The three tier system has been in place since the repeal of Prohibition. Some advocate for it (large distributors and the brewing giants whose beer they distribute) and others don’t believe a strict mandatory three tier system is necessary to accomplish the goals it is designed to promote (me, craft brewers).  I am writing this to provide just a bit of background, a bit of opinion and to perhaps stimulate discussion.

The Three Tier System: (Shortly) How/Why?

Prohibition was a disaster.  As it neared its end, John D. Rockefeller, Jr. commissioned a study by Raymond Fosdick (attorney) and Albert Scott (engineer) to provide the states with guidance on regulating alcohol.  The 21st Amendment ended prohibition and provided the states with control over regulating the production and sale of alcohol. Fosdick and Scott made it the highest priority to prevent a system that allowed tied-houses.  A tied house refers to retail outlets where alcohol suppliers held a direct financial interest in the owners of the retail outlets.  Brewers could ensure that they were on tap and others were excluded by having an “in” with the retailers.  Fosdick and Scott recommended state-run monopolies for all-things alcohol sales and distribution but also provided the option of a mandatory wholesale level between brewers and retailers (a system of licenses that would prohibit all financial relations between the manufacturer and retailer).  The states took the recommendations and required the middle-man wholesaler to create the three tier system.

Now: Limited Self-Distribution

Beer is manufactured at the top tier, then sent to the distributor (middle tier) who sends it along to the retailers before it finally reaches the consumer.  A number of states have (slowly) tinkered with the three tier system over the last 80 years.  Now, breweries can bypass the middle tier in 36 states (under given circumstances) and self-distribute to retailers.  You will often see a limit placed upon the size of the brewery or the amount of beer that it may self-distribute (or both).  For example, in Wyoming, brewers can self-distribute if they produce no more than 15,000 barrels annually.  In Wisconsin, a brewer that manufactures 300,000 barrels or less (in a calendar year at all locations) may self-distribute to retailers.  Illinois is an example of a state that has separate restrictions on production and distribution: it allows a brewery that produces up to 930,000 gallons (approximately 30,000 barrels) to self-distribute up to 232,500 gallons (approximately 7,500 barrels) in a year.  Florida will likely have a bill proposing limited self-distribution in the coming weeks.

Does the Three Tier System Accomplish its Goals?

Probably not.  To be fair, nothing is ever perfect and there are generally just best or better options rather than the perfect solution.  Self-distribution, albeit limited, hasn’t been the cause of any negative affects in those states that already allow it.  Whether a mandatory middle-man exists or not, breweries are prohibited from having any financial interest in, or exerting undue influence over, retailers anyway.  Without mandatory use of a distributor, laws are already in place to prevent tied-houses.

With that said, the lack of a mandatory three tier system would also lower average prices for consumers and provide start-ups with a less costly way to enter the market (at least outside of their own taprooms).

This would also not put distributors out of business and their employees out of jobs.  The middle tier would continue to operate.  It is simply not feasible for small breweries to distribute their beer throughout a large state like Florida and into other states.  Distributors would lose some business initially in local markets but, as breweries grow (which may occur more quickly without the costs of a middle-man in the early stages of development), there will be an increased need for wider distribution – a task most likely reserved (in most cases) for a separate distributor.

There will always be a worry that the largest manufacturers might own their own or exert enormous influence over a distribution company that would demand only they are on tap.  Big beer’s market share is still generally between 80% and 95% depending on the state, so an ability to exert that influence using money would certainly exist.  However, it would be silly to assume that same possibility doesn’t already exist with the current regulatory scheme.

Here’s Why

Just look to Florida for a bit of an example. As Florida sees very simple bills filed that would legalize the standard-sized 64 ounce growler and allow beer tastings on retail premises, there is push back on other brewer activities.  In recent news articles, the president of Beer Industry of Florida has noted that the fact that craft brewers can sell beer brewed by other brewers in their taprooms is troublesome.  The articles don’t mention whether he also explained who was troubled by these practices.  The Beer Industry of Florida represents distributors and MillerCoors is a “Platinum Level Associate Member” of the organization.  Beer Industry of Florida does not represent retailers, but nonetheless uses retailers (apparently) to claim some (someone, somewhere?) worry that taprooms as presently constructed are harmful to the business of others.

Meanwhile, Mitch Rubin, a lobbyist for Florida Beer Wholesalers, also seems to keep his focus on the retail level, despite representing wholesalers.  He makes it seem that his true worry is ensuring some undefined “fairness” for “real retail” (i.e., not a brewery holding a retail license to operate a taproom).  Florida Beer Wholesalers distribute Anheuser’s beers.  Certainly, part of the argument (the part they don’t make) is that looking out for the retailer in this instance can create more work for the distributor (as I mentioned above, it probably doesn’t make much difference).  Whether there is a mandatory three tier system or not, the same three tiers will continue to exist and will continue to be necessary.  But it seems that the mandatory system isn’t working so well if you have a situation in which entities at the distribution level that make most of their money from the manufacturing level (AB InBev and MillerCoors) are commenting and amending bills (apparently) on behalf of the retail level.  If the tiers are separate but all apparently controlled by big beer overlords, we don’t have what some claim we have.

In late 2012, a Washington Monthly article explained how Big Beer already has a captive market.  It explained as follows:

ThreTierOne

This makes pretty clear that you’re either with us or you’re not. And if they’re not? The article continued:

ThreeTier2

That bill ultimately passed but the guide makes clear that even with a mandatory system, the largest manufacturers have the ability and willingness to spread their influence beyond that contemplated by the three tier system.

Conclusion

There is a difference between a mandatory three tier system and preventing tied-houses. One is not required to accomplish the other.  With rules that continue to prohibit financial relationships and, for example, slotting fees in which manufacturers could attempt to ensure ownership of all taps and shelf space to the exclusion of other brewers, tied-houses can remain a thing of the past (as much as they are now).  Distributors would continue to exist and work with brewers of all sizes all over the country.  As of now, craft brewers have a difficult (nearly impossible) time of getting out of contracts with distributors that may not be pushing a given product due to some influence from larger brewers.  That problem, a franchise law situation, could also be alleviated by an overhaul.  Brewers may have an easier time of getting to market (they won’t be widely self-distributed at first, but they can get their beer to some local spots so people can sample new products without having to either go directly to a brewery’s taproom or without having to be the fourth tier (consumer).

Ultimately, the mandatory three tier system isn’t necessary. It is not what keeps people employed, it is not what avoids over-consumption, it is not the means by which anti-competitive behavior is prevented.

What are your thoughts? Brewers? What do you think of the mandatory three tier system? Thoughts on self-distribution and its potential affects? Retailers? Do you think you might have an easier time getting certain products if brewers were not stuck with a given distributor forever? What negatives would you anticipate?  I welcome all comments and discussion.