At the end of 2012 I decided to set a goal for 2013 of digging into the 3 tier system and reporting back on what I learned. I came into this endeavor with a set of preconceived notions about the 3 tier system that are drastically different then what I feel now. Throughout the series of posts, I’ve tried to be as objective as possible and present the views of the people I interviewed. What follows are my thoughts on all those interviews and the 3 tier system as a whole.
- Introduction and History
- Breweries
- Distributors
- Retailers
- My Conclusions (you are here)
When I started this process, I thought the 3 tier system was broken and was a way for the big beer giants to hold down craft beer. I felt like it was a holdover from prohibition aimed solely at trying to stop a resurgence of organized crime related to the production, distribution, and sale of alcohol. All I knew about the 3 tier system at the time was that there were producers, distributors, and retailers all separated from each other and limited in how much of the other levels they could own. All of which is to say I knew very little and had bad preconceived notions.
As soon as I began investigating the Introduction and History I realized the majority of what I knew was wrong. Moving onto the Breweries reinforced some of these new thoughts as well as introduced some new and other doubts about the system. Talking to Distributors shined some light on things and began to change what I thought I knew. Finally, the Retailers gave me a vastly different perspective on what they deal with and how annoying people like me, the rare-addicted-beer-hunter, can be.
After a year of investigation, I now feel that the 3 tier system is not broken. It’s not the best it could be, but it is pretty damn good. The biggest problem it has been the variations in states, but I think that’s also one of the best things it has going for it. The big beer brands have done a fair dose of damage to the separation of tiers in some states while other states have remained more resilient. I am sure that if this were one national system then it would’ve most surely been corrupted by the major brands.
I feel that the 3 tier system is one of the bigger consumer and small business protection laws that I’m aware of. Without the separation of manufacturers, producers, and retailers we would have almost no choice and small brewers would either not exist or would not be available outside their own doors. I can say this for sure thanks to the situation in the UK. They did not have anything like the 3 tier system, and the major breweries owned their distribution companies and owned the vast majority of pubs and had exclusivity agreements with stores. This resulted in bars and stores only have beers from 1 brewery and preventing the bar/store from carrying any other breweries products. This is exactly what the 3 tier system prohibits. That set the UK craft beer movement back for many years, and they have only recently begun to catch up with what’s happening in America. Though I suspect, some of the situation in the UK could be due to a more traditional mindset (not counting BrewDog).
As I’ve said I think the system is pretty solid; however, I do feel that there could be some improvements:
- Semi-standardization across states – If more states had similar laws, like ABV caps, for example, it’d make it easier for small breweries to know what they were getting into before going into that state.
- Reinforced separation of the tiers – This recently came up in Ohio as Budweiser owns a sizable chunk of a distributor up near Canton. There are laws in place to stop them from being too shitty to other breweries but still, I’m not OK with any brewery, be it a billion barrels or one barrel, owning any part of a distributor or store.
Those are relatively small gripes to have in such a massive system. It does work well. There is no doubt in my mind that without the 3 tier system, or with a nationalized 3 tier system or a weaker system, the craft beer movement would not exist. Our beer choices would be limited to the most easily mass-produced and cost-effective beers.
Please share what you’ve learned from this series of posts and what your thoughts are on the 3 tier system.
BrewMinds 
Like any system, it has its pros and cons. It all depends on the presence of mid-sized regional breweries and how well managed they are.
This is how things work in the Czech Rep., and I believe it works similarly in other European countries.
Producers can sell directly to retail (on and off trade) and even set up their own pub chains (often in the form of a franchise), which is something only the larger brewers have the financial and managerial muscle to do. And yet, there’s a fairly healthy competition, specially in the on trade, with regional brewers more often than not having over 50% of the tap market in their immediate regions.
Exclusivity contracts are illegal. You can have a contract directly with a brewery, but they can’t force you to refrain from selling other brands. It’s up to you. Naturally, breweries have found a way around it. They will a pub owner all sorts of marketing trinkets, lend them the dispensing system, and even cash to invest in his place, provided they sign a contract where they undertake to buy a certain minimum volume per given period (the price per pint will naturally be somewhat cheaper, too). This is very clever, the pub owner is still technically free to put a tap for another beer, but they will still need to purchase the agreed volume. Once again, this has not been very much an obstacle for competition.
I also think that you are mistaken about the situation in the UK, and not only because the “UK craft beer movement” exists not much further beyond than in the realm of the marketing, but also because small regional brewers have never disappeared. In fact, some people see the collapse of the tied house system, which was replaced by the pubco system, as one of the reasons the British brewing industry imploded and ended up being easily taken over by foreign corporations. So, in a way, a two-tier system brewer-pubco (at least in the on-trade) might have worsen things after all.
That said, I think you are right in seeing the 3-tier system as something that is positive, all things considered. That said, if it was abolished, I believe the biggest winners will not only be the macros, but also big craft, perhaps even more than the macros, as they will be able to openly set their own rules when it comes to tap space.
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What do you mean On and Off trade?
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Pubs, restaurants, etc.=on-trade. Shops, supermarkets, etc.=off trade
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It is quite obvious that you have drunk the distributor cool aid. Your blog comes right out of the wholesalers script. It is obvious from the amount of content you have under each tier that you got most of your information and formed most of your opinions from wholesalers. Not very thorough “research”.
The distributors must have failed to mention the system of currency that they have created with brewery brands that only they can participate in. It is a key part of the distributor consolidation movement. As a matter of fact, Ohio just enacted a law that forbids brewers from participating in this “barter” for their brands. It is also a key part of the way distributors can hold breweries as “indentured servants”.
They also must have failed to mention that while the number of breweries is growing dramatically in the US, the number of distributors is rapidly declining. Apparently you don’t see a problem with this scenario. Maybe you will when you can’t get some of your favorite beers any more because the distributor has too many SKU’s.
They must have also failed to mention how they collect profits on excise taxes. Breweries pay excise tax on beer produced. The excise tax is added to the price when product is sold to distributors. Distributors and retailers make profit on the tax that is passed on to consumers (not exactly what the people who created the taxes had in mind). A more fair way to collect the tax would be at the point of sale to the consumer. The final amount that consumer pays for beer would go down because the distributor and retailer would not be making profit on the tax. Distributors rarely oppose increases to excise taxes because they profit from tax increases.
Laws are very slanted toward the wealthy middle tier to the detriment of the mostly very tiny majority in the supply tier.
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Perhaps you should broaden your perspective by looking at another segment of the beverage industry. Soda pop is delivered in the same types of containers on the same type of trucks to the same type if not actually the same (such as grocery stores) customers. The investments in warehouses, personnel, trucks, and logistics systems are every bit the same as beer distributors must make. Yet there is no government “protection” for these types of distributors. They must make sure that they keep their suppliers by doing a good job. If they stop paying attention to a brand, they lose it. Not so with beer distributors. They can bury a beer brand, and in most states the brand owner cannot separate themselves from the distributor. Many have become “brand collectors” and will not relinquish a brand for fear that their competitor might actually be able to sell it.
The free enterprise system has shown to work for all types of products, so why not for alcohol? The answer lies in the amount of money distributors pour into political contributions to protect an arcane system fro the 30’s. If you are a true researcher you would have “looked beneath the sheets” at how these laws actually get manipulated. I challenge you to go to Ohio or any other states’ political contribution disclosure sites and look at the contributions made by distributor owners and management vs. small craft brewers. (Hint: you will have to know the names of the distributor owners to get this information because they most often don’t list their company affiliation.)(Same goes for brewery owners.) I hope you provide your findings to the readers of this blog so that they get more of “the whole story”.
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You sound both interested in motivated in doing such a thing. I strongly encourage you to do so and will gladly publish your findings on the blog.
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Freda – In the interest of full disclosure I will tell you that I work in the beer distribution industry. I hope that you will take my comments constructively and I would be happy to respond to any of your concerns as best I can.
I do want to point out that ALL states treat alcohol very differently than they do soda pop or most other forms of products. Alcohol is a regulated product and I would point you to the history of alcohol problems in this country (and others) that lead to Prohibition in the early 20th century. State regulations are largely designed to protect against a recurrence of this. The environment we work in is not at all similar to the soda industry except in the size, shape and weight of the products that we deliver.
By the way, despite all those regulations, the US beer industry provides its consumers with more variety in terms of number of brands available than anywhere else in the world. To your point, the number of brewers in this country is increasing, and it is increasing in dramatic fashion. Is that a symptom of a broken system?
Yes, distributors are shrinking in numbers as consolidation takes place in our industry. Yet most states have relatively low cost, easily available distributor licenses available for those who wish to distribute beer. They are not hard to come by.
Do distributors contribute to PAC’s? Yes, of course. We work in a highly legislated and controlled environment and any small change in alcohol regulation can dramatically impact our businesses. We stay in close touch with the legal and legislative system because we have to. It would be foolish to do otherwise.
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Don’t have time to read your whole thesis but as the 21st amendment granted the states the right to determine what forms of distribution and retail would be allowed, many states chose to allow geographic franchises to wholesalers- essentially perpetual fiefdoms- where suppliers and retailers have only one avenue to sell through/buy from. This is one of the most pernicious of arrangements as it prevents a free market as brands and companies come and go, combine and fragment.
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Without any territory protection what economic incentive would a distribution company have to develop a brand in their market. Is a company that establishes a new brand in an area entitled to any compensation or protection for its cost to market, sell and warehouse the product? Without some protection of rights and establishment of fair contract rights, why would a company establish a brand only to have the supplier or retailer have the complete right to simply ignore that distribution company and purchase the product from another company once the now established brand becomes profitable?
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Distributors in some states have protection others do not. Some suppliers have just up and moved major brands causing them to either go under or try and sell. Read up on what is going on in Arkansas regarding the three tier system where a major supplier pulled all of their brands. This is still in the court system. But this was a family owned business that had been building the suppliers brands for years. I think a supplier should have the right to move if the distributor is not doing his job. That doesn’t mean someone sitting in New York that has never been to your market and telling you to grow the brand 20% and then saying you didn’t hit your goal sorry we are leaving.
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As a wholesaler of wine and spirits in Tennessee we try and carry as many brands as the market will dictate. We are always looking for small craft wine and spirit brands. All of our stores here are locally owned which leaves the buying up to each store not a corporate buying person in another city. SThe large chains end up dictating what brands go in. Then the small craft people get left behind. Look what is happening in Washington state with the small craft suppliers. Thanks for the article.
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Do you stock Rivertown beers? I know they started distributing to Tennesse last year. I think they’re the only Cincinnati brewery (not counting Sam Adams/Angry Orchard) that stretches down that far.
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At this point we only carry wine and spirits. Sorry
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A system that IMPOSES having to sell your product through a distributor and retail, and FORBIDS direct-to-consumer sales, is a system that better suits the principles of a totalitarian regime like North-Korea and is the philosophical opposite of free-market-based systems we have in the west.
The second aspect to keep in mind is that, in a historical context, wholesaler laws in the US were written and influenced to allow the same criminal forces that ruled alcohol distribution in the prohibition era to now continue operating as legally required middlemen.
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Tom you are welcome to your opinion. For you to compare my family that of criminals from years ago is not right. You have no idea what our business does gor our employees or the local community. If you want to come visit our business I would be happy for you to. Most states do allow a form of direct to consumer buying. I know in our state if you were to compare prices from the wineries direct or buy them locally it is about the same price and that is not counting shipping cost or paying the state gallonage tax. I am happy to help you understand the three tier system and what we provide you are welcome to send me a message and we can have a conversation.
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Dear Trey,
No one said anything about you or your family.
It is a historic fact, that at the implementation phase of the 3Tier-System, after abolition of prohibition, one of the (obviously lobbied for) aims of the legislator was to find a leeway to legalize the distribution logistics of what we would now call the “cartels” that back then ran alcohol distribution.
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The problem with the 3 tier system is not the 3 tier system itself, but franchise law on individual state levels. In different states breweries get locked into a distributor and have a very hard time, or a costly time breaking the contract they have with them. This makes it difficult for small breweries to go to a new distributor who may support their brand better. The three tier system by and large works fine as is.
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Alan there are wholesalers out there that do not do their job well and the breweries might be stuck. In most states with franchise laws there are ways to get out. From our business stand point even though we have a franchise law in our state we try and operate like there is not one. You also have suppliers that their expectations are not reality. For instance I had a supplier trying to compare our market ( one of the smallest in the south) to Detroit. Wanted to say he couldn’t understand why we couldn’t sell what they did. So there can be issues on both ends. As in any business there is always give and take and it comes back to communication.
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I find it amazing at how all distributors are indoctrinated into the “company line”. You have to admire how distributor organizations brainwash each subsequent generation as they enter the distribution business.
The Greg Dunn comment is a particularly good example of how distributors are trained to respond. To anyone but an alcohol distributor this comment would seem to make no sense. Many things from food to auto parts to household goods to hardware move through distribution systems. None of these distributors have the “protection of law” to prevent their suppliers from leaving them. To keep suppliers they must perform or stand losing the supplier.
Beer and Alcohol Distributors are indoctrinated to believe that they are different from every other business that must operate in a free enterprise system.
Their ignorance is laughable.
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Freda – ignorance goes both ways, apparently. Alcohol is a controlled substance and the beer distribution world is highly regulated for that reason. I think it’s a shame that you have to resort to name calling and trolling instead of trying to make a point.
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Thamks Bob for your support. As a distributor all I know is the laws were set up after prohibition. I know how we operate our business and how we treat our employees, customers and suppliers. I can look the good Lord my wife and family in the face and feel good about what we do. Freda if you want to go back to the days that this business wasn’t protected by certain laws go check out some books on Al Capone. Where a few were controlling everything all the alcohol business. Most people I know around the country that are in the distributor business are trying to give back to their communities and trying to run a great business. As i have said to others before you go calling me or my family names why don’t you come see and understand our business and what we do. Thanks
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Tom – cheers to you! As a beer distributor myself I appreciate that you are open and honest about your business. I agree with you that I can feel good about what I do for our customers, consumers and our brewer partners. We don’t always agree with our partners (that’s just business and life) but we only benefit financially when we sell more beer. There’s no incentive for us to sell less.
Freda – just as Tom said, you are welcome to come visit us, hear our story and comment all you like. I’d just ask that you come with an open mind and understand that there are limitations, legal and otherwise, in every business. Beer distributors are limited in their work by those regulations as much as you seem to think that we benefit by them.
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