Three-Tier System of Alcohol in U.S. Causes Competing Interests of Producers, Distributors & Retailers

The US repealed National Prohibition in 1933. Federal law then established the three-tier system. This mandates complete separation of alcohol production, wholesaling, and retailing.

Overview

I.    Producers

II.  Wholesalers (Distributors)

III. Retailers

IV.  Summary

The three tier system means that producers cannot either wholesale or retail alcohol. Similarly, wholesalers cannot be producers or retailers. And retailers cannot wholesale or produce alcohol. This separation means that the economic interests of producers, distributors and retailers are fundamentally different. In fact, they are often in conflict with each other.

I. Producers

Producers of alcohol beverages consist of brewers, vintners and distillers. Brewers produce beer, ale and other malt beverages. Vintners produce wine. Distillers make distilled spirits products. These are beverages such as rum, whiskey, tequila, gin and liqueurs.

A standard beer, glass of wine or drink of a distilled beverage each contain equivalent amounts of alcohol. To a breathalyzer they’re identical.

In spite of their alcohol equivalence, society views and treats the three product categories very differently. Laws often treat them unequally. Governments tax them at very different rates. And some people oppose spirits ads on TV.

Differences in treatment mean that brewers, vintners, and distillers tend to have opposing interests. As a result, they typically conflict with each other.

3-tier system promotes conflicting interests.

3-tier system promotes conflicting interests.

Conflicting Interests

But there are also conflicting interests within each segment of producers. For example, small vintners find it hard to market their wine through wholesalers. They depend heavily on direct mail order sales to customers. But larger vintners have no such problem. They oppose competition by direct mail-order sales. Similar conflicts of interest occur among brewers and among distillers.

Producers also operate in even smaller divisions along many different lines. It’s foreign vs. domestic distillers. California vintners vs. those in other states. Large brewers vs. micro brewers, and so on. Trade groups defend the conflicting interests of these divisions. For example, the Wine Institute represents only California vintners. Those in other states or regions have their own trade groups. Thus, American vintners don’t speak with one voice. The same is true of both brewers and disillers.

II. Wholesalers (Distributors)

After Repeal, a number of states became government monopoly wholesalers. The  employees are state workers. Those states call themselves “control states.” But that’s misleading. All states control wholesaling within their borders.

The interests of government monopoly wholesalers are different in many ways from those of free enterprise wholesalers. In non-monopoly states, wholesalers have competition, heavy regulation, and other concerns not experienced by monopoly wholesalers and their state employees. The fact that wholesalers often specialize further reduces the chance of mutual self-interest. And the interests of wholesalers tend to differ from those of both producers and retailers. This is reflected in the frequent political and legal battles that occur between wholesalers and both producers and retailers

III. Retailers

The retail segment is highly diverse. It includes restaurants, taverns, grocery stores, filling stations, “quick stops,” liquor stores, and wine shops,

“Dram shops” are retailers who can sell alcohol beverages by the drink. They differ from package stores. The latter can only sell unopened containers of alcohol. The problems and interests of these sales categories differ greatly. The two have few common interests..

In some states grocery stores can sell beer but not wine. Only liquor stores can sell either wine or spirits. In some states grocery stores can sell both beer and wine.  But only government stores can sell spirits. And they can’t sell either beer or wine.

Government Monopoly Stores

Alcohol Beverage Control stores (ABC stores) or  Government monopoly storesexist in some states.

three-tier system

Government monopoly store in Poland.

The usually drab monopoly ABC stores often resemble state stores in Communist countries. They operate with no competition. So they provide a very limited selection selection. The prices are high. And the service tends to be less than good.

Not surprisingly, the problems and interests of the various retail segments differ greatly. Alcohol retailers are a highly diverse category. They can’t speak with a single voice or present a united front.

IV. Three-Tier System: Summary

three-tier systemThings that benefits producers or wholesalers may not benefit retailers. Or what harms package stores may not harm dram shops. What benefits grocery stores that sell wine many harm wine shops. And what harms a mom-and-pop tavern may benefit a chain restaurant that offers alcohol beferages. For some retailers, selling alcohol beverages is their only business. For most, it’s only a fraction of their business interest and income.

The three-tier system means there is no “The Alcohol Industry.” Instead, it’s a conglomeration of  competing alcohol mini-industries. It is unable to speak with one voice or act together.

The myth of “The Alcohol Industry” or “Big Alcohol” is just that — a myth.

Learn more about the three-tier system

Alcohol Tax and Trade Bureau.

Alcohol Policy.

Federal  Alcohol Administration Act.

Readings on the three-tier system

CA Senate. The “Tied House” Puzzle. Why the Three-Tier System Exists and How It Workes. Sacramento: The Senate, 2005.

Duffy, D. Three-Tier System. Hartford: CT General Assembly, 1996.

FL Senate. Evaluation of Florida’s Alcoholic Beverage Law Three-Tier System. Tied House Evil Laws. Tallahassee: The Senate,1988.

Licensed Bev Dist. Alcohol Delivery in Texas. The Value of the Three-Tier System. Austin: The Distributors, 2005.

Sibley, D. and Srinagesh, P. Dispelling the Myths of the Three-Tier Distribution System. Washington: Wine & Spirits Wholesalers, 2008.

Wine and Beer Law. Leading Lawyers on Navigating the Three-Tier System and Other Regulations on Alcoholic Beverages. Thomson Reuters, 2016.