Does the 3-Tier System Need to Go Away?
October 24, 2007 – 6:09 am
Is the three tier system bad? Does it need to go away? Is it the position of SWRA that it should be dismantled?
These are the questions that tend to arise in the course of a legislative battle over a direct shipping law in different states. They are questions that deserve answers.
First, we need to lay out exactly what the “Three Tier System” is. Nearly every state operate, by law, under a form of the three tier system. Essentially, it refers to a system of alcohol distribution in which the producer of alcohol (the first tier) sells wine to a distributor (the second tier) who then sells wine to the restaurant or retailer (the third tier).
This system should look familiar. Thousands of industries use the same system to distribute products from wine, food and books to toys, advertising space and hardware. The difference with wine, however, is that use of the three tier system is MANDATED by most states.
As a result of the state mandates that wine flow through the three tier system we have a point in the process where product delivery and access to products is controlled completely by the second tier, the wholesaler. Given that there are now 5000 wineries in the United States alone and thousands of imported wines, you can imagine why the wholesalers like that the state mandates the three tier system. They, by law, get a cut of nearly every bottle of wine that eventually gets into a wine lover’s hand. But there are consequences to this.
1. If wholesales won’t carry a brand, that means it won’t get into anyone’s hands and that the producer is stuck with no way to sell that wine in that particular market.
2. Nearly every state has seen the number of wholesalers dwindle to the point that only 2 or 3 control the vast majority of distribution of wine in the state.
3. Because there are few efficient avenues to get a wine to consumers if distributors choose not to sell it, producers find themselves at the mercy of wholesalers in states
4. Wholesalers, particularly the big ones, are nearly immune to competition, which in turn leads to the inevitable: poor service, poor marketing, poor sales of low profit, small brands
5. The power of the wholesalers leads to enormous profits that allows them to use huge amounts of political contributions to gain access to legislators that leads to further legal protection of their already favored status in states.
6. Finally, because most wine must flow through wholesalers by law, and because wholesalers in each state can not possibly carry the thousands upon thousands of brands that exist, consumers find they do not have access to the wines they actually want, but only have access to wines that wholesalers want them to have access to.
These are serious problems that need a fix, but only if consumer access to products is valued. Yet none of these problems flow from the three tier system. Rather they all flow from the STATE MANDATE that wine be moved through the three tier system.
There is a fix to this problem, assuming consumer access to different wines is valued.
De-mandate the three tier system.
This would result in a large increase the number of wines that were available to consumers because it would mean producers would have their choice to sell wine to the wholesaler, retailer or consumer without any impediments. It would mean more access to wine because presumably such a change would also lead to states allowing consumers to purchase wines from either producers or retailers located anywhere in the country. And perhaps most important, the de-mandating of the three tier system would lead to an increase in the number of wholesalers, leading to competition among them, leading to better service for the thousands of wine brands that would still choose to use a distributor.
So, NO. The three tier system is not bad. The STATE MANDATE of use of the three tier system is bad. So, NO. The three tier system does not need to go away since using distributors is an efficient way to move large amounts of wine in far off markets. It just needs to not be mandated by the state.
4 Responses to “Does the 3-Tier System Need to Go Away?”
From a small winery perspective, I can say I agree with some of the points made. Mainly, state mandate of the distribution of alcohol but what state legislature is going to be the one that says, “We were the ones who made alcohol available…[insert underage blabber here].” You simply cannot get re-elected on that platform.
For our brand, we sell direct in California. Not because we want to keep the extra margins, but because there was no good fit with a wholesaler for us. Wholesalers USED to build brands, now they take orders. Even if a small, boutique wholesaler with maybe 20 or so sales representatives state-wide, they would have to spend 2 hours per week on your brand alone to equal one winery-direct sales representative working a 40 hour week. Wholesalers are chasing the ratings wines, as they are easier to sell, and eschewing the hard work of hand-selling. And by the way, I cannot blame them. If you’re going to launch a new brand, just be ready to build it on your own (afterall, who knows your product better?).
In Maryland, there is a new concept of winery-direct shipments to restaurants and retailers who are looking for small, idiosyncratic wines that are not carried by wholesalers. We have found some success in this model, but there is still the problem of some slow/no pays that are tough to collect across the country. Aside from that, it’s given our brand market traction in an area we would like to eventually have a wholesaler in.
I believe in economic Darwinism: if a wholesaler ADDS VALUE to your business model, then by all means, use them. If a wholesaler is simply feeding of the legislated teet, then by all means, eradicate them.
By tannic on Oct 24, 2007
Of course the “moral majority” and the liquor wholesalers work together to maintain the state monopolies. Here, in Tennessee, we have the Bootleggers and Baptists theory in action:
http://www.dis-equilibrium.com/2007/10/bootleggers-baptists-and-political.html
Unless there is money from the anti-liquor-cabal available for reelection campaigns, this isn’t likely to change, unfortunately.
By Mike on Oct 24, 2007
You are right for the most part….except that you might not be aware of what is happening in some markets like NY. A small revolution… The consolidation on the distribution side has lead me and several other younger industry veterans to start new specialty wine houses. I left my company three years ago after it was bought out by Southern….I saw a great opportunity…Most of these new importers and distributors, like myself, import, distribute, sample and hand-sell really awesome small production, artisanal and hand-crafted wines to the best restaurants and stores in NY. We only handle small wineries. Most of our customers are fed up with the big boys and the crap they peddle. They have been clamoring for new, small specialty wine houses….and their wishes are being answered. You gotta think positive and I’ve found a way to bring really hard to find and get wines to many customers in NY. There is always a way, when you have the will (and knowhow)….a good palate helps too. Cheers!
By Nick on Oct 24, 2007
In our state, it seems that the reps from the distributor are often the only persons in the wine store with a clue about the product, so, yes, they do serve a purpose. However, mandating a system that insures that (in my state) two companies control an entire industry is madness. Every year, these companies pour money into legislation to remove our internet option. So far, it has failed. However, the nightmare of every wine drinker in the state should be a drunk driving death linked to an internet purchase. MADD and the liquor distributors would be a deadly political combination.
By Gene on Nov 1, 2007