Three-Tier System of Alcohol in U.S. Causes Competition

The US repealed National Prohibition in 1933.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.     

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


I.    Producers

II.  Wholesalers

III. Retailers

IV. Summary

Three-tier System

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 (liquor) products.

Standard Drinks

A standard drink of beer, glass of wine or drink of spirits each has the same amount of pure alcohol. It’ 6/10 of an ounce.

Yet society views and treats the three products very differently. Laws often treat them unequally. Governments tax them at very different rates.

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

Conflicting Interests

three-tier system
3-tier system promotes 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, US vintners don’t speak with one voice. The same is true of both brewers and disillers.

II. Wholesalers 

After Repeal, a number of states became governmeant monopoly wholesalers. The  employees are state workers. Those states call themselves “control states.” But that’s misleading. That’s because 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 shared by monopoly wholesalers and their state employees.

The fact that free enterprise 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 monopoly stores can sell spirits. And they can’t sell either beer or wine.

Monopoly Stores

three-tier system
Government monopoly store in Poland.

Alcohol Beverage Control stores (ABC stores) or government monopoly stores exist in some states.

The usually drab monopoly ABC stores often resemble state stores in communist countries. They have no competition. So they provide a very limited selection. The prices are high. And the service tends to be poor.

IV. Summary

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.

three-tier systemThings that benefits producers or wholesalers may not help retailers. Or what harms package stores may not harm dram shops.

What helps grocery stores that sell wine may harm wine shops. And what harms a mom-and-pop tavern may help a chain restaurant that sells alcohol beverages.

For some retailers, selling alcohol beverages is their only business. But 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 mix 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.

V. Resources