Turning the Tide on Corruption in Wine, Beer and Spirit Sales

An amazing thing happened recently in, of all places, Texas. Both the Texas Democratic Party and the Texas Republican Party, at their annual state platform conventions, called for the elimination or complete reform of the Three Tier System of Alcohol distribution in Texas in their individual party platforms.

Credit for this rather remarkable political (and popular) victory goes to CraftPac, the political action committee of the Texas Craft Brewers Guild, whose members have been denied direct access to the consumer market.

At its most basic level, the Three Tier System of alcohol distribution is a state-based regulatory regime that creates separate licenses for producers, wholesalers and retailers. In general, no entity may hold a license in more than one of the tiers. So, a producer may not be a wholesaler and a retailer may not be a producer. When originally created in the 1930s after Prohibition ended, this separation of the tiers was put in place to promote two policy goals: 1) prevent producers from exerting controlling influence over retailers as occurred prior to Prohibition and which led to socially harmful retail marketing practices and 2) make the collection of state excise and sales taxes more efficient.

In addition to prohibiting a single business from holding licenses in more than one tier, states also generally prohibited producers from selling directly to retailers and consumers. Producers were required to only sell their products to wholesalers, retailers were required to only buy their inventory from wholesalers and consumers were only able to purchase directly from retailers (including restaurants and bars).

While this system may have worked back in the day when the number of producers was relatively few and wholesalers were relatively many, in today’s marketplace where the number of producers of alcohol has exploded, these strict requirements have resulted in a system of regulation that gives wholesalers the ability to dominate the marketplace and decide winners and losers. 

Put another way, the same corrupt system that existed prior to Prohibition and which the Three Tier System of developed to prevent, is now guaranteed by that very system.

Preventing any one entity to hold licenses in more than one tier isn’t the worst idea in the world. At the very least it results in a more efficient way to collect the important taxes that result from alcohol sales. However, the continued legal prohibition on producers selling directly to the consumer either for take-home sales or for on-premise consumption and prohibiting retailers from purchasing directly from producers around the country no longer serves a reasonable policy goal. 

Occasionally, a state will entertain legislation that breaks down these prohibitions to whom producers may sell to and from whom retailers may purchase their inventory. When that happens, wholesalsers—the middleman in the traditional Three-Tier System, argue that any such change would be allowing producers to act as both producers and wholesalers. But of course, this isn’t true. Producers don’t sell multiple brands as wholesalers do. They only sell their own brands. And allowing producers to sell directly to the public for on-premise or off-premise consumption doesn’t make them retailers because, again, they are not selling multiple brands. They are only selling their own.

In fact, the only possible policy goal that would justify a legal mandate that producers sell only to wholesalers and retailers only buy from wholesalers is to protect the economic stability of the middleman. There is another word for this kind of policy goal: Corruption.

Over the past five election cycles, Texas wholesalers have given more than $15 million to state politicians. As a result, In Texas, manufacturing brewers may not sell directly to consumers for take-home sales. Additionally, Texas brewers making more than 225,000 barrels of beer must sell their beer to wholesalers, then buy it back from them, before they can sell it to consumers for on-premise consumption. It’s understandable why the Texas Craft Brewers Guild has chosen to spend money on an all-out lobbying campaign to change the laws.

In New York, consumers may not purchase wine, beer or spirits from out-of-state retailers and have it shipped to them.  In Michigan, retailers may not buy wine, beer or spirits from out-of-state producers. In most states, a consumer may not have a bottle of spirits shipped to them from a distiller in their own state or from outside their state.

As the platform adoptions in Texas demonstrate, politicians understand the benefits of free trade and a regulatory structure that does not support rent-seeking and protectionism. Yet something happens to these same lawmakers and political activists when money for campaigning comes into play. All sense of right and wrong goes by the wayside. Wholesalers understand this dynamic and with the protected status they have purchases they are able to entice lawmakers to keep in place that protected status and you get a terribly corrupt wheel of protectionism that goes round and round.

The only solution to this problem of political corruption and out-dated alcohol regulatory schemes that currently deform the alcohol market and consumers alike is lobbying, litigation and consumer involvement. Activism. In a country that is not desperately split into camps that pursue “resistance” and “Swamp Draining” it can be difficult to get lawmakers and consumers to focus on what is seemingly the insignificant issue of “alcohol law reform”.

However, despite this challenge, there is the CraftPac in Texas. There is WineFreedom. There is Free the Grapes. There is the National Association of Wine Retailers. There are lawsuits in various states challenging severely archaic, anti-consumer and market-demeaning laws. And now there are two important political parties in Texas that have called from the dismantling and reform of the state’s Three Tier System.


8 Responses

  1. Jim Wallace - July 9, 2018

    Jerry Mead just rolled over in his grave.

  2. Tom Wark - July 9, 2018

    Jim,

    No kidding!!

  3. Bill McIver - July 9, 2018

    Jerry Mead did like to take credit for taking on the wholesalers first, but it was Tom Wark, John Hinman, and Bill McIver who actually went to war for reform of the 3-Tier system and dragged the reluctant wine industry along.

  4. Donald Haberek - July 9, 2018

    Exciting when logic and common sense break out in the political area around this issue. Changing times, changing minds.

  5. Kathy Bailey - July 9, 2018

    I hope that as these modern ideas get more and more traction, they are not tailored too narrowly. I am a very small importer, and yes, I also have a distributor’s license, making me one of the evil wholesale tier. But the rules are just as harmful to people like me as they are to producers. If I want to sell my wine from Virginia to a retailer in Texas, no can do. I have to sell only to a Texas wholesaler, who sells to the retailer, even if I have done all the work to get the business. The same is true in most states. And forget about selling direct to consumers. The only reason, as far as I can see, that I can’t be allowed to sell direct to consumers, especially in states that do not have a retail outlet for my wine, is that not enough people would get to put their finger in the very small pie.
    It is a nightmare of a system.

  6. Tom Wark - July 9, 2018

    Kathy,

    You are correct! The status of importers is, and ought to be understood as, the equivalent of producers. They ought at least to have the same rights as producers in terms of selling directly to the consumer. And for this same reason, just as retailers ought to be able to purchase directly from producers, they too ought to be able to buy directly from importers.

    BUT….importers must make themselves heard and be involved for any of this to come to pass. And frankly, there is nothing in the way of an importers lobby in the various states and the national importers association (National Association of Beverage Importers) seems entirely unconcerned with the issue of direct sales of self-distribution.

  7. VVP (veux, veux-pas) - July 9, 2018

    Alcohol policy says:

    The 21st Amendment gives individual States control over:

    Whether to allow sale of alcohol in the State
    Whether to allow importing alcohol into the State
    How to distribute alcohol throughout the State
    Possession of alcohol in the State

    The 21st Amendment does not give individual States control over consumers’ choice where to buy alcohol.

    BTW

    Tom, where are the answers to our three questions (see email)?

  8. L.M. Archer - July 10, 2018

    TY for being such a tireless voice in the wilderness on this topic.


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