Change in THE Dynamics of the Three Tier System


The big question we need to ask is, what are the practical effects of what is happening in the world today?

A lively panel on the ever-changing world of liquor and the debate raged on about how should our legal system adapt to this ever-changing world. Should we embrace change by allowing advancement even though the law may not permit this change, or are we by embracing change that does not fit the textual legal requirements going down the slippery slope of lawlessness and creating tied house issues?

All the panelist agree on the dangers of a tied-house and a major player trying to buy control of the system. What the panelist may not agree on is what the system should allow.


John Hinman– Partner, Hinman & Carmichael LLP


Paul Gatza-Senior Vice President-Brewing Division, Brewers Association

Paul Pisano-Senior VP, Industrial Affairs & General Counsel for NBWA

Jill Gautreaux-Special Counsel for Kean Miller

Hunter Limbaugh-Southeastern Counsel for Wine Institute

Global Trends, the Role of Social Media and cutting the three-tier system

John Hinman (JH) discussed the global overview of the liquor industry. The U.S. is about the only country with a three-tier system. The rule of thumb for other countries is direct to retail from small producers, this trend is growing in the U.S.

He next discussed the global growth rate of alcohol. The CAGR (Compound Annual Growth Rate) of the total revenue of the Alcohol Market is expected to increase 2% a year for the next 5 years. – Easy access to information provides both opportunities as well as challenges to the alcohol industry – India and Africa are important new markets for international producers.

After this he discussed the three-tier system which is maintained by state laws, which differ substantially from state to state. In some states there are strict franchise laws which allow distributors to control a territory.

What is prevalent in the liquor with all three tiers is that consolidation and control of the market is expanding rapidly.

On the wholesaler tier dominant giants are controlling.

In New York, Empire Merchants North remains the largest wholesaler in a single state.

The 2017 merger of Southern Glazer created the largest wholesaler in the country. And when RNDC merger with Breakthru in 2018 which was not allowed by the federal government, RNDC it turned around a purchased Young’s.

Producers are also consolidating with major mergers and purchases recently ABI buying SAB Miller and Diageo buying Casamigos. Retail consolidation leads to major players controlling more and more retail shelf space. Brand consolidation is the key to controlling shelf space, and increasing leverage with chains and wholesalers

Cutting through the three-tier system

With consolidation increasing the power of big brands which allows these brands to obtain better terms with distributors and to have increased shelf space, small brands must find ways to become creative.

Social media has become the best conduit for reaching out into the marketplace.  It lets small producers advertise for free and post events, brand visits, and promotions. Further, it develops a data base of brand champions to market their brands. For example, the Casamigos commercial was seen by 100s of million viewers.

There are also middle-man websites that are allowing small producers to cut the three-tier system.

Websites such as “Bar Gofer” can arrange and manage transaction flow directly from producers to retailers. It allows small producers to enhance their market share.

Further, some of these middle-man services may allow smaller retailers to get rates that only large retailer can obtain.

However, there is a word of caution on some of these services as they are not available in every state.

So, what are the effects on the three system?

The different state laws will lead to different investment in certain states over others. For example, new concepts such as Bar Gofer are more likely to invest in California operation than in a more restrictive state like Delaware.

Advertising and social media will increase profits for large producers and retailers and promote consolidation, and the lines between producer and retailer become increasingly blur as alcohol law evolves with the times.

How do you deal with innovation that is non-compliant with the law?

JH posed an interesting series of questions, suddenly the market and technology develops quickly and we are going to have noncompliance. How do you deal with this? Is the state’s purpose to collect tax and protect the public? And how do you accomplish this with strict rules that pertain to a different era?

And how does Tennessee Wine change the whole picture. Under this decision the state needs to justify its articulated interest for liquor restrictions.  For example, can they state their interest in prohibiting lower liquor prices. In the Missouri Broadcasters case there are 1st Amendment rights to advertise, this case opens up the issues related to social media advertising.

Direct to consumer shipping

Hunter Limbaugh (HL) discussed how beneficial DTC shipping has been for the wine industry.

He indicated that DTC is only way to get products to market, and has led to massive growth in wineries since Granholm DTC.  DTC sales have been crucial to the health of wine industry.

JH asked HL is Wine Institute working with retail direct shipper. HL replied that their ideal bill would be winery, retailer, and wholesaler direct shipping.  HL indicated that Wine Institute doesn’t object to direct to consumer shipping. He doesn’t know if they are working with any specific member on direct ship.

Wholesaler’s point of view

Paul Pisano (PP) provided examples of where beer selection is great versus other products and the importance of the three-tier system is playing this role. He contrasted McDonald which signed a contract for Coke to be exclusive versus an on-premise retailer(bar) which has numerous brands available to the consumer. He indicated that state regulation provides product diversity and provides consumers with unprecedented consumer choice.

He believes this diversity of product has led to an increase in wholesalers, producers, and retailers.

PPl mentioned that the image of distributors blocking change in a dynamic marketplace is not true and that there have been 1,923 changes in liquor laws since 2012.

JH asked PP about ciders, which in some states cider is treated like beer whereas in others it is treated like wine.

PP indicated that Cider is a high-end product, which transports like beer, but depending on the state it is treated like wine or beer.

Small Brewers

JH asked Paul Gatza about product development for small brewers, and how does your system work for small brewers?

Paul Gatza (PG) stated that Internationally there is no three-tier system, and there is no range of products, this is different in the U.S., so, it brings value here. But there are places where the three-tier system is only a partial win, this is where there are few distributors in an area, and you’re a small brewer and you are down the list, it is not working well for you. Some members will say whether the three-tier system works depends geography. If you have a bad relationship with a distributor you are stuck.

JH asked about how small brewers market their products?

PG indicated it is usually word of mouth, social media is important, and community-based marketing helps, such as sponsoring a fun run.

JH asked PG about the alternatives to the three-tier system and how do brewers find them?

PG indicated that the best alternatives are tap rooms, because when brewers can sell from their own bar, they become high profitable. He spoke about a brewery entrenchment when a brewery that has been around since 1979, decided to pull out of the marketplace and serve in their own brew pub. That is a major change.

He also spoke about how self-distribution helps to develop track record. Distributors aren’t interested in developing new brands they want a track record. It is a catch 22, you can’t have a track record without distributor, and you can’t have a distributor without track record.

JH asked the panel about the forces of global, regional, and national consolidation that are impacting on the regulated industry and the regulators?

They spoke about the importance of globalization but also about the importance of margins for industry members and how margins are driving change.

Pertaining to margins, JH indicated that regulators must ask they why companies are doing certain things and why they want to go towards private label brands?

The ever-present Adam Chafetz asked a question from the audience and wondered why distributors are not embracing change.

PP stated that distributors aren’t against change. But that we must be careful of the slippery slope of change. If we allow Private labels, what happens to tied-house separation, what is the comeback for Coke/Pepsi domination of a certain retailer. Do we have a situation where the manufacturer could make my product for free for a retailer and gets their other products in the retailer’s locations?

PG indicated that the rules regarding distribution needs to change, more than half of crafts don’t use distributors because they are terrified of signing over their brand rights to a distributor because of franchise laws. As a result, distributor have a PR problem with crafts. Maybe that means change like not being so heavy handed with franchise laws and maybe having a carve out for small brewers.

HL spoke about the concept of exceptions swallowing the rule, he believes exceptions are chewing on the three-tier system, it is not a bad thing. He indicated that the three-tier system is just a mechanism, not a fundamental principle, it is a mechanism to protect health and welfare, collect revenue, and develop and preserve an orderly marketplace. When it becomes tricky is when you talk about the orderly marketplace, what is orderly to one group is not so much to the other group, and the orderly marketplace justification becomes business crushing to another group of people.

The first thing people want to ask is does this violate the three-tier system, this is the wrong question to ask. The question that should be asked is whether what you are doing vindicates the three principles of: protecting health and safety of the public; collecting tax; and maintaining an orderly marketplace, these are the important questions, not about whether it violates the three-tier system.

JH agreed with HL, and he posed the question, what is the most important things regulators do. He stated that PP mentioned the most important regulatory principle was tied-house or pay to play.

If we go into pay to play it is an entirely different world, tied house laws driven by TTB mostly, the regulatory core of this industry, is too protect someone from buying the marketplace. JH indicated that is the simplest principle that the regulators should be focusing on. That is the one that impacts most people and most industry players.


A lively discussion on how the changing marketplace could shape the regulatory environment. The laws made many years ago have not caught up to the ever-changing landscape.

So, where does this leave us in the future? Do regulators disallow concepts that don’t fit specifically into their regulatory framework? Or do they become flexible, as they view allowing these concepts as serving the goals of their regulatory system?

Time will tell the story in this great debate, but what is undeniable is that the debate will rage on!