It was great sitting down and interviewing with winesearcher.com and discussing the complicated three-tier system. The liquor world never sleeps and change is always on the horizon. Enjoy and have a great weekend!
Taking Apart the Three-Tier System
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Having covered many of the legal issues relative to wine distribution in the US it is easy be critical of what another sales tier may be providing. So weighing various tiers’ pluses and minuses with attorneys who have worked within the legal drinks field is always interesting.
It is fascinating to see what drinks attorneys find beneficial about the current US system and how it might change for the better. So with the help of Chicago-based alcoholic beverage attorney Sean O’Leary – The Irish Liquor Lawyer – as a guide, I delved into how these laws can work well for different parties in the US wine business.
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O’Leary started practicing law in 1999, after working at state and local tax firms including Arthur Andersen and Pricewaterhousecoopers. He worked at the Illinois Liquor Control Commission from 2016 to 2018 and recently started the O’Leary Law and Policy Group and also has a blog called IrishLiquorLawyer.com. All responses have been edited and condensed for clarity.
Do you think the three-tier system really balances competing interests and effectively distributes wine and spirits products at a fair price?
That depends who you discuss this with, I think the distributors and the bigger producers would agree that it does. For the smaller producers, some believe their product is not adequately distributed or marketed by the distributor and that the balance of the system is tipped against them.
Is it a system we currently have in the US a legacy of Prohibition? If so why and how?
Yes, Congress passed the “Tied House” laws in reaction to Prohibition, as they feared a return to the “morally depraved” saloon system. So they made it illegal for any one spirits-sales entity to own more than one tier of the distribution system. What is more, they also prevented bars from being the exclusive outlet for any one brewery.
What would the US spirits/wine sales market look like without the three-tier sales distribution system? Would it be better or worse or potentially seem more UK/Aussie retail market in its retailer-dominated sales model?
Without the existence of the three-tier system producers would make their own choices on whether to contract with a distributor as opposed to the law mandating their choice.
For larger producers it may not make economic sense to get into the distribution game. For the smaller producers, it may make sense at the beginning to self-distribute, but as they grow and want their product to reach more areas, it may make sense to start working with a distributor.
If we want to achieve a balance and still keep the same system, I think there is a need for a mechanism that allows small and growing producers to self-distribute until they hit a certain production limit.
Are more wine and spirits products actually available as a result of the three-tier system?
I haven’t seen any hard evidence that proves or disproves the theory that distributors provide the market with more products. I think market economics and consumer demand also drives the variety of choice that is available.
When I was growing up in Chicago we usually had three domestic beer choices, Bud, Old Style and Miller. Then came the microbrew craze and what resulted were breweries opening up like crazy to meet the demand for the better quality craft beer.
I don’t think the vast diversity of beer available on the market is because of the presence of a wholesale tier, as the fact that consumer demand is driving the market also contributes to greater choice.
Do distributors cost consumers more in terms of bottom-line pricing?
Anytime there is a middle man, it increases the cost of the final product. The great debate is whether the cost is actually worthwhile. And I guess the answer about the ultimate bottom-line costs depends on your perspective on what the services are worth to the consumer.
© Behance | Would smaller producers actually benefit in terms of cost and volume distributing themselves?
Without a doubt they would benefit from this opportunity because in starting off it is hard to get your business off the ground. With the distributor being responsible for so many products, it is very difficult for them to give the smaller producers the attention they need.
Furthermore, when producers start out the transportation costs tend to be low and they can often deliver the product effectively and inexpensively. However when they want to expand beyond small growth stages, the distributors can play a crucial role in helping them expand their markets.
I really think it is a numbers game for mid-sized and large wineries.
What valuable additional services does the three-tier system provide?
The system acts as a very effective tax-collection agency for the government and plays an essential role in administering the liquor industry. Secondly, distributors can enhance marketing and sales opportunities for producers, especially small ones who want to expand into different markets.
Do you think big distribution’s lobbying dollars have been overwhelming for politicians in many states who have backed them in their policies?
At the legislative and executive level they are very powerful and always seem to be on the offensive. Whether it is introducing legislation strengthening their position or blocking legislation or regulatory reform against their interest, they are among the most powerful groups in the wine and spirits business.
At the judicial level, they experience more parity and are often on the defensive. What we see are the distributors fighting a battle on many fronts against an adversarial equal. So yes they are politically powerful, but their power is being tested in the court system.
What is the alcohol-delivery vehicle Drizly doing that regular wholesalers aren’t, given that it is funded by a separate DBA of the Wine & Spirits Wholesalers of America (WSWA)?
Drizly is reaching a new market for the wholesalers. The wholesalers’ profit depends on retailers buying more product and Drizly electronically connects people to numerous retailers and expands the market a retailer can reach.
I personally like knowing my guy at the liquor store but I guess there is a new generation of Hipster kids that would rather sit on the couch, order off their app, and have no human interaction.
Drizly also allows consumers more choices as you can purchase from more than one retailer. The question becomes now that the e-commerce cat is out of the bag, where does the border exist for e-commerce liquor transactions? Do E-commerce liquor transactions exist only in intrastate commerce or is it part of interstate commerce? This is the big question the courts will eventually answer.
However when Amazon starts shipping in the state like they are in Texas, then it becomes a whole new ball game for these apps. They probably can’t match the Amazon leviathan coming into their market place.
Do Tied House laws work anymore? Or should everyone be able sell and purchase wine and spirits?
The Courts could make a decision striking down the current “Tied House” laws.
With Missouri Broadcasters’ Association decision – which dealt with the issues of freedom of speech in advertising – the US District Court said that the three-tier system is riddled with so many inconsistencies that it’s hard to justify laws that curtail free speech based on maintaining the integrity of the three-tier system.
The Court primarily focused on Missouri’s state system – which allows brewers and wineries to distribute under certain circumstances and retailers to manufacturer under other circumstances – to show that the lines in the three-tier system are blurred. I think the “Tied House” laws will ultimately be struck down by the Courts.
Interesting enough, the hipsters of the Drizly generation that use e-commerce to order everything may one day grow up and be in charge of state government and demand legislative changes. So even if the distributors prevail at court, a generational change of how the market is seen in the future could change the system.
But I wouldn’t bet against the distributors, so change – if it does occur – will happen at the judicial level.
Or are major chains going to destroy independent retail as we know it by opening in almost every state and supposedly attracting customers to discount products that could be priced so low as to run local retailers out of business?
Stores, such as Total Wine, could do to small liquor stores what Wal-Mart did to the rural General Stores in the south. However, they do face some challenges from protectionist state laws. Also, their power to drive down prices may be limited by those states that maintain minimum posting laws.
Nevertheless, I do see Total Wine dominating the market and eventually either defeating state protectionist laws in the courts or moving into these states and dominating the marketplace based on size and scale.
Is free sales competition fair in every product sales arena – i.e. should discounts for bread be as easy to come by as those for wine?
The free market is always the best solution. Alcohol should be treated more like a consumer good than a dangerous and controlled substance. The Courts have questioned the temperance justification in their decisions and I really think any kind of justification for maintaining high prices on wine and spirits is becoming dubious.
Practices that artificially inflate prices do not benefit our society and create inefficiencies. If there are more choices in liquor than there was 20 years ago, then why aren’t we seeing prices go down? Twenty-five years ago it cost around $50 to make a stock trade on Schwab, now with the increased competition from Etrade and Ameritrade, the price is $6.95.
If the free market operated properly, relatively to wine, we would see a reduction in the product’s bottom-line sales price.
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