Alcoholic Beverage Wholesale Distribution

The Three Tier System involves Producers / Suppliers, Wholesalers / Distributors and Retailers.

The three-tier system of alcohol distribution is the system for distributing alcoholic beverages set up in the United States after the repeal of Prohibition.The three tiers are producers, distributors, and retailers. The basic structure of the system is that producers can sell their products only to wholesale distributors who then sell to retailers, and only retailers may sell to consumers. Producers include brewers, wine makers, distillers and importers.

Seth Goldman on Beverage Distribution – Honest Tea’s CEO on how beverage companies can build non-traditional distribution networks.

Some states chose to become alcoholic beverage control jurisdictions after Prohibition. In these states, part or all of the distribution tier, and sometimes also the retailing tier, are operated by the state government itself (or by contractors operating under its authority) rather than by independent private entities.

The only state with a privately operated retailing and distribution system that does not require any form of three-tier system is the State of Washington. In Washington, retailers may purchase alcoholic beverages directly from producers, may negotiate volume discounts, and may warehouse their inventory themselves. However, the three-tier system remains a de facto reality in Washington despite the law.

History and legal justification

In 1933 the 18th Amendment was repealed by the 21st Amendment. (Previously, the 18th Amendment had outlawed alcohol in the US in 1919 and led to Prohibition in 1920.) Section 3 of the 21st Amendment specifies that the power to control alcohol resides with the states, leaving each state to decide when and how to repeal Prohibition.

After Prohibition, the states began to seek methods to regulate and control the alcohol industry lest it return to the excesses and abuses that led to Prohibition years before. The states were also eager to devise a method to levy and collect taxes on alcohol producers. Both of these concerns led to the states individually creating environments in which single ownership of all three tiers (production, distribution and retail) was entirely or partly prohibited. As states were left by the 21st Amendment to regulate themselves, alcohol laws and the nature of the three tier system can vary significantly from state to state.

Exceptions and regulations

States have various exceptions to this rule, the most prevalent one being the case of a brewpub, which is simultaneously a producer and retailer, and has no requirement to sell to a distributor. Some states allow an entity to have a part in two of the tiers, letting small breweries act as their own distributor, for example. Many states permit wineries to sell bottles of wine on-site to customers.

Usually producers will give a distributor exclusive rights to market their product within a geographical area, so that there will not, for example, be two distributors of Anheuser-Busch products competing against each other.

Rules also vary according to what kind of relationships each of the tiers can enter into with the other two tiers. For example, a producer may not be allowed to give promotional items or services to a retailer. Another example is that a beer distributor might be responsible for setting up and maintaining draft lines in a restaurant, or may be legally prohibited from doing so, depending on the state.

Also, several states are alcoholic beverage control states – in any of these jurisdictions state governments maintain a monopoly on the distribution tier of the system (at least for distilled beverages). Some (such as Utah and Pennsylvania) monopolize the distribution and retail tiers. Those that maintain monopolies over the distribution system only (such as Michigan) could still be said to have a three-tier system – in such states producers sell to the distributor (in these cases, the state as opposed to a private operator) who in turn sells to private retail outlets.

A substantial exception to the three-tier system is the State of Washington. In November 2011, voters in Washington approved Initiative 1183, which essentially dismantled the three-tier distribution system and the state-operated retailing system for the sale of liquor and wine. Under the modified law, the prior state-operated liquor retailing system was eliminated in favor of heavily taxed private retailing. By a substantial margin, Washington has the highest liquor tax rate in the nation. With a liquor tax rate around $35 per gallon, its liquor tax is about 50% higher than in Oregon, which has the next highest rate. In Washington, retailers may bypass distributors by purchasing directly from producers, may negotiate volume discounts, and may warehouse their inventory themselves. Private retailing began on June 1, 2012. Although private retailing should increase competition in principle, in many cases producers have entered into exclusive marketing agreements with distributors for the market region, to the extent that each brand is often only available from a single distributor in the state. Contrary to the fears of some in the political process, the number of drunk-driving arrests and alcohol-related motor vehicle accidents actually dropped in the year after the conversion to the new system. – Source: Wikipedia