availabity, quality and pricing of what is, in fact, a dangerous drug. Just look to laissez-faire countries like the UK for the examples and costs of the nightmare of deadly counterfeits, mass alcoholism, and public chaos. The people have an interest in regulating this industry.

    • Gregg Burke - March 20, 2014

      Brad,
      Please you should not be in this conversation. It is obvious you have know idea what you are talking about. The issues in the UK have more to do with cultural issues rather than lax distribution laws.

      • C Wells - March 20, 2014

        But Gregg, I have studied and worked in the UK and it is pure chaos. Dogs living cats, etc. We need 3 tiers to save us from ourselves. Any modification to the mandated 3 tier system will produce an alcoholic 9/11, where everything is changed and you will RUE the day you wished for that change.

        • Gregg Burke - March 20, 2014

          Brad your arguments smacks of the same insanity that led to prohibition. Opening up avenues for producers to go directly to retailers will not cause the wholesale collapse of a society. People said that if you legalized pot that people would run wild in the streets. So far Co & WA are doing ok and bringing in a lot of tax revenue. The government’s job is to protect us from foreign aggression not from ourselves. we may not agree but I dig your. passion

  20. Michelle - March 20, 2014

    You are an idiot and have no idea how a wholesaler works. We are more than “Box on, Box off” loaders. Get a clue. Why dont you try and do some interviews before you write this crazy off the wall factless crap?

  21. Tom Wark - March 20, 2014

    Michelle:

    Imagine my utter surprise that you had no comment to make about the the point of this post, specifically, that the State Mandated Three Tier System is unnecessary. I’m shocked!!

  22. Tom Wark - March 20, 2014

    Brad:

    Why don’t we look closer to home, rather than England. In California producers of wine, beer and spirits are all able, if they choose to sell directly to retailers and restaurants without using a wholesaler. In other words, the three tier system is NOT mandated by law. In California do you observe the “costs of the nightmare of deadly counterfeits, mass alcoholism, and public chaos”? No you don’t. You need to account for this if your point is going to make any sense.

  23. Tom Wark - March 20, 2014

    Mike:

    Are you suggesting that producers of wine SHOULD NOT have the option of selling direct to retailers and on-premise accounts because it’s unlikely they would fare better doing business this way than with a wholesaler? Because that’s what it sounds like.

    I’m willing to discuss the economics of self distribution by wineries, brewers and distillers with you. But first, let’s find out if we are on the same page: Are you saying that wineries, brewers and distillers SHOULD NOT be allowed to work this way if they choose?

  24. Mike - March 20, 2014

    Tom-

    You are inferring that I believe they shouldn’t be allowed direct sales.

    My point is that in most cases smaller producers lack the resources to distribute regionally, much less nationally. That said to blow up the ship on the three tier system seems to throw the baby out with the bath water.

    I’m curious if in your research you interviewed Suppliers, Distributors and retailers… Or if it was largely brush strokes based on perceptions of what distributors do vs. the reality of what they actually do (sales, marketing, category development, training and yes, throwing boxes.

  25. Tom Wark - March 20, 2014

    Mike,

    I still can’t tell if you believe that producers should not be allowed to self distribute their products, rather than be forced to use a wholesaler. And it’s not as though removing the state mandate that the three tier system be used would put wholesalers out of business. Look at CA. No state mandated three tier system here. Yet, Youngs, Southern and many other wholesalers flourish.

    As for me, I’ve worked in the wine business for 25 years. I’ve known numerous wholesalers and talked to them about this. I’ve dined with presidents and CEOs of wholesalers. I’ve ridden with wholesalelers when they call on accounts. I’ve visited their warehouses. I’ve testified with them at legislative hearings, I’ve debated them at public industry forums. So, let’s say I know a little about the industry and about wholesalers and how both work.

  26. mike - March 20, 2014

    A very one sided and generalized article, it is articles such as this that lead those who do not know better and don’t care to understand to make judgements that are normally wrong. We live in a society that is democratic if you don’t like the rules of a state because each state is different, you can work to change them. You are correct that wholesalers donate money to political campaigns but not nearly as much as DISCUS, if you don’t believe me look what happened in Washington State along with the biggest of retailers who backed the change so they could monopolize the market. Wholesalers force competition not eliminate it. It is true that some of the largest wholesalers that are multistate can dominate in the big box stores. But in a healthy environment where consumers support the true wine shops independent family owned wholesalers can survive even in franchise states. But the key is the consumer and the entrepreneurs to start both the private distributorships and the wine shops. The biggest danger and key to selection is the consumer, if they decide to support only the big retailers the small ones will go away once they are gone than the consumer will not have a choice and believe me the box stores cater to profits not to selection.

  27. Bill Haydon - March 20, 2014

    Though I consider this histrionic piece to be the intellectual equivalent of a badly written community college paper, I do agree with Mr. Wark’s underlying point that the three-tier system should not be mandated by law. We part ways as to the results of such deregulation. Mr. Wark–as a loyal courtier to the Lords and Ladies of Napashire–undoubtedly toes the valley line in believing that such deregulation would open the floodgates of pent up demand for boutique California wine that has only been stifled by the evil three tier system. All those Euro dominated wine lists and retail merchants would suddenly become tribunes of the Golden State.

    The harsh reality that Mr. Wark and his ilk refuse to face is that those distributors are not driving the market. They are reacting to it. Those salespeoples’ bags are filled with samples of Bierzo, Muscadet and Barolo rather than Napa Cab, Sonoma Chard and Paso Zin because the latter are the uphill sell and a fight against a waning demand curve. The former are what people are asking for. Distributors are lazy. They will always take the path of least market resistance, and if they’re not selling your wine, it is a reflection of their customers and their market. That’s a harsh pill to swallow…….oh so much easier for the naked emperors to admire each other clothes while screaming, “off with the three-tier system.”

    And for what it’s worth, Chicago, Boston (and I believe DC though not certain) all have allowed direct-to-trade for several years. Those markets have not swung back to domestic wines in the least bit. In fact, the marginalization and shrinking market share for domestics has continued apace. I even watched a group of high end Napa Valley wineries band together and attempt it in Chicago. How are they going to compete with local distributors with no daily presence in the market? Are they going to expect a restaurant to wait several days for their delivery? Who is paying for shipping only one or two cases across the country? It failed miserably. Their hubris refused to allow them the notion that they might actually have to invest in the project and the person on the ground in Chicago. Instead they hired a 1099 contractor with no base salary, no benefits and no expense reimbursement. After all, “the wine sells itself, and all of our problems have been the fault of three tier.” I know the person well (he’s a good sales manager and marketer who has been successful both before and after this misadventure), and he walked away from them after less than a year. Some of those wineries went back to the three tier system (with rather middling distributors to be honest) with their tails between their legs. The others are currently selling nothing.

    Again, I don’t think three tier distribution should be mandated legally. The notion, however, that all the troubles and market problems that high end Cali juice is currently facing will suddenly fall by the wayside is complete fantasy. If it couldn’t work in a massive, dense market like Chicago what the hell is going to happen in Texas or Ohio with their smaller, spread out markets. It might work in California, but that’s only because of proximity, and don’t get me started on the almost human chattel system that has arose around it in California where the bulk of wine salespeople not employed by a large distributor have seen decent, stable middle class W2 jobs replaced by crappy, commission only, no benefit 1099 “contractor” positions all for the greater glory of their feudal Lords and Ladies in Napashire. California Uber Alles!

  28. Mike - March 20, 2014

    Michelle –
    You hit the nail on the head. 100% agree.

    Today’s wholesaler provides countless ways for the retailer to market & sell the vendor’s product whether the suppler is the 500 lb gorilla or the 500cs mom & pop winery.

    BTW, I personally have no problem with vendor to retailer or vendor to residence selling. However I’m trying to picture the State of Florida letting thousands of wineries and craft producers remit the excise taxes not to mention selling to a retailer who is “on the no ship list”. It’ll never happen.
    .

  29. Tom Wark - March 20, 2014

    Mike:

    I still can’t tell if you support a STATE-MANDATED use of wholesalers. You simply won’t say. And as for your statement that DISCUS contributes more than wholesalers, that’s not even close to true. I’ve actually done the study and the research and published it. It’s not even a contest. Wholesalers contribute FAR more than DISCUS and more than all DISCUS members combined.

    As for wholesalers “forcing” competition, how can that be when in most states the ONLY wines that are allowed on the shelves are those that wholesalers decide to bring into the state. And consider that it’s ALWAYS the wholesalers who go all out to STOP winery to consumer shipping, retailer to consumer shipping, self distribution and any other action that is competitive with their model?

  30. Brad Sullivan - March 20, 2014

    Tom:

    California is unique and possesses its own rather large wine industry, so I don’t think it is reasonable to use it as an example of what would work for the whole country. Regardless, in my state wineries can and do self distribute, and I don’t have a problem with that. But to eliminate the mandate for the middle tier for out-of-state/imported products would in essence take the power to regulate alcohol away from the states. I understand the libertarian impulse in general, to allow supply chains to self regulate and achieve their highest efficiency, and that is fine for regular products and services, but alcohol is different. Prohibition does not work, but neither will a completely free marketplace. The states have an interest in reducing the social costs associated with the product. I understand that from the point of view of your clients, the bigger the better, but who pays the bills for the problems their products cause? And considering that you advocate for this issue and are paid by producers, how is it that you do not qualify as one of those special interests you complain about in your article?

  31. Tom Wark - March 20, 2014

    Bill Hayden wrote:

    “Again, I don’t think three tier distribution should be mandated legally.”

    Good to know, Bill.

  32. Bill Haydon - March 20, 2014

    Oh, and the dirty little secret of the ill-fated Chicago DTD project that my friend clued me in on–90% of the savings of eliminating the wholesale tier on a case of wine were not passed onto the retailers and restaurants (and certainly not the guy in Chicago actually doing the work!) but stayed right in Napa.

    Greed and stupidity is no way to run a business!

  33. Bob - March 20, 2014

    If you study wine prices in franchise states they will always be higher than in open or non franchise states. Vermont, Virginia, and others. These distributors have no need to compete vs. others distributors in their markets because once a winery appoints wines they cannot be given to another distributor. Not to mention the consumer pays more for their wine.

  34. C Wells - March 20, 2014

    Rationalization and self preservation are our ‘Top 2 Traits’. I see some classic examples here. Due to the payola, I don’t see much changing at all. Not in my lifetime. It is a nice thought, thanks for thinking it.

  35. Tom Wark - March 20, 2014

    Brad wrote:

    “But to eliminate the mandate for the middle tier for out-of-state/imported products would in essence take the power to regulate alcohol away from the states.”

    Brad, you say this, but you dont’ explain how this would be the case. Today, thousands of out of state wineries and retailers very successfully obtain licenses from states, issue regular reports to the states, regularly remit excise and sales taxes to these states where direct shipment of wine is concerned—and the number of direct shipping transaction would be far greater than the number of direct to retail transactions that would occur in a world with no STATE MANDATED three tier system. And guess what, no regulator in any state has reported problems with this kind of remittance and reporting system.

    No, allowing out of state producers (wineries, brewers and distillers) to self distribute without a wholesaler in states where they are not located would work perfectly fine. There’s no evidence to the contrary.

  36. Ron Marsilio - March 20, 2014

    Tom,
    Sounds as if you saw a member of your family kicked by a wholesaler when you were a young boy.

    I understand your misgivings with the Three Tier System, but your vengance for the very existance of distributors is a little harsh, don’t you think? I used to work for the “Middleman”, and I cannot tell you how many small producers, in both this country and abroad would give their right arm for a competent distributor. They are not just “box carriers” like you said, but hard working middle class folks who build brands and satisfy a market. They make relevant suggestions to the winery concerning packaging and quality controls. They insure the public that what they are buying is safe to drink and represents what is on the label, no one else in this Country does that. They also insure that the taxes and fees are paid to the State in which they are operating. Their existence also protects the retailers.

    If there are small boutique producers out there that want to direct ship, I agree, that option should be open to them, but where does it end. Can the producers of vodka, gin, whiskey and other “hard liquors” be able to direct ship also? Do you see the ramifications of cutting out the middleman? Please, lets be sensible.

  37. Bill Haydon - March 20, 2014

    Tom Wark Wrote:

    “No, allowing out of state producers (wineries, brewers and distillers) to self distribute without a wholesaler in states where they are not located would work perfectly fine. There’s no evidence to the contrary.”

    Can it work? Yes. Theoretically, a restaurant in Boston can order a case of wine from a winery in Napa Valley and shipping and delivery service providers exist to get it there.

    Can it work well? Efficiently? Competitively? And most importantly, can it work in any way that brings additional value to anyone other than the winery? I say there is a perfect case study that says it can not.

    Again, how does that wine get from the warehouse in American Canyon to the restaurant table in Boston? Who sells it? Who samples the buyers out on it? Who builds and maintains the relationships? When Mr. Too Important to Respond to E-mail Sommelier can’t be reached, who goes into the restaurant and sits at the bar to reach out to him (and pays the bar tab). And how is that person compensated? Are the wineries going to invest in the human capital fundamental to making this work, or are they going to expect some naive “independent contractor” slob to live off his savings while trying to get it off the ground?

    And as for logistics, there are such things as economies of scale. Say that this restaurant in Boston decides to feature a high end Sonoma Coast Chardonnay by the glass. What is the turnaround on order to delivery? What happens when that buyer forgets to order on Thursday and calls for a case to be dropped off on Friday afternoon? The evil, inefficient “middleman” delivers next day and will be at the back door at 5pm on Friday with that emergency case. Does a small winery lease warehouse space? A delivery van? Hire a guy to work in that warehouse and do those deliveries (or is said naive slob above supposed to do all that for his independent contractor 10%?). How do the economies of scale work for a small winery seeking to sell 100-200 cases of wine in Boston?

    Who compensates the state of Massachusetts for the extra labor in having to process 3,000 monthly excise tax reports instead of 100? Who eats the cost of bad debt when that restaurant goes out of business owing $1500?

    The only way this works competitively and efficiently is in the delusional bubble of self-importance of Napa Valley where they literally do still believe that the wines sell themselves and retailers and restaurateurs will gladly put up with any and all inefficiencies and hassles for the honored privilege of buying their wine. Once this model leaves the comfy confines of California it evaporates under the weight of its own inefficiencies, hubris and self-interest.

    As I’ve pointed out repeatedly. There was a perfectly good case study of what happens when this delusional theory is put to practice in Chicago. It didn’t even make it a single year!

  38. Jason - March 20, 2014

    I agree with the author. This repeal of this archaic system is long over due. I have years of experience working within distributors and suppliers, large and small, spirits and wine. No doubt wholesalers have value over and above loading and unloading trucks. This stated, the use of a wholesaler should be a matter of choice and not a matter of mandate. The article focused on the artisan and boutique producers, however large producer/suppliers would benefit from this repeal, as would retailers and consumers. Most suppliers of note have professional sales people selling to major retailers. When a program is agreed on, the supplier tells the distributor to deliver the goods. The problem is the distributor tacks on 20-30% margin and really did very little to secure the sale (true middleman) and this additional cost gets passed right on to the consumer. How much more value would producers and consumers see without this mandated system? A small amount of the article speaks about Franchise states. This is understated. These states are legalized monopolies (think utility Co). Suppliers are not only mandated to use a third party by the Feds, but once they choose one, they can never leave as madated by the state! The only caveat is if the wholesaler decides to sell the brands to another wholesaler for typically 3x revenue! This is not a free market in any sense. There could be a book written on this subject and the ways suppliers and consumers are getting the short end of the stick while wholesalers gain greater share and power. Again, I believe there is a place, even a significant place for wholesalers, but it should be a business’s choice to use them, not a mandate.

    • Brad Sullivan - March 20, 2014

      Question: How much additional margin would Pernod or Majestic or whoever tack on if they had to operate warehouses, run trucks, pay for insurance, handle the paperwork, etc?

      • Jason - March 20, 2014

        They may tack on some margin, which is their prerogative. The margin is largely a mandated handling fee on deals cut to Costco or Wal – Mart, Safe way, etc. These Co. have trucks and warehouses, they don’t need someone to receive the goods before they do.
        Distributors roll would be to service On Premier and Mom and Pops. They often stifle competition within their own walls. I’ve been a tier 1 supplier and worked at the largest distributor in the world, it’s all about protecting their own interests

  39. Tom Wark - March 20, 2014

    Ron wrote:

    “They insure the public that what they are buying is safe to drink and represents what is on the label, no one else in this Country does that.”

    How exactly does the distributor insure that the product is safe? Do they taste from every case? It’s the producer that does this. Furthermore, the distributor plays no role in determining if what’s on the label is in the bottle. How does a distributor know if a wine that says “Santa Lucia Highlands Pinot Noir isn’t actually Central Coast Pinot Noir? they don’t.

    “They also insure that the taxes and fees are paid to the State in which they are operating. Their existence also protects the retailers.”

    And it turns out that producers and retailers also remit taxes to the states. Take the issue of direct shipping. Wineries have for many years now easily and efficiently sent both sales and excise taxes to the states they sell to. And retailers too. This notion that producers would be incapable of remitting excise taxes to the state if they don’t use a wholesaler and instead sell directly to retailers and restaurants makes no sense. It’s as though you are saying there is something about someone who produces a product that prevents them from cutting a check or writing money.

    “If there are small boutique producers out there that want to direct ship, I agree, that option should be open to them, but where does it end. Can the producers of vodka, gin, whiskey and other “hard liquors” be able to direct ship also? Do you see the ramifications of cutting out the middleman? Please, lets be sensible.”

    Why shouldn’t the direct option be open to all producers of wine, large and small? Why shouldn’t consumers be able to purchase wine from out of state wine retailers, which is only legal in 15 states and is something wholesalers always oppose. And of course producers of whisky, beer, vodka and gin should be able to ship direct to consumers. ANd if they are shown to be selling to minors, they should be punished.

    For the last 20 years, I’ve watched wholesalers methodically retard the alcohol beverage industry at every turn. They regularly have opposed winery shipping, retailer shipping, self distribution, while advocating for even more protection in the form of Franchise laws. And due to their protected position as the state mandated bottleneck in the three tier system, they are able to accumulates huge amounts of cash to influence lawmakers and get their way. And they’ve been doing this by telling lies. Remember all the tales of how minors would cash in on direct shipping? Not a single member of law enforcement in any state has ever described any problem with minors obtaining alcohol via direct shipment. Remember the wholesalers who said their business would be hurt if direct shipping and self distribution was allowed. It hasn’t done so in any way.

    Wholesalers and their protectors in the state houses have not been sensible. And its consumers and businesses that have felt the brunt of their selfish, protectionist strategies.

    • Brad Sullivan - March 20, 2014

      The purpose of the three tier system is to retard the industry. I think you should consider that people are so opposed to what you are saying because you are scapegoating the people doing their jobs in a regulated industry. If you think there should not be regulation, then make an argument based on philosophy. And if you hate sausage factories, then don’t participate in a democracy. The truth is that you are a special interest, I am a special interest, and so is everyone else in this business. Compromises are part of the deal.

      • Tom Wark - March 20, 2014

        Brad:

        This isn’t 1933.

        Also, when did I say I didn’t want any regulation. Red Herring there.

        And what gives you the impression that I am unfamiliar with politics or think things won’t change without going into the sausage factory. Have you not read what I’ve written?

    • Ron Marsilio - March 21, 2014

      Tom wrote, “How exactly does the distributor insure that the product is safe? Do they taste from every case? It’s the producer who does this.”

      In answer to that Tom, no, the distributor does not taste every case, but I think we have to differentiate between large producers and small ones. If Kendall Jackson is selling the wine, then you will not find the distributor regularly tasting every shipment of every kind of wine, relying instead on the winery’s reputation and history. If, however, there is a small, boutique producer of wine, one that will almost certainly be more involved with direct shipment, then, yes, the distributor will regularly taste their products to insure quality. I worked for an importer/distributor and wine that did not make the grade, no matter what the reputation of the winery, was frequently returned to the producer as unsaleable. Where is the safety net for the consumer who buys wine such as this directly? Do we rely on the producer to police themselves? That sounds absurd to me.

      Distributors will frequently visit their suppliers and are in constant communication with them. They will visit the production facilities and the vineyards where the grapes are sourced. This is where the distributor can determine whether the winery is being honest and forthright in the presentation of their products. Yes, they will find out whether the grapes come from the Santa Lucia Highlands or the Central Coast, and in turn, determine whether the label is misrepresenting the wine in the bottle.

      Your assumption that all producers of wine are upright, truthful and honest is a tad naive. By eliminating the middle man, you are most definetly lowering consumer protection. I will gladly pay a little bit more per bottle to be assured that I am not being “ripped off”.

      • Tom Wark - March 21, 2014

        Ron,

        One thing that is absolutely clear to any producer is that the wholesaler is NOT in constant contact with the winery. The constant refrain from primarily small and medium sized wineries is that their brand is ignored by the wholesaler.

        And really, the wholesaler can’t possibly be privy to grape sources, particularly if they visit the winery once, maybe twice per year. If that. In the very rare case where the source of the groups dont match what is claimed on the bottle, it’s almost always a case of when wineries contract with growers. Wholesalers play zero role in this kind of policing.

        As for the distributor insuring quality, why is it that Ive sent wine back at a restaurant because it is corked? Why didn’t the distributor discover this since they are so concerned with quality? Did they fall down on the job? Or isn’t it the fact that wholesalers could care less about what’s in the bottle? I think it’s the latter. I’ve worked with numerous wineries in the past 25 years and not once has the winery had wine returned by the distributor for quality reasons.

        On the other hand, I’ve seen on numerous occasions that when a consumer who had the wine shipped to them from the winery found that the bottle was corked, it was the winery that was contacted and who made the situation right.

        I’m not suggesting that wholesalers ought to be done away with. I’m saying that the state mandate the a producer go through a wholesaler is a policy that lacks any merit and exists now as a means of protecting these middlemen.

        • Ron Marsilio - March 21, 2014

          Like having bad auto mechanics, bad butchers, bad plumbers and bad electricians, there are also bad distributors and if the winery is not happy with communication, exposure or public relations with their products, they are free to change distributors. I happened to work for a diligent and concientious importer/distributor that did regularly taste and test products for authenticity and saleability. I am NOT talking about corkage in a wine, which is fairly common, but wine suffering from some sort of chemical taint or spoilage. This flaw has to be present in more that one bottle and be significant enough to warrant return of the merchadise. If a winery has suffered some misfortune to have there wine spoiled, do you think that it is in the realm of possibilities that they would then try to sell this rot gut through direct sale rather that take a huge loss? Is it in the realm of possibilities, Tom?

          Your contention that wineries can do no wrong is just a little bit lopsided don’t you think? Wineries, like any other commercial enterprise are businesses in existence to make money. Some are not so honest and will missrepresent their products or try to pass off products that are of less than the standard the consumer expects. No one polices them, Tom, only good distributors can keep them sumwhat in check.

          • Bill Haydon - March 21, 2014

            Ron, you can’t argue nuance or grey areas much less any real life experience outside the echo-chamber bubble of the Linen and Range Rover Valley with this guy.

            Wineries are a combination of noble, shining Knights on horseback who can do no wrong and Christ-like figures constantly nailed to the cross and persecuted for their innocence and purity.

            Conversely, distributors are mafia related thugs who do nothing more than put boxes on trucks and take them off. They have utterly corrupted our political system through their bribes, which are not to be confused with the political donations and influence of the domestic winery industry. The latter is a shining example of democracy in action straight out of Frank Capra.

            Self distribution is the panacea for all ills and will wipe European wines off the shelves of New York and Chicago. It will absolutely work! Never mind that it’s been available in the latter market for several years and has failed.

            In this world, expensive California boutique wine has never been more popular and any difficulties are all the fault of those insidious distributors. Millennials are about–and day now…..really!–to start drinking more Napa Valley Cabernet and Chardonnay than their parents could have dreamed of.

            What you have to recognize is that Tom Wark is pandering to a crowd. It’s not you. It’s not me. It’s not the illusory American Wine Consumer. Tom is pandering to his client (and potential client) base. Whether as a result of a cynical business calculation on his part or being a true kool-aid drinking believer, he is hellbent on telling them everything they dearly want (need?) to hear. He is not, for one moment, going to address the fact that the Emperor is naked. There is no room for nuance or grey area in his presentation.

          • Tom Wark - March 21, 2014

            Ron,

            What I’m wondering is where is the outcry, the reported problems, the scandal associated with wineries trying to sell rot gut directly the consumer? Where are all the examples of wholesalers policing this world of rot gut? It just isn’t happening. In fact direct sales of wine continue to increase at a rate faster than the overall wine market.

            Wholesalers perform a necessary function. But, do their services really need to be mandated by law? is there any reason whatsoever that this kind of protectionism ought to be sustained? There isn’t.

          • Ron Marsilio - March 21, 2014

            Tom,
            Although it may not seem that abuses are going on, one has to look at history and the big picture. Prior to prohibition, the alcohol beverage industry was the “wild west”. Producers controlled the retail outlets, consumption was way up, cost was low and supply was high. Because of the inherent danger in this, the Volstead Act passed Congress. It, the Act, was a mistake of course, but upon its repeal, Congress saw fit to control this mess and abuse of distribution that transpired prior to the Act. The consumer had to be protected from harmful products and taxes needed to be collected. That is why Congress made it mandatory for a middleman to be created to be a buffer between the producers and the suppliers. The original charge of the “Middleman” was to protect the consumer and aid in the control of alcoholic beverages and assist in the collection of excise taxes.

            Now, as far as I can see, alcohol is STILL a dangerous drug, probably more dangerous than heroin, cocaine and oxycodone combined because of its widespread and accepted use. You wouldn’t allow cocaine and heroine, be legalized without some measure of distribution control would you. Just because you sit at your computer and write your blog, and make friends with all the upper crust winery operatiors out there in Disneyland does not mean that there are REAL problems with alcohol and unfortunately, boutique wineries fall into the catagory of producers of what needs to be controlled. Not everyone in this country collects fine wine and sips it delicately in opulant restaurants with a wary eye on their amount of their consumption and whether or not they are going to get behind the wheel of an automobile or beat up their children or set their houses on fire. There are a lot of irresponsible people out there and as such the products that they choose to alter their state of consciousness with need to be controlled for the good of society. Distributors are merely a tool in that chest to accomplish this.

  40. Tom Wark - March 20, 2014

    Bill Hayden wrote:

    “Can it work well? Efficiently? Competitively? And most importantly, can it work in any way that brings additional value to anyone other than the winery? I say there is a perfect case study that says it can not.”

    First and foremost the question should be this: Should self distribution be allowed? You and I agree it should be.

    The question of whether it will work for producers, retailers and restaurants is another question altogether. Clearly it can work. And if a restaurant or retailer sees no value in buying direct from the producer, then they won’t. At the very least, shouldn’t they have the opportunity to evaluate whether they want to?

  41. Bill Haydon - March 20, 2014

    I’ll add one more thing. The only people for whom this could conceivably work are the Gallo, K-J, Constellation giants of the world. The people have well paid, existing sales forces already on the ground. They have the capital necessary to invest in both people and logistics. They have the existing business relationships and critical mass that would allow them to truck full pallets from California directly into individual supermarkets.

    For the small, boutique producers who you attempt to appeal to in these screeds, it is nothing but a pipe dream. And while it does you no harm to be the pied piper to these people while it is all talk, I caution you against ever taking the lead on putting it into practice. Loyal courtier though you may be, it wouldn’t be too long before the Lords and Ladies of Napashire started screaming, “off with his income!”

  42. Bill Haydon - March 20, 2014

    Tom, you keep saying that “clearly it can work.” Outside of California, on what basis can you stake this claim? The only large scale experiment in that I’m aware of was the one in Chicago, and that failed miserably. Theory doesn’t always translate into practice.

    California is a unique situation because the wineries are right there? A small winery can literally drive down to SF and spend half the day dropping off cases and the other selling. As for the larger “broker system” that’s come into being to establish sales channels, I’ve seen that up close and personal on the importer supplier side. If that’s how salespeople are to be treated and attempt to make a living, give me an out-and-out asshole like Rocky Wirtz any day. At least I know that the salespersons I’m working with are all W2 employees with base salaries, health insurance, expense reimbursement and 401Ks.

  43. mike - March 20, 2014

    I am totally cool with non state mandated use of wholesalers, where I live they are not mandated, many of the state wineries have self or coop representations. As for distributors creating competition it does happen when you have enough distributors which is where the entrepreneurs come in. A wholesaler license is not that expensive, in fact compared to many franchise start up fees it is cheap. We also have open shipping which is great for finding items not carried within our state. Yet I hear people profess the same complaints about the lack of choice and blaming distributors for it. Every retailer runs their own business and they are the door keepers not the distributors at least where I live. I think you should go to some distibutors and have a conversation with them, not just Southern, Glazer, Wirtz, Charmer, the big guys but visit some independents as well it may change your mind.

  44. Joe - March 20, 2014

    Tom,
    As evidenced by so many comments your article is interesting and provocative. I would agree that things change over time and the system should change along with it. But SMTTS works. As Americans we enjoy the most and best selection of Wine, Spirits, & Beer anywhere in the world, and it is affordable. Your depiction of Distributors is horribly naive, what about the role of quality of what gets to retailers and consumers? About 90-05% of the products consumers enjoy come from Suppliers who certainly see a value of distributors for all the reasons you seem to be oblivious to. You seem to suggest a solution to a problem that largely doesn’t exist.

  45. Bill Haydon - March 20, 2014

    Mike, you just nailed it. Chicago is both DTC and self-distribution (for small wineries) friendly. It is both a huge market and one that is highly concentrated in one massive metro area. The barriers to entry for a new distributor are very low ($295/year and you can outsource warehousing and delivery), so there are currently over 120 small distributors and importers working the market, which has led to a hyper-competitive situation where everyone is looking for good product to represent–wines that will open doors and open accounts. If boutique, high end Cali wine fit that bill, every one of these wholesalers would be loading up on it and working the market hard with it. Instead they’re loading up on Bierzo, Muscadet and Sardinian Vermentino because those are the wines that get appointments and orders.

    If a boutique California winery can’t sell wine (either direct or through finding a wholesaler), it is not because the wholesalers are acting as gatekeepers. It is because they are on the wrong side of a shifting demand curve (and history if you ask me). The restaurants and retailers want more California wine like they want a hole in the head, and that lack of demand filters upwards to the wholesalers and ultimately the Valley of Privilege.

    • frustrated reader - September 29, 2014

      Bill Haydon wrote:

      “If a boutique California winery can’t sell wine (either direct or through finding a wholesaler), it is not because the wholesalers are acting as gatekeepers. It is because they are on the wrong side of a shifting demand curve (and history if you ask me)…”

      Uhh. No. You say there are 120 or so small distributors and importers “working” the market. How many California pinot noirs are they each going to carry? Do you know how many California PN producers there are? Of course distributors are gatekeepers. Wineries must be chosen and with so few distributors, many are not. And they have no alternatives if they aren’t picked up by someone. Sure some of them make bad wine. Many do not. Horrible, unfair practice.

      And the idea that distributor sector is actually competitive (aside from the top, biggest names) is silly. If retailers start getting too much wine from a small upstart distributor, they get strong-armed by the big guys. I know several examples. This keeps startups to distributor sector low, at least for all the stuff people drink most.

      All of this talk trying to defend a clear regulatory overreach that was put together in another day and age. Just don’t mandate the 3-tier. There really should be no argument for it. Of course there will still be distributors. And the good ones, with something to offer, will thrive. All the scary talk about safety, taxes, etc. is pure B.S.

  46. Keith - March 20, 2014

    I’m in Ohio where the three tier system has some flexibility that encourages smaller distributors and thus more out of state selection. Ohio also allows shipping to consumers and retailers by wineries that hold a permit to do so. Ohio also has some complications with the Food Safety laws being applied to any winery that may wholesale. So in essence we need to buy a license from 2 state agencies to do the same thing as well as be subject to regulation as Food Processing Facilities, with subsequent ridiculous requirements. Any small winery in a normal state can buy just a liquor permit in Ohio to sell directly to wholesalers without being regulated as a food processing facility, so In Ohio we are subject to totally unnecessary duplicate regulation that discriminates against our own wineries. Oh, also many of these wineries cannot sell directly to a retailer in their own states. Ohio actually seems to treat out of state businesses better than their own businesses and other states in this matter. We have a bill to fix it but a number of larger wineries also bottle grape juice (a real food product) and they have a lobbyist and lobbied against us, also changing the wholesale distributors position in favor as they are included in the bill, to against it as the larger wineries also distribute through their members and see it as a way to remove those quality minded wineries that object to the duplicate regulation (as food processors) from the store shelves. Also at issue is collusion with our agriculture department (of which the Food Safety Division is part) dealing with the excise tax supported grape industries program (run by the Ohio Ag Dept) and their marketing efforts that mostly benefit the larger wineries. Yes, it is a rats nest in Ohio for sure. http://www.FreeTheWineries.com

  47. Tom Wark - March 20, 2014

    Joe Said:

    “But SMTTS works. As Americans we enjoy the most and best selection of Wine, Spirits, & Beer anywhere in the world, and it is affordable.”

    Joe, do you know what results in great selection for consumers? The ability of consumers to access the wines they want. In any given market in the U.S., the number of wines available via distributions is a miniscule proportion of the wines available in the American marketplace. The only way a consumer anywhere can have ACTUAL great selection is if they have access to the direct to consumer shipping market from both out of state wineries and retailers.

    it is literally impossible for any state’s collection of wholesalers to represent all the goods made in or imported to America. Wholesalers know this, regulators know this, retailers know this and certainly consumers know this.

  48. tom merle - March 20, 2014

    Jason wrote: ” I believe there is a place, even a significant place for wholesalers, but it should be a business’s choice to use them, not a mandate.” a theme that runs through many comments. This is the issue in a nutshell. Protectionism is now on the wrong side of history. If a new “distruptive” alternative serves sellers and buyers more effliently it will eventually prevail, even if it means going to the highest court of the land. This is why Elon Musk will ultimately prevail against the fearful auto dealers. And why Uber and Airbnb are more appealing to more peopld than the old way of doing business. We are witnessing a remarkable revolutionary era.

  49. 10 Way to Undermine the Three Tier System of Wine Distribution - Fermentation - March 20, 2014

    […] response to my recent post on Repealing the State Mandated Three Tier System, I’ve received a number of pessimistic comments and emails that essentially go like […]

  50. Good ol Boy Mike - March 20, 2014

    I would ask the broader question of why is any alcohol product taxed any different than any other product of commerce.

    Danger to public safety? I’m thinking an automobile is more of a public safety hazard than alcohol. So why not pay more for a car or motorcycle?

    Taxes on alcohol are a construction of revenue for conflicts of war, period. I don’t see a beer tax making contributions to knocking a dent in that $17T deficit.

    This should go the way of shrinking the supply chain, only the things that add value will survive. While I think there are parts of the distribution systems that add value, they also hide and impose process that adds no value as well.

    The entire concept is contrary to the concept of capitalism as well. If you think you have the superior product, why are you afraid of any competition no matter if you hold market share or don’t?

    All of those entities that are financially reliant on these structured regulated industries need to find a better teat to go suckle on. It’s a sad day when there is more free market economy outside the US than inside the US.

  51. Bill Haydon - March 21, 2014

    One other thing regarding the repeated sloppy and sophomoric use of language in this post.

    Do you use the same term “bribery” to refer to any political donations made by Family Winemakers of California? Are all those California grapegrowers who are now calling in their political chits to get their slice of the drought relief pie also getting payback for their past bribes? Is it applicable to any of your clients who donate in support of a local politician or ballot initiative? Did Robert Mondavi bribe the California legislature when he lobbied extensively and donated extensively in opposition to a farm workers rights bill in the 1990s? If so, I eagerly await your first column calling out those with whom you sympathize for their roles in corrupting our political process and their undue influence on the political process.

    I will be the first to say that our political system has been utterly corrupted by corporate money. In a sense, it is bribery. I, however, recognize that many, many sides are all sending those bribes in. What you seem to have a problem with is not so much the inherent corruption but, rather, that your side is being outbid.

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  53. Dan Traucki - March 26, 2014

    Tom: a great article. many of us in the rest of the world have often wondered how come the “land of the Free” has more regulations than even a communist country. Here is Australia our wine & liquor distribution system is open and it works exceptionally well. There are a number of viable regional wholesalers, a few national wholesalers and all wineries call deal direct with any customer/consumer anywhere in the country WITHOUT having to have government legislation mandating the use of wholesalers. Guess what it isn’t the end of the world and cats don’t sleep with dogs!!!! It just works with the minimum of fuss and minimum Government interference. The producers still all pay their taxes and the consumers can order what they want when they want it. Furthermore “market forces” ensure that producers of bad/poor wine go out of business so I can’t see one single reason for maintaining the legislated requirement for the 3 tier system. Why not just have the government sell the alcohol like in Canada and the Scandinavian countries? SMITTS simply defies common sense in this day and age.

  54. Lin Daniel - May 27, 2014

    Keep an eye on the progress of Tesla Motors’ fight against the various states’ Automotive Dealers Association. The same general frame is there: Middlemen want to stay in the middle. The Tesla Motors fight may or may not produce information, legislation, or court decisions that may prove useful to the people working to repeal SMTTS.

  55. Corrine Purvis - August 4, 2014

    Hi Tom,

    I was writing a paper about the state of Indiana allowing farm wineries to self-distribute their product to a certain gallon-size before having to distribute through a wholesaler. I was wondering if you had any data or statistics on states that have a two-tier system, self-distribute, or free-trade and how it improves the state or state wineries economically. Anything you can offer would help! Thanks!

  56. Casey Miles - December 10, 2014

    Well said! We run into this everyday and it’s heartbreaking! We have ZERO dollars in revenue because we’re blocked by the big distributors! HELP! What can we do?

  57. Keith - December 10, 2014

    I commented above on Ohio. You may have zero revenues. But I gave up my self distribution revenue(about 6 figures worth) to fight the food safety nazi’s in Ohio. About all that can be done is a campaign of lobbying your state legislators to change the laws in your state.

  58. Jerry Miller - December 16, 2014

    You have barely scratched the issue. I completely agree with you the large retail chains (.e.g Bevmo, Ralphs) are colluding with the distributor creating a monopoly forcing small retail operations to suffer the issue with pricing. I wish there was some other significant distributors to allow some additional intermediation of prices. 95% of my wine/beer/iiquor puchases come from just four companies…I have no choice if I want coverage on major brands. But I prefer the adventure part of Liquor…trying new and creative things but it is impossible to get most things craft or artisan oriented through these big four.

  59. Wes Hagen - December 20, 2014

    “I don’t want to give the impression that I believe that alcohol wholesalers are merely protection-seeking cousins of gangsters who foment corruption, stifle innovation in the alcohol industry, boot consumer interests aside and provide no real benefit.”

    –That’s cool, let me say it. Three tier is criminal. If these big companies didn’t work really hard to KEEP ME from selling my wine in many, many states—selling American wines to Americans–I wouldn’t say this, but distributors are the ENEMY of fine wine in this country. They are antiquated and basically useless in a connected world.


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