If there was ever an example
of arcane laws still on the books, the three-tier distribution system in the
United States would fit the bill. Seventeen states have absolute control of
distribution (and are referred to as control states), going as far as
owning the retail outlets and disallowing competition. Others have a more open
system, but the truth is the three-tier system is woefully outdated and needs
to end.
And, with that last
statement, I’ve probably ticked off several of my friends who are distributors.
What is the Three-Tier
System?
It is a relic from the end
of Prohibition. In a nutshell, it was set up to regulate the taxation and
distribution of alcohol. Yes, it is about ensuring everyone who is owed a tax
can collect it. The three tiers are:
- Tier 1: The distiller or non-distilling producer. They must sell to Tier 2.
- Tier 2: The distributor. These are essentially middlemen. They buy from Tier 1 to sell to Tier 3.
- Tier 3:
The retailer (on-premises or off-premises). If the terms
on-premises or off-premises sound confusing, they aren’t. It depends on where
the alcohol will be consumed. A bar would be an on-premises retailer. A liquor
store would be an off-premises retailer. But Tier 3 must purchase from Tier 2.
What’s Good About The Three-Tier
System?
Craft and startups get an
advantage from working with distributors. A good distributor can command a lot
of pull and shelf space with the stores they sell to, making it easier for
these smaller and unknown brands to get in front of the consumer’s face. The
big boys don’t need this help because the Tier 3 entities constantly replenish
the major labels to keep up with demand.
A Wisconsin retail manager, who asked to remain
anonymous, told me:
“Most manufacturers won’t want to deal with retailers directly except large national chains. The end results would likely be the end of many small independent stores that would not be able to compete. Imagine buying a product from a wholesaler after factoring in manufacturing markup and their markup and having to compete with a chain that can buy direct and only pays the manufacturing markup.
You would not want to see what would effectively be dealerships for every major brand. Consumers would end up paying higher prices after most competition is eliminated.”
Why Should We End the
Three-Tier System?
There’s no short answer
here, but I have a few significant issues with the system.
The first issue has to do
with the Tier 1 folks themselves. In many states, they cannot sell their
product directly to the consumer. Oh, you can buy from them, but they’re acting
as both a Tier 1 and Tier 3 entity. Tier 2 still got its cut of the pie. The
distiller legally must sell its product to the distributor so the distributor can
sell it back to the distillery.
"State law prohibits me from taking spirits I make, and legally sell, to the bar around the corner that legally sells my spirits. By law it has to go to a distributor, has to go to the distributor warehouse, has to be gotten off the truck, touch the ground, put back on the truck, then drive to the bar, and has to be marked up by a minimum amount by law." – Brian Sammons, owner of Twisted Path Distillery, on Wisconsin Public Radio (May 13, 2019)
My friend Brian and I can’t
be the only ones who think this is beyond stupid.
The second issue has to do
with territories. Distributors are granted agreements by each state to carry a
distillery’s products in a single region. If a brand changes distributors, the
new distributor has to register and inform the state that the prior distributor
agreement is no longer valid. This doesn't become a big deal until you realize that if a Tier 1 entity cannot find a distributor to work with in any given territory, they're left with no means to sell their products in that territory.
The third issue involves shenanigans
and game-playing that some (not all, but some) distributors engage in. In many
states, it is illegal for distributors to set quid pro quo conditions
for retailers to obtain products. To bring this into the whiskey discussion,
here’s a fictional example of what quid pro quo means:
Billy Bob’s Bait & Booze wants to order a few cases of Eagle Rare Bourbon. The exclusive distributor for Eagle Rare in Billy Bob’s territory is Dealing Dan’s Distribution Depot. Dealing Dan has many cases of Eagle Rare on hand, and it is in high demand. Unfortunately, Dealing Dan recently made an ordering error. Instead of buying a pallet of Malört, he accidentally ordered ten. No one in his territory buys Malört in bulk. He knows he will be sitting on that stock forever.
Dealing Dan verbally suggests to Billy Bob that he will sell one case of Eagle Rare to Billy Bob, but he may want to also purchase a dozen cases of Malört, which he will gladly sell to Billy Bob at a greatly discounted price. Billy Bob scoffs at this because he knows that much Malört will likely sit on the shelf until his grandchildren’s grandchildren own the store. Dealing Dan suddenly remembers that he promised that case to someone else. Billy Bob, who really wants that Eagle Rare, orders both.
The fourth major issue with
the three-tier system is when distributors circumvent Tier 3 and consumers
altogether. This happens in both control states and those that aren’t. This is from
my Wisconsin retail manager friend:
“I know a lot of allocated bottles, including some of the lesser Van Winkles, are going out to employees at our local distributor. Literally, have the same ability to buy as many bottles as any store can on most things.”
If you say to yourself, “That’s
just sour grapes,” or it is an isolated incident, it isn’t. The people who
are supposed to be policing the system are instead taking advantage of it. On
February 8, 2023, Noelle Crombie of The Oregonian/Oregon Live
reported:
“Oregon Liquor and Cannabis Commission employees, including top-level managers and the agency’s longtime executive director, have for years set aside for their own use some of the most sought-after bourbons, diverting them from the public and running afoul of state ethics laws.
The blockbuster findings, detailed in an investigation obtained Wednesday by The Oregonian/OregonLive in response to a public records request, reveal a longstanding practice within the agency of reserving bottles of the popular bourbon, Pappy Van Winkle, for multiple employees, including the recently ousted executive director, Steve Marks, and his second-in-command, Will Higlin.”
Those emphases are mine. And,
strangely, it is too similar a story to what’s happening in my state of
Wisconsin. You and I both know that this isn't limited to just Wisconsin and
Oregon.
What Should Replace the
Three-Tier System?
I’m a bit torn on what
should replace it. Brick-and-mortar liquor stores are an essential part of
today’s culture. Not only do they provide a valuable safeguard against those
who are underage from purchasing alcohol, but it also provides an avenue for
people to learn about craft and startup brands. I look at my friend who manages
a Wisconsin liquor store, and I understand his concerns about the survival of
mom-and-pop outlets compared to the big box stores.
On the flip side, the
Internet is a beautiful thing. We already have online retailers. I’ve purchased
from them myself. There are current safeguards in place. UPS and FedEx, who deliver
to my house weekly (if not more often), require an adult signature for anything
alcohol-related. They don’t just leave it on your doorstep (at least not when
you’re making a legal purchase).
Do distributors have a
place? Yes. But should distillers and producers be forced to sell through
distributors? No. I look at Brian Sammons’ issue to get a bottle to the bar around
the corner. It is akin to flying from Madison to Milwaukee with a stop in Montpelier. It makes no sense (short of the state missing out on its tax money).
What’s Your Solution?
I’d love to hear your
thoughts. Do you love or hate the Three-Tier system? If you dislike it, what would you replace it with?
Cheers!
The 3 tier system should absolutely stay in place. Think of the thousands of jobs that would be lost, the independent retailers that will be put out of business because they will not get the attention, training, and analytics that they receive from the distributors to keep them competitive and the numerous innovation items that consumers would never see because of the work of the distributors. As far as your statement that other people are getting the good stuff before others, give me a break, that happens in EVERY business from meat cutters getting the prime cuts, car dealer employees getting the first pick of inventory before the everyday consumer, to realtors getting the first chance to buy a good deal on a property. I promise you, you won’t get an extra bottle of allocated bourbon if the 3 tier system is demolished so stop with the nonsense.
ReplyDeleteThe entire reason this article even exists is because somebody is sour. They’re having a hard time getting allocated whiskey, boo-hoo.
ReplyDeleteDo you think that once this three-tier system is done away with, the basic fundamentals of supply and demand will go away and you’re just going to get your eagle rare for $30 by walking in to Buffalo trace?
You need to think a little bit deeper about the entire multi billion dollar industry that exists, job creation, the complications of import export, the simple fact that distribution itself is complicated and involves a lot of logistics.
In the single example that you listed about the craft distillery, wanting to sell a bottle of whiskey to the bar down the street, do you think that said craft distillery is set up with a marketing department that’s fit to multiple states, go nationwide, penetrate local bars, restaurants and liquor stores with existing relationship like a distributor would? Do you think they have the logistics set up to run a multi state operation? I mean talking about the bar down the street is cute, but let’s get real man, these are real business is out there.
Trying that Artisanal Mezcal from Mexico, or that Artisnal aquavit, or how about an aarak, or a craft pear brandy from Spain?
We have access to such things because of the distribution model, distributors are willing to take risks and invest in inventories of craft producers.
I know you want your EH Taylor small batch available on the shelf for $40, but I think a little bit deeper here, my friend it’s not all about you and your bourbon. The wine and spirits industry, as a whole, is much larger than American bourbon.
If you want your old Fitzgerald, participate in supply and demand, find a way to make more money and buy it at the going rate.
I can absolutely assure you I have no issues getting whiskey. There's no boo-hooing here. You'll notice if you peruse some of my reviews, that I cover allocated whiskeys. Cheers!
DeleteI say “you” in a figurative state, meaning any delusional reader who dreams of a world were allocated whiskey is just available on the shelf, but in their eyes the greedy store owner is to blame, and it’s all the three tier system’s fault
DeleteGotcha, thanks for the clarification. Cheers!
DeleteAs a multiple liquor store owner in WI, this article's publisher has zero experience in liquor retail. Most liquor store managers hardly have an understanding on how to work with a distributor. Store managers demand the world of them all while buying 10 cases a week. When you're small peanuts you get very little reward. There's much bigger fish out there than you. The last thing i want is to go from 15 to 20 sales reps calling on my stores to one rep for each brand. You'd have to see 100's of reps, keep your back door open all day long for 100's of trucks a week. You think things are bad or unfair now? Let the suppliers get into the game and it will be 1000x worse. Let's not even get into the accounting nightmare this would ensue as well. I strongly stand with the 3 teir system. It's not going anywhere.
ReplyDeleteThe three-tier system was developed for several reasons including to prevent what occurred in the late 1800s and early 1900s; "tied houses" when producers, distributors and retail outlets were all owned by one entity (talk about a monopoly!). Are there common sense tweaks that can be done to improve the industry? YES. If you look at some states that have many craft beverage producers, you'll see some carve outs for them. Does this system of regulation create some modern day frustrations? YES. But any changes should be done at the State and local levels, not on a federal level.
ReplyDeleteWow. All these comments seem to based on some belief that a) the author wants to completely do away with the three tiers (he never said that), and b) there is not a completely successful alternative system of distribution that works for almost all other imaginable CPG businesses. (There is.)
ReplyDeleteHow about some serious talk about how the system can be improved so that suppliers (especially small / craft) and retailers (especially independent) can benefit?