3 Tier System Replaced by Wholesaler Protection System

On December 5, 1933 the 21st Amendment to the U.S Constitution was fully ratified. Commonsense, along with the effects of the Great Depression, finally put an end to constitutionally endorsed prohibition on the sale of alcohol in the United States and the most radical reaction to a social problem ever attempted in this country. However, the greatest legacy of Repeal is not the re-balancing of commonsense that came with the reintroduction of capitalism to to the alcohol sector of the marketplace, but rather long-term installation of the three-tier system and the market-inhibiting and diminishment of  entrepreneurial possibilities that came with it and still reside with us today.

The 3-tier system was put in place in nearly every state following repeal in order to assure that producers,
wholesaler, and retailer were kept separate where ownership was concerned. Given the experience of pre-Prohibition marketing practices it was assumed that unless a strict separation was imposed between the three tiers of the marketplace, then the inevitable vertical integration of the alcohol business would result in extreme marketing practices that in turn would lead to the kind of excessive consumption that was instrumental in leading to Prohibition. Without separation of the tiers, it was assumed, large producers would exert excessive control over retailers and taverns, forcing them to either only sell their products or to sell them in ways that encouraged excessive consumption.

This separation of the tiers was the primary reason for state legislators turning to the three tier system after Repeal. And the fact is, it made sense as long the market remained as it was in 1933 and your goal was to reign in excessive marketing practices that resulted from vertical integration of the wine industry.

Of course the world is different now than in 1933.

Tomorrow, 76 years after Repeal, seven and a half decades after repeal, three-quarters of a century after repeal, you no longer have simply a "Three Tier System" (TTS). That system has morphed into a market diminishing, protectionist, amalgam of laws better described as "The Wholesaler Protection System" (WPS).

Somehow the goal of preventing vertical integration between the tiers morphed into the goal of assuring wholesalers receive a cut of every bottle of alcohol sold, whether they need be brought into the transaction or not. Yes, the current WPS prevents vertical integration by continuing to prohibit common ownership between the tiers. But you have to ask yourself if the legislators who crafted the creation of the three tier system in 1933, legislators born in the 19th century, legislators who could not imagine a logistics system that would allow the shipment of wine from producer or retailer to consumer, would have ever imagined there would ever be a market for the direct shipping of wine? The question is rhetorical.

There is nothing about the remaining prohibitions on direct shipment from wineries to consumers in 13 states or the prohibitions on direct shipments from wine merchants to consumers in 37 states that advances the primary goal of the three tier system to prevent vertical integration of the three tier system.

As for the claim that the three tier system prevents minors from getting their hand on alcohol, anyone with limited access to the logical processes of the mind or the ability to look over statistics will tell you that there is no relationship between preventing minors from accessing alcohol and preventing the vertical integration of the producer, wholesale and retail tiers of the alcohol distribution system.

Repeal is an important moment. And I can't think of a better day to have celebration. But for wine lovers and for craft beer lovers, it might be a day to keep in mind that the amazing expansion of craft products that has occurred over the past 20 years, an expansion that clearly could not have happened without repeal, is an expansion that can't be taken advantage of as long as the original Three Tier System has morphed into the Wholesaler Protection System.

10 Responses

  1. Prioratwineguy - December 4, 2009

    Very well written. Good job. I myself as a producer am completely fed-up with the 3-tier mafia system as it currently exists in the USA. So, I am simply forced to look for ways to uh, “cheat” a little. It’s a sad, sad state of affairs. 🙁

  2. AC - December 4, 2009

    You should tackle pharmacy prices. check this out, from a friend:
    ” Are you sitting down? I went to Target to refill my longtime antidepressant meds, a old, pre-Prozac generic (desipramine) that usually costs about $36 a month or about $100 for three months. THIS time the three-month supply rang up at $320. I kid you not. CVS quoted a price of $449. By using a county discount card and …getting only a 30-day supply, I got it at the old rate.”
    that is a sad, sad state of affairs. Pass the wine…

  3. Austin James Carson - December 4, 2009

    Being that nothing in this country is truly static, I would be curious as to everyones thoughts about whether the three tiered system will continue it’s reign of inhibition, or if there are any cogs in place to loosen their hold on the industry?

  4. Ned - December 4, 2009

    Only one of many dysfunctions in the USA today. Money has corrupted representative government beyond anything the founders were able to conceive.
    By the way Drug Prohibition is a sad policy disaster too. Particularly with respect to cannabis, the list of bad unintended consequences is long. Why we must be saddled with 19th century policy models that don’t work in the 21st century is bizarre and inexplicable.

  5. OWD - December 7, 2009

    The most interesting issues to do with 3-tier will be:
    When some brand, big or small, sues the Big 5 Cartel for antitrust violations.
    When UPS and Fed Ex get licensed up and start delivering boxes more efficiently then any wholesaler.
    When some enterprising young reporter/blogger goes undercover to expose all the corruption at large distributors.
    When some group exposes each and every political payoff from wholesalers to government.

  6. VinoFina - December 7, 2009

    I certainly agrees with this. It is unbelievable the regulations and inefficiencies that three tier system creates for an online wine retailer. Of course, large producers don’t really mind because their clout with the distributors basically means that they don’t have to worry about competition.

  7. Marc the Wine Giy - December 7, 2009

    Great article. I’m a retailer who is not able to get small production wines because of the three tier system, worse, as of November 13 in the state of Rhode Island, distributor friendly ‘interpretation’ of existing law (two pages to explain a few sentances) outlawed cooperation between a retailer and a restaurant for wine dinners, any tastings at byobs and senoir and military discounts. We are already restricted in our in store tastings to four wines no advertisement, no spirits and no online shipping. These are not consummer friendly laws, that’s obvious, but they aren’t small business friendly either. Read about it: http://www.examiner.com/x-14504-Providence-Wine-Examiner~y2009m12d4-State-puts-a-cork-in-retailers-wine-dinners-and-tasting-events
    Marc the Wine Guy

  8. Marcia - December 7, 2009

    Having read the linked story, Marc, looks like the smallest state in the union wants to ensure its residents have the smallest choice of wines to drink, too. My sympathies and good luck fixin’ the 3-tier system in RI!

  9. WhackBoy - December 7, 2009

    For some reason, The Feds will recognize and honor any state law associated with the alcohol trade, protectionist or not. But, should a state democratically pass a law treating cannibis as medicine, The Feds cannot allow states to self govern. There must be a constituional issue there somewhere…

  10. Mark - January 6, 2010

    RI is definitely one of the worst. One of my main problems with the state specific laws is that the states don’t even know where my company falls most of the time. Are you a distributor? Depends who you ask, we’re a 3rd party wine club….usually that is met by silence.
    We’re having an interesting time with a distributor as we speak right now. We will be using one of the wines they represent in one of our initial clubs(luckily we can buy our club wine from the winery directly), we wanted to place it in a restaurant as well(restaurant has to be bought through the distributor)….distributor is giving us a major run around, taking 2+ weeks to return phone calls and there is nothing the winery can do about it.

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