The Blueprint For Fixing the Wine, Beer and Spirits Industry

In a previous post, I expounded on why and how the three-tier system is retarding the growth of the alcohol industry primarily through the state mandates that require all alcohol to flow through a middleman wholesaler before it can reach the retail shelves and restaurant lists. I also discussed some of the forces that are defending this tired system, in particular many state regulators.

At the end of that post, I promised a roadmap for dismantling the three-tier system. The map isn’t complicated or complex. It’s doable. But it would take a commitment of time, effort, and money on the part of producers of alcohol, retailers, and restaurants.

First, Know You Are Right
If you don’t understand all the reasons the three-tier system is bad for business and bad for the alcohol beverage industry then you aren’t in a position to convince anyone that change is needed. However, the three-tier system has become such a sclerotic artifact of a time that does not exist anymore that understanding its harmful effects is not a heavy lift.

At this point in the process, the defenders of the three-tier system are actually leaning on the notion that without a wholesaler mandate the country will be awash in counterfeit booze. Along with this, they argue that that the strict use of a wholesaler is a necessity for the state receiving its taxes due. Finally, they claim that without the state-mandated use of a middle tier, producers will come to dominate retailers the same way they did prior to Prohibition.

Of course, the wholesalers and their defenders don’t usually bring up the fact that 1) restaurants and retailers could easily buy counterfeit alcohol (if it existed) today, 2) producers of alcohol are quite adept at writing tax checks and do so regularly to the federal government, and 3) simple tied house laws that were not in existence prior to Prohibition could easily prevent any producer from controlling a retailer.

The point is that while it’s necessary to understand the arguments that will be tossed out in defense of the three-tier system, it’s fairly easy to combat them. As for the arguments for dismantling the state-mandated use of a wholesaler, simple reference to monopoly status, the inability to bring products to market, and an explanation of how growth is slowed as a result will suffice as your primary arguments.

It’s a State-By-State Effort That Will Happen in the Legislatures
Although I believe there are good legal arguments that the use of a state-mandated wholesaler is unconstitutional, in the end, success in bringing down the system is going to happen by convincing the state legislatures to change their laws and that means lobbying.

Going state-by-state is, as you are thinking, a very slow effort. However, bring down two or three important or vulnerable states and others followed more easily. But the effort will require lobbying and hiring at least one good lobbying firm in each state where the three-tier system is contested.

In the Beginning, it’s Going to Be a Multi-Year Effort
Even after the Granholm v Heald Supreme Court decision it often took multiple years to for many states to change their laws and allow direct shipments by out-of-state wineries. It will most certainly be the same with the attempt to bring down the three-tier system. The lobbying effort has a goal. However, part of that goal is educating lawmakers, the media, the regulators, and the consumer. It’s not going to happen overnight. So, it’s about digging in for the long haul.

It’s Going To Take a Bit of Education
As I mentioned above, part of the effort will entail educating a broad range of stakeholders that dismantling the three-tier system with its state-mandated use of a wholesaler is good for all involved. This will mean working the media in a given state. It will mean marketing efforts to educate the public. It will mean a broad communication and marketing effort to educate producers, retailers, and restaurants in the state. And it will mean educating state alcohol regulations

You are certainly looking at hiring a local PR firm. In addition, you are likely going to need to produce economic studies addressing a range of issues and demonstrating that the dead will not rise from their graves if a retailer is able to buy 4 cases of Pinot Gris directly from an Oregon winery.

It’s Gonna Take Money
A strong lobbying firm. A good PR firm with experience in government relations. Economic firms to create studies. Travel. Websites. Marketing. By my estimation, you are looking at between $150,000 and $250,00 a year with at least a three-year commitment to that kind of funding to take on a large state with an active and well-funded opposition.

You’re Gonna Need a Coalition
You may be able to find a single entity willing to pony up the $200K per year. But you don’t want that. You want an effort that is funded by a broad coalition of supporters. You are going to want a coalition of producers of beer, wine, and spirits in and outside the state you are targeting. You will want a coalition of both restaurants and retailers residing inside and outside the targeted state.

This all means the creation of a non-profit organization to oversee the effort and the coalition. Moreover, you are going to want prominent names on your board of directors. You want folks from every part of the industry who are respected and carry weight.

The benefit of having a broad coalition of members supporting this organization is that it will reduce the amount of dues each member must pay. But don’t kid yourself, creating and maintaining this coalition of dues-paying members will be the hardest thing you do. You’ll need 100 to 200 members each willing to pay between $3,000 and $1,000 per year. At first glance, this doesn’t seem like much. But having led an industry organization for a number of years now, I can tell you that convincing folk to join a reform effort and to pay for the privilege is not the easiest of lifts. However, with a strong board and a strong executive director and given that you are drawing membership from a broader swath of industry players than most associations do, this is indeed a doable goal.

What You’ll Be Facing (Who Is Not Joining Your Coalition)
Those who will oppose efforts to replace a rotting system currently possess most of the political power inside the alcohol beverage industry. The irony, of course, is that they possess most of this power due entirely to the dynamic workings of the three-tier system.

Whichever states are chosen to target, wholesalers based in that state will oppose the effort.  Additionally, wine, spirit, and beer’s national trade associations will oppose your efforts. You will be very unlikely to receive any aid or comfort from large beverage producers who rely on the three-tier system, despite the fact that they would benefit most from the leverage they would gain by operating in an environment that does not require them to use a wholesaler to move their products into and around a state. Local retailer and restaurant associations will oppose your efforts for the simple reason that their largest members depend upon, work with, and can’t imagine a beverage world without wholesalers in the middle of it. However, many of their members will support your efforts.

The institutional and formal opposition will come from lawmakers and state alcohol regulators. While state alcohol regulators have no business weighing in on political matters, they will nonetheless.  Regulators perform an important but largely thankless task. But it’s important to recognize that most of them have never laid eyes on or worked within a regulatory system that did not legally center wholesalers. They are by nature conservative and oppose any significant change. Finally, lawmakers will initially oppose any effort to reform the system. Most have come to understand the three-tier system from their interactions with wholesalers (who fund their campaigns) and from state alcohol regulators they’ve come to rely upon. However, the beauty of lawmakers is that they are the most efficient weathervanes in the world. Once they feel a change in the direction of the wind, their attitudes can change.

The Benefits Far Outweigh the Cost and Effort
When you consider the benefits to small and medium-sized producers who can’t get wholesalers to look them in the eye, let alone represent them and market their wines, and the benefits to the restaurants and retailer that would love to augment their inventory and selection with samplings from the enormous variety of products never offered by their local wholesalers, the reasons for undertaking an effort to tear down the harmful three-tier system is clear.

And consider the change in the wholesalers’ attitudes once their place in the system is not guaranteed and protected by the state. All of a sudden service will get a little better. All of a sudden the obscene margins they charge will come down. And consider in which direction those released margins will flow.

Finally, consider the innovation in logistics, marketing, and sales that will occur once the burden of clearing your sales through a middleman only wanting their cut is eliminated.

The recruitment, coalition building, dues-paying, lobbying, public relations, and marketing effort should be undertaken by the alcohol beverage industry. It’s been almost 100 years since this three-tier system has been put in place. It used to work. It hasn’t for years. It’s harming the alcohol beverage economy and killing jobs.  If I had a dime for every time I listened to or read a complaint by a producer or retailer or restaurateur about how they are screwed by the three-tier system and their wholesalers, I could fund this effort myself.

It just takes a few good folks to step up.

4 Responses

  1. Paul Beveridge - February 9, 2021

    Tom, you are so right as usual. We are closer to making your goals a reality in Washington State than any other jurisdiction in the country. The house of cards is ready to fall — we just need a little more funding to get the job done and set an example for the rest of the country.

  2. David Pergl - February 9, 2021

    Great plan !

  3. acv - February 10, 2021

    I wonder as I have said before if a frontal assault on the 2nd tier from the outset (If that is what you are arguing) is the best approach. I would create first more stakeholders.

    The first step – My focus would be to go after the tied state dispensary stores. I think the appeal of privatization can be won. The focus should be on the distilled spirits stores system that is primary monopolies in 15 of the 17 control states.

    Alabama, Idaho, Iowa, Maine, Michigan, Mississippi, Montana, Montgomery County, MD, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia, West Virginia, Wyoming.

    1(a) ha, ha. Grocery store sales. (Convenience Stores too)

    Currently, only Beer can be sold in Grocery stores in – Utah, Minnesota, Kansas, Oklahoma, and Connecticut. = Lobby to open wine at a minimum.

    Currently on Beer and Wine can be sold in Grocery stores in – Oregon, Idaho, Montana, Arkansas, Mississippi, Alabama, Georgia, South Carolina, North Carolina, Virginia, Indiana, Maryland, DC, New York, and New Hampshire. – Lobby to open liquor sales. (yes, there will be an overlap with state liquor stores in some cases)

    With new stakeholders large (Whole Foods, Kroger’s, etc.) and small new liquor store owners, we will have even more people vested into the system for alcohol distribution. Many of these folks and corporations may be our best advocates (not all) for still more changes to come and that is the moment to go after the 2nd tier.

    I think with Uber’s acquisition of Drizzly there is a landscape for change but clearly, the Iron is hot right now. I would be more than happy to join the movement if anyone needs a good lobbyist.

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