The Most Signficant Development in wine since 1933

The "three tier system" can be a complicated beast invested and stuffed with a myriad of regulations and special interest mandates. However, at it’s most basic the three tier system mandates that producers sell to distributors, distributors sell to retailers and restaurants and the retailer and restaurants sell to the consumer.

The three tier system is in fact the most efficient way move large quantities of products across state lines from producers to consumers. However, the fact that such a system is MANDATED by most states has resulted in it becoming among the most corrupt and stifling structures currently in place in the wine business.

We are about to find out what happens when the three tier system is NOT MANDATED.

In the most important development in alcohol distribution since 1933, Washington State de-mandated the use of the three tier system and will allow producers of wine anywhere in the country to sell their product either directly to consumers, directly to restaurants and retailers or directly to a distributor.

This is unprecedented. No other state in America allows both in and out-of-state producers to choose how they sell their wines. They demand the out-of-state wineries sell directly to distributors and wholesalers.

It is reasonable to ask: Why do we have a three-tier system in the first place. You have to go back to the years before prohibition to understand why.

Prior to prohibition beer producers owned or controlled taverns and saloons across the country.They tied the saloons to them through ownership and coercion. And saloons as well as beer producers engaged in activities that promoted problem drinking, such as offering free lunches just to get people in the saloon at noon so they’d buy and drink beer. It was a problem that helped lead to prohibition being instituted.

To deal with the problem of "tied houses" after Prohibition ended most states demanded that producers not own retail outlets or restaurants. They mandated that a wholesaler be put between the two and mandated that the wholesalers have no interest in the producing or the retail side of the alcohol business. Wholesalers would collect and remit taxes to the state and would work closely with the states’ various alcohol departments and commissions and boards. The 21st amendment that ended Prohibition gave the state the right to regulate alcohol sales just about any way they wanted. Since then various Supreme Court decisions have confirmed that right as long as inequities and discrimination were not put in place that stifled interstate commerce.

The problem with the three tier system is not that it prevents cross ownership between the tiers, but that it mandates that wineries, retailers and restaurants always work with a wholesaler.

A winery that must sell to a wholesaler rather than directly to a retailer means they make 25% less by going through the wholesaler. This 25% is enough to stop some wineries from making a profit. Yet the winery can do all the things a wholesaler does, such as collecting and remitting taxes to the state and making sure the wine is not sold to an unlicensed retailer or restaurateur.

In Washington State, as in many other states, local wineries had the right to "self distribute" and go around the wholesaler, while out of state wineries did not. The May 2005 Supreme Court decision as well as a December Federal Court decision made clear that this kind of discrimination is unconstitutional.

Unlike most other states, Washington has decided to de-mandate the use of the three tier system for out-of-state wineries rather than take away the self distribution right from in-state wineries as is likely to happen in Illinois, Indiana, Virginia and Maryland…as well as a host of other states as soon as distributors get their act together and find a legislator to introduce a winery-killing law.

Distributors are willing to essentially destroy the profitability of small wineries in order to protect themselves from the prospect of large wineries in CA choosing to distribute their wines themselves to restaurants and particularly to large retailers. Furthermore, legislators are willing to go along with this business-killing type of legislation in order to protect their own sources of campaign contributions that are liberally offered by distributors. It’s corrupt.

It’s time for the states and wholesalers to demonstrate why a mandated three tier system is in the interest of the state. They should show how only a wholesaler is capable of collecting taxes and remitting them to the state, but out-of-state wineries are not. The should show how only wholesalers are capable of assuring alcohol isn’t sold to non-licensed entities. And they should show how state licensing of out-of-state wineries to sell to retailers and restaurants is an unfeasible way of keeping track of who is selling to who.

If they cannot demonstrate any of this then the mandated three tier systems should be de-mandated, producers should be allowed to sell to whomever they want and competition should be allowed.

We are about to find out in Washington State that even if the three-tier system is de-mandated that more than 80% of the wine sales will still go through wholesalers because it’s the most efficient way to get wine market. But we will also discover that some enterprising wineries and retailers will be even happier to go around the wholesalers. This is good because it might cause the wholesalers to work harder to keep the business they have and it might make wineries appreciate the wholesalers even more.

5 Responses

  1. jens at cincinnati wine warehouse - February 13, 2006

    What, no one has commented yet! Holy shit, this changes everything! You need to check your RSS feed!

  2. Fredric Koeppel - February 14, 2006

    tom, this is an incredible development. one question, however: how did this come about without the wholesalers in washington raising an unholy stink and the usual rationalizations for their existence?

  3. maggie - February 14, 2006

    The other issue you don’t touch upon is choice. I think this is good on one hand because it exposes an inferior wine industry in Washington state to more competitive prices from neighbors south. However, in WA, prices are posted withe the state, meaning everyone retailer/restaurant pays the same for the wines that they buy. If this changed, outlets like Costo could negotiate much, much lower prices on a larger quantity of wine, undercutting any “little guys” and shops.
    I think we’d also see many of our ponytail distributorships go out of business, and with it–some amazing portfolios. No room to wheel and deal like Southern or Youngs-Columbia, disgusting, bastard corporations that might just as well be selling tires or widgets. Open the trough and the pigs will come. I’m not even touching on the Bush family-like monopoly within our “Liquor Control Board” in WA. Folks, it is fracked.
    Personally, having been a buyer up here, I think the three-tiered system allows mucho amounts of mediocrity to exist. If half of these distributors in our state weren’t selling something with an ABV, they’d be on their ass. So I’m for this, in a Chuck Palahniuk kinda way. Fuck it! Smash it up. Break it. I say, open ‘er up and let the resulting chaos sort it out. Because the only way to fix this system is to completely destroy it first.

  4. tom - February 14, 2006

    WA is the second largest producer of wine in America. That carries a lot of weight. So much so that the wholesalers really can’t push the wineries around. Note that it is in states where the wine industry is rather small that the wholesalers are able completely dismiss the notion of competiton and get legislators to tell the wineries that the death of their industry is good for them.

  5. Zinman - February 14, 2006

    Your comments are on the mark, particularly in your second post. The Washngton wineries were too politically powerful for the distributors.
    Distributors can’t be happy with this bill but they are betting that not many wineries will want to persue this opportunity.
    The big wineries (i.e. Gallo, Diageo, Constellation and The Wine Group)are not interested in self distribution for a number of reasons, some good and some bad.
    There is fine print in the bill just passed that makes self distribution a less attractive option than it first appears, but it’s still a sea change. Read it carefully.
    A maverick such as Bronco Wine Company is a good candidate to self distribute for a couple of reasons. They sell a lot of controlled labels (Charles Shaw)so they aren’t exposed in the general market, and they are privately owned so the shareholders aren’t a big influence.
    The real story though is that the other challenges that remain for the judge are the ones that really could change things. Posting laws, credit laws and direct to warehouse sales.
    Tom, you are right that this process will redefine the future of the wine business, but the bill that is in the Washington Senate is only a small piece. There are bigger changes to come.

Leave a Reply