The three-tier system fails the competition and choice test
Advocates of the three-tier system, mainly those representing the wholesaler tier, claim that wholesalers bring commercial benefits to society by creating healthy competition and by providing a vast assortment of brands to the marketplace.
According to this theory if not for the wholesalers, there would be less competition in the marketplace and less brands available to customers in any given marketplace.
Is the increased competition and choice theory true?
So, let’s look at this argument, does it hold up as a sound argument?
First, the most obvious and glaring inadequacy of this argument is the if not for A than no B reasoning used.
The argument that the presence of wholesalers led to the explosion of choice and competition lacks evidence. The evidence does not demonstrate a cause and effect.
Increases in the choice of the liquor portfolio and enhanced marketplace competition are due to numerous factors that may have nothing to do with the presence of wholesalers.
Mainly competition and choice increased due to the entrepreneurs that took the chance to develop a product and went to market not knowing the certainty of how their product would sell.
When I was growing up in the 90s, craft beer portfolios were not really diverse. In Chicago, the domestic options were majorly Budweiser, Old Style, and Coors. Further, there was some imported options, but not many craft beers.
Years later, the craft beer explosion has changed that, and the liquor portfolios are more diverse. Many producers entered a market that lacked choice and changed the equation.
So, can we thank the wholesalers for this demand? In other words, if it was not for them putting the beer on the shelf, would we consumers ever know these brands? And if not for them, would the craft beer market be substantially smaller?
Arguments based on the importance of both tiers, the wholesalers and suppliers, can make one confused. Do we have a what came first the chicken or the egg argument? In other words, do we owe enhanced choice and competition to the wholesaler’s existence, or do we owe it to consumer demand for craft beer?
It would seem the answer is obvious, the distributors existed before the diverse craft portfolios when big brands dominated their portfolios. Competition and choice seemed less in a bygone day.
The craft brewers brought choice and competition to the marketplace based on the ingenuity of businesspeople willing to take on the risk and expense of fostering a more competitive marketplace.
Without the ingenuity of these brewers, increased competition would not exist.
Has the wholesale tier hurt choice and competition?
The 2005 victory in Granholm opened up competition to small wineries that wanted to access customers across state lines. In Granholm, New York and Michigan were sued because their discriminatory winery shipping laws allowed in-state wineries to sell direct to consumer (DTC) to in-state consumers but denied this privilege to out-of-state wineries. Holding that these laws violated the dormant Commerce Clause and were in fact discriminatory, the Supreme Court overturned these laws.
What resulted is that states were required to open up their DTC markets to out-of-state wineries.
The wholesaler associations supported the previously restrictive state laws which required shutting off state markets to many wineries.
This position contrasts with the principle of promoting choice and competition. What resulted Post-Granholm demonstrates what occurred when the barriers to competition erected by the state legislatures with full support from in-state wholesalers were eliminated. The number of wineries in America has increased exponentially since the Granholm decision in 2005. In 2005 there were somewhere in the neighborhood of 5,000 wineries. In 2020, the number of wineries in the United States is estimated at 10,472.
Many of these wineries exist because they can access state markets via DTC shipping. If small wineries had to rely on distribution and did not have the option to utilize DTC shipping, it would become very hard to exist.
Even though there are over 10,000 wineries, the top 50 wineries represent more than 90 percent of domestic wine sold by volume.  Which means there is very little room for small producers and national distribution is almost impossible.
A wholesaler’s end game is to sell all the wine they import into the state, so their goal is to quickly deplete their supply of popular wine. It is not the norm for wholesalers to import small-volume wines from outside major wine-producing regions.
As forty-five percent of the wineries produce below a thousand cases of wine, and eighty-one percent produce below five-thousand cases, the vast majority of wineries provide very little incentive or appeal for distribution to push through their network.
The only way for consumers to have access to a more diverse portfolio is through DTC shipping versus through traditional liquor distribution. Further, allowing these out-of-state wineries to compete with in-state wineries increases competition and choice.
In contrast, wholesalers across the country fought for a regime that tried to accomplish the opposite.
The wholesaler’s argument fails to convince me that the wholesaler tier is responsible for the diversity and competition that exist in today’s marketplace. First, there is no cause and effect evidence that supports this conclusion. Second, the argument fails the chicken or egg test of did the wholesalers bring competition and choice to the marketplace, or did the great entrepreneurs bring this to the marketplace?
Finally, wholesalers have tried their best to inhibit competition and increased choice in their own state. By restricting access to out-of-state wineries and supporting discriminatory winery shipping laws, the wholesalers stunted the growth of brands and hampered the development of a growing industry.
In the end, people of sound mind and reasonable intellect can debate the merits of the three system. But based on what I see, I can’t conclude that the wholesalers are the driving force behind competition and choice in its marketplace.
 https://www.statista.com/statistics/259365/number-of-wineries-in-the-us-by-state/; https://winesvinesanalytics.com/statistics/winery/
 Wine Business Monthly, February 2020 at Page 34
Leave A Comment
You must be logged in to post a comment.