Once upon a time, there was little regulation in the beer/alcohol industry. Breweries, distilleries and wineries were able to sell what they wanted, when they wanted, where they wanted. The creator was in control. That led to problems – “intemperance” was the word used to describe the situation. Then came Prohibition, and breweries were put out of business, forced to change tacks completely, or went underground. Of course, Prohibition was eventually repealed 13 years after going into effect, but things didn’t go back to the pre-Prohibition norm. Most US states adopted what’s called the three-tier system, and it remains in place for many states today, stifling success and putting unnecessary restrictions on craft brewers.
The Case for the Three-Tier System
First and foremost, there is a case to be made for the three-tier system. Ostensibly, it prevents breweries, distilleries and others from gaining a stranglehold on the industry, and creating “tied houses” that sell only that company’s products. It fosters competition (supposedly), and helps to create business (again, ostensibly).
Here’s how it works:
Tier 1: The Brewery
Tier 2: The Distributor
Tier 3: The Retailer
The system states that no single company can do all three things. Brewers cannot sell their products on their premises, nor can they ship their own product to other retailers. Breweries have to partner with distributors, who have contracts with retailers to stock their shelves and bring in new product. On the surface, it sounds like a good idea. No single entity is able to do it all. Of course, that’s not really how things work.
The problem is really the fact that many distributors are owned and operated by Big Beer (yes, they own the distributors through a variety of different ways, but not generally outright). Little guys can’t buy their own distributors, and are often locked into very narrow markets with few options for getting their brews out to the buying public. There are other problems here as well that are specific to small, struggling startups.
One of the other factors throwing a wrench in the works is that every state has the right to tweak the three-tier system to suit itself. In some states, brewers are able to own their distribution network. In others, they can own retail sites, but not distributors.
Imagine you’re a craft brewer. You’ve created several great recipes, written a business plan and taken on massive debt in order to get your brewery up and running. Now, you’re forced to deal with wholesalers and distributors to ship your product. Rather than letting a customer buy a bottle or two (or a six-pack) from your brewery and you being able to pocket the money immediately, you have to wait 60 or even 90 days for the money to come in. That puts a huge crunch on your financial position.
Sounds more than a little stifling, doesn’t it? That’s exactly what opponents of this outdated system claim. It’s been challenged all over the country with mixed success.
Georgia: A recent state to reconsider the three-tier system, Georgia decided in mid-February 2014 to stay with the status quo, although the government did recommend that breweries be able to sell up to two growlers on site, so long as the buyer consumed some of the beer while on property. There’s currently a push to reconsider this decision, but it won’t be settled until later in 2015.
Texas: Texas has seen some big changes to their distribution laws. Notably, brewpubs can now use third-party distributors to get their products into bars, but they can also sell directly to stores and other retailers, as well as selling their own products on site.
Washington DC: Our nation’s capital has benefitted from the Alcohol Beverage Regulation Administration’s decision to allow brewers to self-distribute throughout the District.
South Carolina: South Carolina has languished in terms of the number of breweries within the state, largely due to their oppressive laws (very similar to the ones still in operation in Georgia). However, the state lifted those laws in 2014, allowing brewpubs to sell their own brew, as well as other packaged products on premises.
Pros and Cons
Yes, the three-tier system is established and it does offer some benefits. However, the drawbacks more than outweigh those benefits. Let’s take a closer look at the pros and cons of the situation.
Pro: There is no ability to create a monopoly.
Pro: States benefit from trifold taxation.
Pro: It fosters competition among those financially able to play the game.
Con: Small breweries often lack the ability to land distribution contracts.
Con: It increases the cost of beer significantly.
Con: It often results in beer that’s less than fresh.
Con: Distribution contracts can be very difficult to end, resulting in breweries being tied exclusively to one distributor who might not be the right fit anymore.
So, is the three-tier system actually necessary, or are reforms needed? While it might have served its purpose immediately after Prohibition, the situation has changed drastically in the last 80 or so years. We’re not the same country we were then and the beer industry is nothing like it once was. If the US wants to really foster growth and competition in the industry, then small breweries need to have the ability to sell to their patrons directly, whether that’s on site or through their own distribution methods.
What’s your take on the situation? Do you think the three-tier system still has something to offer or do you think that modification or complete removal is the right way to move forward and ensure a brighter future for all involved?