What is the “Three Tier System”?

3tier On more than one occasion, when I've pitched stories to a member of the media concerning direct shipping or wine politics, I've found myself spending the majority of the time with a writer explaining to them what the "three tier system" is. That the writer understand this contraption built of early 20th Century concerns is crucial to any discussion of the politics of wine.

What confuses and gets the writer stuck is the notion of mandated relationships between the tiers.

"Well, first, only a state wholesaler can import wine into the state from an out of state importer or winery or distiller or brewer…The winery in California, for instance, can't sell directly to a retailer even if they know they want to buy it. First the winery has to have a wholesaler in the state. And there is no requirement that the wholesalers in the state work with the winery. Then the retailer or restaurant is forced to buy their inventory only from a wholesaler who has the wine. If the no wholesaler carries the wine the retailer or restaurant can't buy it from the winery directly, unless the winery is located in the state and then only sometimes can the winery in the state sell directly to the retailer or restaurant without a wholesaler. Then the wholesaler and the retailer must…."

And it goes on and on.

The fact is there is very little that is true about the three tier system across all states. In fact, just about the only thing one can say about the three tier system that is common to all states is that one tier may not have an interest in another tier. Wholesalers may not own restaurants. Wineries may not own a retailer, retailers may not own wholesalers.

Put another way, the three tier system is about restricting cross ownership between the tiers.

Beyond this requirement, each state is different.

What's interesting is that wholesalers have done such a good job of convincing lawmakers and courts that the "three tier system" means much more. Most specifically, they've convinced gullible lawmakers and judges that the definition of the three tier system is everything encompassed by a state's regulatory system from prohibitions on self distribution by producers to the right of a retailer to ship wine to customers in the state via common carriers.

This mistaken view of what the three tier system encompasses is, in a word, fraudulent.

The reason most states do have a prohibition on cross ownership between the tiers goes back to the sins of the pre-prohibitionary era when brewers often tied taverns to them in arrangements that forced the tavern owners to only sell one brewer's suds and to do so with marketing efforts that could only be called predatory. These practices and "tied houses" were what the states wanted to avoid after Prohibition ended in 1933 and the best way to do that was to pass state laws that assured a separation of the tiers and assured no undue influence by one tier or member of that tier over another tier or member of that tier.

There is nothing, however, about mandating that a retailer in Wisconsin only buy his inventory from a Wisconsin wholesaler and prohibiting that retailer from buying directly from a California winery that prevents the evils that concerned post-Prohibition lawmakers so much that they separated the ownership and influence of the tiers.

Today, this expanded and fraudulent meaning that has been invested in the notion of the "three tier system" has the effect of retarding the growth of craft wineries and craft breweries and severely lessening consumer access to the numerous new products that are available in in the United States. This expanded meaning of what the three tiers system is does serve to protect wholesalers from competition and having to innovate, and does very little else.

6 Responses

  1. Sara - The Wine Colours - March 15, 2011

    Thank you from Barcelona for sharing all this interesting information about wine.
    Sara Sala

  2. BobbyC10 - March 15, 2011

    Thank you for the comments and perspective. I completely agree the 3 tier system is a mess and it is prohibiting small merchants and wineries from growing their wine business. It’s bad for the consumer, the winery, and the industry.

  3. Bacchus and Beery Wine Blog - March 16, 2011

    As always, a very astute observation on an absurd problem. Don’t forget wholesalers and the three tier system are also the grand protectors of State’s Rights… he said sarcastically

  4. Bubba - March 16, 2011

    A different, and perhaps more informed POV, being in the trade: the ABC regs., or for that matter any set of regulations, e.g. tax code, need not make perfect sense to best serve the needs of govt. and the community; it needs to be consistent and uniform. The 3-tier system is not anti-competitive, or anti-consumer, rather just the opposite as it sets an equal playing field with due respect to the entrenched interests of govt. and business. Specifically addressing what seems to be the above contention: Wholesalers do in fact provide a significant value to the supply chain, and could never operate to the extent that they do without the protections afforded by the 2nd tier. Sure, you can ship your geeky CA juice vineyard-direct, that’s great for you, but should the 2nd tier loose grip on its established franchise, no state could offer an environment friendly to the boutique importer and distributor that make this business so interesting. Every licensee (I assume the writer acknowledges the value of licenses) would have 2 choices: Constellation or Gallo (exaggeration intended).

  5. Mark - March 17, 2011

    The worst is when a winery in your state mistakenly thinks they need you to buy from their distributor. Like many things in Congress right now, there is some serious debate about the relative value of choice versus protectionism. As both a consumer and someone selling directly to consumers, I hope greater choice wins out.

  6. Tom - March 21, 2011

    @Bubba, I’m in the trade as well. No one says that wholesalers don’t have a place, and no one disputes that retailers sometimes get protections too. But “wholesalers … could never operate to the extent that they do without the protections afforded by the 2nd tier?” And “no state could offer an environment friendly to the boutique importer and distributor that make this business so interesting?” Really? DC does, so does VA for wine, and everyone benefits.

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