Does the three-tier system hinder diversity?
Last month I had the pleasure of listening to the Honorable Douglas Ginsburg speak. Judge Ginsburg, sits on the D.C. Court of Appeals and was nominated by President Reagan to the U.S. Supreme Court. Unfortunately, youthful indiscretion did him in as he admitted to smoking pot in his law school days, which disqualified him from getting confirmed.
Judge Ginsburg in the Reagan administration was the Assistant Attorney General in the Antitrust division. In his role he recalled a story in which Ronald Reagan pulled him aside and discussed the motion picture industry.
In 1948 the Paramount Decree was handed down by the U.S. Supreme Court. Essentially, the Paramount Decree banned vertical integration in the movie industry. Before this Decree the studio owned the movie theaters and showed their own movies at these locations. The Paramount Decree required the movie studios to divest their holdings in movie theaters.
In President Reagan’s opinion the Paramount Decree and the ban on vertical integration did more harm than good. In the end, Reagan told Ginsburg that the Decree led to less movies being made, less big-name actors, and the amount of movie studios shrinking due to the Decree. Reagan told Ginsburg that before the Paramount Decree, the Studio would make a whole bunch of movies, some of them A movies and some of them became B movies. They would package the lot and show them at their move theaters. After the Paramount Decree, the movie studio needed to work with distributors and theaters they did not own, and the movie studio had less control over the movies that were shown in the theater. According to Reagan this led to less risk taking, less movies, and resulted in the collapsing of certain studios.
Now I admit I didn’t check on the Gipper’s assertions, as my purpose is not to write a treatise on the Paramount Decree.
But Judge Ginsburg’s story got me thinking about how has the three-tier system effected the diversity of liquor products available to the consumer. Also, does the three-tier system’s history and trends, mimic the film industry?
The traditional three-tier system at its core is driven by a strict ban on vertical integration. In this traditional three-tier system, a manufacture is required to sell to a wholesaler who then sells to a retailer.
The wholesaler industry indicates that the three-tier system, which traditionally banned vertical integration, led to the diversity of products in the marketplace.[1]
Many proponents of the three-tier system point to the difference in diversity between liquor and a consumer good like soup or soda pop. Yes, liquor’s product offerings are more diverse than pop and soup, but it’s because there is more demand for liquor than these two consumer goods. Revenue in the liquor field exceeds $250 billion[2], whereas for carbonated soft drinks the sales totaled $29.4 billion,[3] and the soup industry earns revenue of $16.4 billion.[4] So the products aren’t as diverse in these areas, because quite frankly consumers aren’t demanding it, and its not worth the risk for businesses to get into the field to supply this demand.
So, did the end of vertical integration in the liquor space lead to the explosion of products, or did it hinder the diversity of products like Reagan claims it did for the motion picture industry?
The Role of Vertical Integration
Vertical integration has become a more fluid concept over the years. In the first 50-60 years after Prohibition the liquor industry experienced strict prohibitions on vertical integration for the most part. But with the modern and explosive growth of small wineries, craft brewers, and craft distillers, the industry experienced a rapid growth in vertically integrated businesses.
So, I want to compare how the diversity of products faired under the era of strict prohibitions on vertical integration v. when vertically integrated businesses grew.
The beer industry provides a pretty clear look into how the concept of vertical integration impacted diversity.
A study looked at the number of breweries in America from 1934, when Prohibition ended, to 1990. During this period vertical integration prohibitions were strict and brewers sold to wholesalers, who then sold to retailers. During most of this period there were very few craft brewers that manufactured and sold their own product.
In 1934 the year after Prohibition there were 756[5] brewers in America, in 1980 there were 101 brewers in America.[6] In 1990 the trend reversed and the number of breweries increased to 286. According to the study, what led to the increased numbers were the rise of microbrewers.
Keeping with the trend, by the year 2000 the number of breweries exploded to 1,566 Breweries and in 2020 the numbers of breweries climbed to 8,884 Breweries.[7]
So, what changed, what lead to the great and unimaginable increase in breweries?
Let’s answer this question by taking 1980 and utilizing it as our base, and then we will look 40 years back and look 40 years ahead and see what happened.
In 1940 there were 684 brewers, in 1980 there were 101 brewers. The number of brewers decreased by 85%. In 2020 the number of brewers increased to 8,884 versus 1980’s 101 brewers. The number of brewers increased by an astronomical number of 8,696%.
As you look at the 40-year period before and after 1980, there are some significant differences. Between the period of 1940 and 1980 the number of brewers significantly decreased and there was in a steady downward trend. In this era, there was little in the way of craft brewers and most brewers operated in a strict three-tier system.
In 1980 to 2020, the growth of microbreweries and craft beers began to take off. Many of these businesses were allowed to vertically integrate (A manufacturer of beer could sell at retail or on some occasions distribute its own product) during this era. Further, as the years went on, the laws allowing vertical integration expanded.
State liquor laws began to deregulate from the strict three-tier system to a system that allowed vertical integration. Distributor lobbies fought these laws very hard and eventually acquiesced, but not before hindering and holding up progress.
As liquor laws are run by 50 different state jurisdictions, the ability for a brewery to vertically integrate depended on the state’s laws.
In my view, the ability for brewers to practice some form of partial or whole vertical integration led to a trend where instead of decreasing, the number of breweries began to increase.
Reagan told Ginsburg that movies decreased because the distributor would only take a certain number of movies from the studios and the studio could not develop more films, which led to a less diverse portfolio of movies.
Similarly, it would follow suit that in the era of strict prohibitions on vertical integration that the distributor would be more selective, which meant the brewer had to sell what the distributor would take and the brewer would take less chances with unique brands. This could essentially lead to less diverse products entering the marketplace as the brewer was required to play things safe.
But with the advent of vertical integration, a manufacturer that could now retail, and could take chances and develop what was once thought of crazy beer formulas and become innovative with their portfolio. They could instead of selling their beer directly to a distributor, manufacture a beer and sell it at retail in their own tap room, and maybe even distribute the product. This freedom has created more brewers and the ability to experiment and create a greater diversity of brands. I mean come on, before the vertical integration era, did sour beer even exist!
The freedom to sell their own product at retail, something a previous era did not allow, led to a growth in brewers and hence an explosion in products.
As I have experienced in my life, the growth of different beers available in the marketplace from when I started drinking is flat out amazing. In my early days, Coors Banquet Beer was considered the exotic and unique beer in the Chicago market, wow have times changed.
Now, I don’t have the capabilities, mainly the time, to hypothesize which specific law changes lead to the increase of brewers and products and when these events occurred. What I can tell you though, is that the trends don’t lie. As state laws deregulated and allowed more vertical integration in the marketplace, the selection got more diverse in the pubs and in the store shelfs.
Conclusion
So, it begs the question, did the three-tier system lead to the growth in the diversity of products? Well, its existence was there the same time rapid growth occurred in the industry, but it was also there at the same time of a rapid decline in the number of breweries in America. Hence, there is no proof that the three-tier system led to an increase in diverse products. The wholesalers may claim that if they didn’t distribute the product for brewers that it would never make it on shelves or tap handles. But as indicated before, the wholesalers existed during the era of rapid decline and their presence did not lead to product diversity.
In my observation, what led to the diversity of product more than any other factor was the deregulation that permitted vertical integration. Previous to its widespread existence the number of breweries was contracting, after vertical integration became more prevalent, the number of breweries increased.
In the end, it brings me to another question, does Reagan’s analysis carry over to the liquor industry and was Reagan right. The answer to both, I would say, of course, yes!
[1] https://www.wswa.org/news/wswa-issues-statement-recent-biden-administration-executive-order-promoting-competition
https://www.statista.com/statistics/207936/us-total-alcoholic-beverages-sales-since-1990/
[3] https://www.bevindustry.com/articles/93231-state-of-the-beverage-industry-carbonated-soft-drinks-sees-value-sales-up1990/#:~:text=In%202019%2C%20alcoholic%20beverage%20sales,approximately%20252.82%20billion%20U.S.%20dollars.
[4] https://www.industryarc.com/Report/18053/us-soup-market.html#:~:text=U.S.%20soup%20market%20is%20estimated,forecast%20period%20of%202018%2D2023.
[5] https://eh.net/encyclopedia/a-concise-history-of-americas-brewing-industry/
[6] https://www.brewersassociation.org/statistics-and-data/national-beer-stats/
[7] https://www.brewersassociation.org/statistics-and-data/national-beer-stats/
Last month I had the pleasure of listening to the Honorable Douglas Ginsburg speak. Judge Ginsburg, sits on the D.C. Court of Appeals and was nominated by President Reagan to the U.S. Supreme Court. Unfortunately, youthful indiscretion did him in as he admitted to smoking pot in his law school days, which disqualified him from getting confirmed.
Judge Ginsburg in the Reagan administration was the Assistant Attorney General in the Antitrust division. In his role he recalled a story in which Ronald Reagan pulled him aside and discussed the motion picture industry.
In 1948 the Paramount Decree was handed down by the U.S. Supreme Court. Essentially, the Paramount Decree banned vertical integration in the movie industry. Before this Decree the studio owned the movie theaters and showed their own movies at these locations. The Paramount Decree required the movie studios to divest their holdings in movie theaters.
In President Reagan’s opinion the Paramount Decree and the ban on vertical integration did more harm than good. In the end, Reagan told Ginsburg that the Decree led to less movies being made, less big-name actors, and the amount of movie studios shrinking due to the Decree. Reagan told Ginsburg that before the Paramount Decree, the Studio would make a whole bunch of movies, some of them A movies and some of them became B movies. They would package the lot and show them at their move theaters. After the Paramount Decree, the movie studio needed to work with distributors and theaters they did not own, and the movie studio had less control over the movies that were shown in the theater. According to Reagan this led to less risk taking, less movies, and resulted in the collapsing of certain studios.
Now I admit I didn’t check on the Gipper’s assertions, as my purpose is not to write a treatise on the Paramount Decree.
But Judge Ginsburg’s story got me thinking about how has the three-tier system effected the diversity of liquor products available to the consumer. Also, does the three-tier system’s history and trends, mimic the film industry?
The traditional three-tier system at its core is driven by a strict ban on vertical integration. In this traditional three-tier system, a manufacture is required to sell to a wholesaler who then sells to a retailer.
The wholesaler industry indicates that the three-tier system, which traditionally banned vertical integration, led to the diversity of products in the marketplace.[1]
Many proponents of the three-tier system point to the difference in diversity between liquor and a consumer good like soup or soda pop. Yes, liquor’s product offerings are more diverse than pop and soup, but it’s because there is more demand for liquor than these two consumer goods. Revenue in the liquor field exceeds $250 billion[2], whereas for carbonated soft drinks the sales totaled $29.4 billion,[3] and the soup industry earns revenue of $16.4 billion.[4] So the products aren’t as diverse in these areas, because quite frankly consumers aren’t demanding it, and its not worth the risk for businesses to get into the field to supply this demand.
So, did the end of vertical integration in the liquor space lead to the explosion of products, or did it hinder the diversity of products like Reagan claims it did for the motion picture industry?
The Role and History of Vertical Integration
Vertical integration has become a more fluid concept over the years. In the first 50-60 years after Prohibition the liquor industry experienced strict prohibitions on vertical integration for the most part. But with the modern and explosive growth of small wineries, craft brewers, and craft distillers, the industry experienced a rapid growth in vertically integrated businesses.
So, I want to compare how the diversity of products faired under the era of strict prohibitions on vertical integration v. when vertically integrated businesses grew.
The beer industry provides a pretty clear look into how the concept of vertical integration impacted diversity.
A study looked at the number of breweries in America from 1934, when Prohibition ended, to 1990. During this period vertical integration prohibitions were strict and brewers sold to wholesalers, who then sold to retailers. During most of this period there were very few craft brewers that manufactured and sold their own product.
In 1934 the year after Prohibition there were 756[5] brewers in America, in 1980 there were 101 brewers in America.[6] In 1990 the trend reversed and the number of breweries increased to 286. According to the study, what led to the increased numbers were the rise of microbrewers.
Keeping with the trend, by the year 2000 the number of breweries exploded to 1,566 Breweries and in 2020 the numbers of breweries climbed to 8,884 Breweries.[7]
So, what changed, what lead to the great and unimaginable increase in breweries?
Let’s answer this question by taking 1980 and utilizing it as our base, and then we will look 40 years back and look 40 years ahead and see what happened.
In 1940 there were 684 brewers, in 1980 there were 101 brewers. The number of brewers decreased by 85%. In 2020 the number of brewers increased to 8,884 versus 1980’s 101 brewers. The number of brewers increased by an astronomical number of 8,696%.
As you look at the 40-year period before and after 1980, there are some significant differences. Between the period of 1940 and 1980 the number of brewers significantly decreased and there was in a steady downward trend. In this era, there was little in the way of craft brewers and most brewers operated in a strict three-tier system.
In 1980 to 2020, the growth of microbreweries and craft beers began to take off. Many of these businesses were allowed to vertically integrate (A manufacturer of beer could sell at retail or on some occasions distribute its own product) during this era. Further, as the years went on, the laws allowing vertical integration expanded.
State liquor laws began to deregulate from the strict three-tier system to a system that allowed vertical integration. Distributor lobbies fought these laws very hard and eventually acquiesced, but not before hindering and holding up progress.
As liquor laws are run by 50 different state jurisdictions, the ability for a brewery to vertically integrate depended on the state’s laws.
In my view, the ability for brewers to practice some form of partial or whole vertical integration led to a trend where instead of decreasing, the number of breweries began to increase.
Reagan told Ginsburg that movies decreased because the distributor would only take a certain number of movies from the studios and the studio could not develop more films, which led to a less diverse portfolio of movies.
Similarily, it would follow suit that in the era of strict prohibitions on vertical integration that the distributor would be more selective, which meant the brewer had to sell what the distributor would take and the brewer would take less chances with unique brands. This could essentially lead to less diverse products entering the marketplace as the brewer was required to play things safe.
But with the advent of vertical integration, a manufacturer that could now retail, and could take chances and develop what was once thought of crazy beer formulas and become innovative with their portfolio. They could instead of selling their beer directly to a distributor, manufacture a beer and sell it at retail in their own tap room, and maybe even distribute the product. This freedom has created more brewers and the ability to experiment and create a greater diversity of brands. I mean come on, before the vertical integration era, did sour beer even exist!
The freedom to sell their own product at retail, something a previous era did not allow, led to a growth in brewers and hence an explosion in products.
As I have experienced in my life, the growth of different beers available in the marketplace from when I started drinking is flat out amazing. In my early days, Coors Banquet Beer was considered the exotic and unique beer in the Chicago market, wow have times changed.
Now, I don’t have the capabilities, mainly the time, to hypothesize which specific law changes lead to the increase of brewers and products and when these events occurred. What I can tell you though, is that the trends don’t lie. As state laws deregulated and allowed more vertical integration in the marketplace, the selection got more diverse in the pubs and in the store shelfs.
Conclusion
So, it begs the question, did the three-tier system lead to the growth in the diversity of products? Well, its existence was there the same time rapid growth occurred in the industry, but it was also there at the same time of a rapid decline in the number of breweries in America. Hence, there is no proof that the three-tier system led to an increase in diverse products. The wholesalers may claim that if they didn’t distribute the product for brewers that it would never make it on shelves or tap handles. But as indicated before, the wholesalers existed during the era of rapid decline and their presence did not lead to product diversity.
In my observation, what led to the diversity of product more than any other factor was the deregulation that permitted vertical integration. Previous to its widespread existence the number of breweries was contracting, after vertical integration became more prevalent, the number of breweries increased.
In the end, it brings me to another question, does Reagan’s analysis carry over to the liquor industry and was Reagan right. The answer to both, I would say, of course, yes!
[1] https://www.wswa.org/news/wswa-issues-statement-recent-biden-administration-executive-order-promoting-competition
https://www.statista.com/statistics/207936/us-total-alcoholic-beverages-sales-since-1990/
[3] https://www.bevindustry.com/articles/93231-state-of-the-beverage-industry-carbonated-soft-drinks-sees-value-sales-up1990/#:~:text=In%202019%2C%20alcoholic%20beverage%20sales,approximately%20252.82%20billion%20U.S.%20dollars.
[4] https://www.industryarc.com/Report/18053/us-soup-market.html#:~:text=U.S.%20soup%20market%20is%20estimated,forecast%20period%20of%202018%2D2023.
[5] https://eh.net/encyclopedia/a-concise-history-of-americas-brewing-industry/
[6] https://www.brewersassociation.org/statistics-and-data/national-beer-stats/
[7] https://www.brewersassociation.org/statistics-and-data/national-beer-stats/
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