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.
Superb Article…I have been a proponent of eliminating the Laws & Regulations for many years ! I have a career in every aspect of Consumer Beverages.
Health Issues: Dairy, Meats, Baked Goods Do not have this issue? DUH !
DTC and DTR is available for the Majority of ACV.
The “CLUB” is falling apart…!
A supplier should have CHOICE ! Distribution via DSD is good for a good % of ACV.
But not by Federal and State EDICT !
Fantastic article addressing an archaic and inherently corruptible regulatory system.
Peeling back the Onion of Tiers.
So, if my history is correct, we went from Tied relationships to a 3-tier system and, I was told, that these new channels to the consumer would ‘prevent any one party having undue control over the sale of alcohol.’ Clearly, anti-trust law sentiment played a role in 1933 – i.e., the goal of leveling the playing field and preventing any one company from gaining and/ or limiting the access of their competitors.
As the new model for alcohol distribution was conceived it quickly either created a system where the state all-but guarantees monopoly power, either through closed state structures, or quirky laws from state to state like in the case of the hideous Franchise laws that tie a brand to a distributor for life. The result is that the 2nd tier has stunted to evolve to become dynamic as market forces are shielded from affecting their business model.
Obvious to us all, distributors have focused on maximizing company profits, and company rewards, and focus the company’s attention on the top brands that have the budgets to offer incentives trips and payback/ through schemes that suck up the air of a broader consumer focus feedback loop.
A practical example from my perspective was when I worked for RNDC VA. At one point they were distributing a Spanish brand called Artadi. Artadi as I recall was switching importers…. or rather toying with setting up their own US-based import arm, something like that, and I remember pitching to the leadership, in which I had an ear…. hey, this is a brand we want to keep in the stable. But because they were not locked into an important supplier portfolio, nor were they offering loads of cash for placements and case sales there was zero interest in keeping the brand active.
Artadi is not some small family winery from Rogue Valley in Southern Oregon hoping beyond hope to increase distribution nationally in a key state like a VA. Artadi….had street cred. So, it would be my thought that one of the primary forces of change we should focus on is allowing vertical integration so that an Artadi could continue to ship to customers in VA that wanted to support the brand.
The solution for Artadi would be to allow the brand to sell in VA independent of distributor representation. Allowing producers/ Suppliers to become distributors or retailers would breathe life into the 3-tier network. Wineries and brewpubs already are producers and retailers across the US a focus on attacking the rule against tied relationships in all 50 states would be huge.
This would start to place pressure on the 2nd tier to adapt. But I think it is a fair question to ask do things get better with an all-out assault on the 2nd tier?
I hear the arguments that are often offered up that without the 2nd tier how would America not look like the UK and Australia where big brands dominate just the same – maybe more so? Still, one must wonder what that landscape will look like? Will it look more like the UK model where larger retailers import wine brands directly, often creating their own brands in the process to stave off price wars on recognizable brands?
Would this new reality look any less exclusionary? Would the outlook really change for a small winery in this new reality?
The Wuhan Virus has shed light on one aspect that I wonder is worth exploring the arbitrary State line. I live in Kansas City MO, but Kansas City, Kansas….has another set of Wuhan Virus rules.
It is no shock, shock…. that one of the most profitable stores for Total Wine and More store sits right across the state line Pennsylvania in Delaware not far from the Philadelphia market. Decriminalizing interstate purchases, in general, should be another focus. I remember growing up in Stamford, CT, and watching my older brother’s (I had 4) make Sunday runs to Purchase NY to buy beer because Sunday liquor sales in CT were prohibited. In this case and in the case as in the TW&M Delaware example this is a state crime.
Allowing wine retailers to ship to other states must be a continued focus of the retail industry. The protectionist restrictions of the 2nd-tier need an Amazon revolution to facilitate change.
Like the Amazon model economies of scale in a tied tiered distribution model may allow big brands to exit their distributor relationships and develop their own distribution integration. It happens all the time in California. This idea that large and small wineries could develop a “direct-to-specialty retailer system wherein distribution from domestic wineries would resemble that for small-production direct imports.” Is revolutionary to reaching the end purchaser.
Whether or not this will put enough stress on the anticompetitive 2-tier to begin to evolve and become more responsive is speculative I will concede (and wishful thinking). But reducing costs whether it be administrative or logistical will be the first goal in revolutionizing the 3-tiers. Allowing vertical integration will be the primary focus and attacking some of the archaic laws on the books like Franchise law should follow right behind this step. Laws enacted will not change things overnight but given time for the market to adapt and test out this new freedom will result in more choice and these choices will have a competitive price.
As a small producer, we are hand cuffed by the 3 tier system. To get our product into a restaurant who Really wants our products, we are forced to use distributors who don’t want our products because we are small, don’t work to represent us and when our products get on the wine list they are marked up 4X from what we are paid. We should have an option, not be forced to use a system that doesn’t really want our business. It hurts the retailer’s and the customer. If the right distributor is available and is doing the job, we would use them. But being forced to use a distributor who doesn’t want our business is wrong.
Living in a country, Greece, where alcohol sales are for all intents and purposes completely unregulated (except for selling to minors under 18) and where alcohol addiction is rather rare, I find all that is described in this excellent article unbelievable. All the more so in a country that so respects personal freedom. I find equally preposterous the legal drinking age in the US which I believe is 21 everywhere. So, you can actually die for your country but not have a beer doing so. Crazy. The fact that by definition the constituency most affected by this prohibition, i.e, the 18 to 21 year olds is never stable, is in fact ephemeral, and therefore can never organise and claim as a right a change in the law, should be declared somehow unconstitutional!
Someone needed to say it. THANK YOU.
I had spent my entire career in the wholesale distribution business, and I would agree with your take on things. There should be a way for smaller people to sell in to different states on their own. There are nearly impossible barriers to success. However, while that will make things fairer for small producers, it is still a very difficult task to break in to both the off and on premise outlets. As everyone know there are hundreds and hundreds of wine brands. Anyone who has spent decades calling on retailers will tell you that they are not exactly begging for some new person walk through the door or phone to ring on a Monday morning with a another Cab. Don’t misunderstand me, I agree with the comments about the system, and I hope that there is success in opening things. Retail is a war zone and Southern at over 20 billion and RNDC at 13 billion are not going rollover and play dead. Gallo now is responsible for about 30% of every bottle of wine that comes from California. I agree with your premise, and I hope there is a way to allow more access for the small producers. I think that allowing individual producers to ship directly in good, but without any “boots on the ground” it is really difficult. Your point about DTC is the real answer for a producers. 21st century technology, including Zoom and social media are the tools that can perhaps make a difference. Remember. Amazon responds to the highest bidder, just like everybody else. If Amazon can really begin to be an outlet for wine DTC. Gallo will be there and if anybody thinks that you do an Amazon or Google search and the first products that come up are random, I have bridge that connect Brooklyn to Manhattan, I would like to sell you. I hope your campaign works out, because access for all is important. With so much wine available, the competition is fierce. Great points brought up by all. If there was a ever a good old boys club, it is the wholesale distribution business in the wine and spirits industry.
Having worked in the fine wine side of the industry (at all levels) since 1975, I find that not only have the blue laws of the famous prohibition “experiment” impeded the the small business efforts of wholesale, production and retailing, they have shut down consumer availability of small brew, fine wine and craft distillers. Shame on our industry, shame on large corporate America, and shame on the lobbyists of these large corporations, that only want to squelch the small production sales wholesalers, retailers, and producers. This mind set does not exist in other countries and the consumers in the other countries that have a thirst for quality are rewarded, with more availability of these hand crafted products that are not available to consumers in these archaic 3 tier system states.
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