The Deception and Duplicity Necessary to Defend the Three-Tier System
One thing is absolutely clear about the alcohol industry: Its primary form of regulation, the “three-tier system,” is so fundamentally flawed that today it serves mainly to retard the growth of the alcohol industry, acts as a barrier to small and medium-sized alcohol producers from entering markets around the country, and acts to increase the political and financial power of a very small group of middlemen wholesalers.
Yet, this destructive system of regulating the sale and distribution of alcohol continues to be defended by lawmakers as well as regulators.
The two most fundamental aspects of three-tier regulation are 1) a prohibition on any of the tiers (producers, wholesalers, and retailers) having an ownership interest in any of the other tiers and 2) the state legal mandate that producers may only sell to middleman wholesalers, who in turn are, by law, the only source of inventory for retailers. It is this second function of the three-tier system that puts small and medium-sized producers at the mercy of wholesalers (most often wholesalers refuse to distribute small producers) and results in consumers in most states having terrible access to product selection.
Between 2017 and 2020, the federal government approved more than 400,000 alcohol labels for sale in the United States. Yet in most states a relatively small collection of wholesalers offer no more than 40,000 to 60,000 products combined. The wholesalers call this a success. Most small producers, whether domestic or imported, call it a farce and abuse of power.
Recently on my Facebook page, I asked anyone to offer a defense of the state-mandated use of a wholesaler. No one could. Most didn’t even try. What’s the point? So, I went looking internet-wide for a defense of this system of alcohol distribution.
You can find any number of wholesalers and large alcohol producers who actively defend the system. What’s interesting about all these defenses of the system is that nearly all of them fail to mention that the system they are defending REQUIRES all alcohol to flow through the middle man wholesaler.
But the most egregiously deceptive and inappropriate description of the three-tier system came from a source that has no place defending it: The National Alcohol Beverage Control Association (NABCA). This is an association of state regulators from states where the sale and distribution of alcohol is, in one way or another, controlled by the state. Think Utah or Pennsylvania. Members of the NABCA are bureaucrats whose job it is to carryout alcohol regulations passed by their states’ lawmakers.
Nowhere in the stated mission of this association of bureaucrats does it suggest they exist to promote and defend a particular form of alcohol regulation like the three-tier system. Yet not only does the NABCA go to lengths to defend the three-tier system, but they also go as far as to denigrate and characterize as “threats” any alternative system. One would expect this perspective from wholesalers, but not from bureaucrats who have the job of simply carrying out the will of the legislature.
Consider first the NABCA’s description of the three-tier system:
“The three-tier system is simple in theory: manufacturers provide alcoholic products to wholesalers, who distribute the products to retailers, who sell to the consumers. No one entity can be involved in more than one tier under most state models and each tier is regulated and licensed separately.”
No mention whatsoever of the fact that all alcohol sold in a state with a three-tier system MUST—by law— flow through a wholesaler nor of the fact that wholesalers are under no obligation to represent a brand that wants to be distributed in the state. Why would NABCA not mention this fundamental element of the three-tier system? I think it’s obvious: The NABCA is well aware that this system of alcohol distribution is an obvious form of rent-seeking and results in all members of the system being dominated by the wholesale tier—a circumstance they’d like to avoid mentioning because it doesn’t sell well to independent thinkers.
In perhaps NABCA’s most duplicitous and questionable attempt to defend the three-tier system, it attempts to convince readers that consumers are all in favor of this system. They quote a 2012 survey by the Center for Alcohol Policy that shows:
- 72% believe states should regulate alcohol as a unique good
- 81% support states determining their own laws and regulations regarding alcohol
- 76% support the states’ right to regulate the manufacture, sale and distribution of alcohol
While these results in no way deliver any proof of consumer support for the three-tier system, that’s not the worst of it. The survey they quote was commission by an organization owned and run by the National Beer Wholesalers Association—a group whose members benefit more than any other from the three-tier system. NABCA doesn’t mention this. They don’t mention it for the same reason they never draw attention to the fact that using a wholesaler is mandated by state law: Were people to know this they’d see exactly how corrupt this system and its defenders have become.
Here’s the problem when a group of bureaucrats like those members of the NABCA concerns themselves so thoroughly with keeping in place a discriminatory and ineffective regime like the three-tier system: these bureaucrats can’t be trusted to fairly enforce new laws and regulations that are passed by their state legislatures that reform the three-tier system.
Today, slowly, more and more states are loosening their alcohol distribution regulations in the face of more and more producers demanding access to a market that historically has been built around efforts to protect the economic interests of a very small group of wholesalers. Consumers too are demanding access to the parade of new products flooding into the marketplace that are produced domestically and imported but are often hard to find locally.
The single most important change to alcohol distribution regulations that would help consumers, producers, and retailers is the removal of the state mandates that require producers to sell to wholesalers and retailers to buy from wholesalers. As long as this provision remains in place in most states wholesalers will continue to provide the terrible service everyone in the industry beyond the very largest producers have become accustomed to.
Without the state mandate that a wholesaler be used, producers can create paths to market that allows them to be creative and innovative in getting their products in front of new customers. Moreover, they would be able to find new paths to market without the burden of being at the mercy of a constantly diminishing but ever more powerful mob of middlemen who more and more appear to be in business to serve the largest corporate producers while showing complete disdain for the needs of consumers and the rest of the trade.
The good news for those members of the alcohol trade who might be interested in reforming this ancient and archaic system of alcohol regulation is that the rationales and arguments that are offered up in defense of the three-tier system are extraordinarily weak.
For example, the NABCA suggests the primary health and safety argument for the three-tier system is that “As each party must be licensed and accountable for alcoholic products, this prevents tainted alcohol from entering the marketplace.”
However, unless wholesalers are tasting product from each and every case of alcohol that moves through their warehouses, there is no way whatsoever their state-mandated use does anything to prevent “tainted alcohol” from entering the marketplace. What’s disturbing is that these compromised bureaucrats at the NABCA don’t understand the simple principle that the greatest deterrent to tainted alcohol entering the marketplaces is 1) retailers and restaurants’ easy access to an array of products and 2) access to products that are not overtaxed or too costly.
Or consider this example of the NABCA’s explanation of the commercial benefits of the three-tier system: “For manufacturers, they are given equal access to the marketplace that they would not receive under other systems.”
Now, how can you argue with this wisdom? I suppose one might point out that under the three-tier system as it works today, all manufacturers of alcohol can equally be denied access to a state’s alcohol market by a mob of middlemen wholesalers. One might also point out that without having to gain the approval of wholesalers, who have almost no incentive to represent small producers of Cabernet Sauvignon or Pinot Noir that wants to sell only 10 or 20 cases to a few restaurants in the state, producers truly possess real equal access to the market place.
So, again, for those members of the alcohol trade—perhaps a group of small producers, independent retailers and fine wine restaurants from across the country—that might consider creating a coalition to reform or eliminate the three-tier system’s wholesaler mandate in a given state, the challenge will not be combatting strong arguments in defense of the three-tier system.
In a subsequent post, I’ll discuss how such a coalition can launch an effort to bring down a state’s archaic and slavish adherence to the now detrimental three-tier system.