Wednesday, May 2, 2012

The Three-Tier Alcohol Distribution System

Owning a winery sounds romantic and fun, but there is a lot of information that must be understood, considered, and decided on each day for normal business operations.  One such issue involves the selling of your wines.  Unfortunately, this subject is a moving target, thanks to the 3-tier alcohol distribution system. 
The 3-tier system was set up for the distribution of alcoholic beverages in the U.S. after the repeal of Prohibition in 1933.  The 3-tiers are made up of the producers (those who make it), distributors, also known as wholesalers, (those who deliver it to the store/restaurant), and retailers (the stores/restaurants that sell it.)  

The way it works is that producers/manufactures (wine makers, brewers, distillers, and importers) must sell only to distributors/wholesalers who then sell the product to retailers.  Retailers (on-premise sales include bars, clubs, restaurants…  Off-premise sales refers to wine shops, liquor stores, grocers…) are the only ones in the chain who can legally sell to the consumer.  (But wineries sell… I know, I’ll get to that.)

It’s been almost eight decades and these jurisdictions are still in control, monopolizing how and what wine (and other alcohol beverages) the American consumer may have legal access to.  This 3-tier system needs to be revamped in order to allow direct-to-consumer wine shipments from wineries and retail shops without the chokehold the distribution system maintains on it.

Studies indicate that consumers spend about 25% or one-quarter more for a packaged alcoholic beverage because of this 3 –tier system, than they would if they were allowed to purchase directly from the producer, thereby cutting out the middleman – the distributors.

The margin breakdown for the producer is sobering.  Although the winery grows the grapes, or purchases the juice, ferments it, crafts it, ages it, bottles it, labels it, pays several levels of taxes on it, and many time delivers it to the distributor, the producer only gets an average margin of 20 - 28%, depending on what type of deal s/he was able to make with the distributor to handle the wine. 

The distributor handles shipping, warehousing or storing the wine, and delivery to the retailer for a margin of 30 - 45%, after shipping costs. 

The retailer then creates shelf space, displays and maintains shelf displays - many times with point-of-purchase materials received directly from the producer because the distributor’s representative did not pass it on to the retailer. (In the distribution business, this is known as ‘trunk-mulch,’ sales materials forgotten about and left in the trunks of vehicles to rot.) 

The retailer also hires employees to sell the product in their stores/restaurants.  The retailer gets an average margin of 30 - 33%, depending on the deal s/he was able to set up with the distributor.  Interestingly, the distribution tier has the least invested in the product, but has the most control over it, and the potential to make the most money.

The bottom line in this 3-tier system is that it restrains and drastically reduces the consumer’s access to a more diverse selection of wine (or other alcohol beverages) by limiting the consumer’s choices to only what certain distributors carry in certain regions.

In the past 30 years, distributors or wholesalers have decreased in number by over 75%.  This is mainly due to a few large distributors buying out, or forcing the smaller, local and regional wholesalers to close.  Currently, the ten largest distributors control over 60% of the liquor market in the United States.  These are the companies determining what is available on the shelves in your region for you to drink.

In the U.S., there are over 7,000 wineries – at least one in every state.  But the top 50 large wineries produce more than 90% of wine for this country.  Less than 17% of all wineries have national distribution.   If you are a small winery (or brewery) and a distributor does not think that your line of wines will be very profitable to their company, they can refuse to carry your product.  This now limits your wine sales to only those who come in your door! This decision not to carry a winery’s product is usually based on sales numbers, not the quality of the product. And the coup de grace; in order that distributors not end up in direct competition with each other, the winery usually has to give the distributor exclusive rights to distribute their product within a geographical area.

There are various exceptions to this system – such as a winery that produces its wine, can then sell that wine in its tasting room. But only 2% of all wine produced is actually purchased by a consumer at a winery.  And even the allowance for a winery to sell its own wine can become convoluted, as some states have tried to require that a customer must first have visited that tasting room in person and signed an affidavit to that effect before they could order those wines online.   The next concern; will the state that the winery is located in allow them to ship outside of their state’s borders? And finally, will the state the consumer lives in allow for those wines from the winery’s state to come into the consumer’s state?

C’mon folks – all of this legislation for….wine?!

To make it even murkier, some states like Utah, Mississippi, and Vermont are considered alcohol beverage control states.  This means that an ABC state maintains a monopoly on the distribution tier; they act as both distributor and retailer. The state’s ABC (Alcohol Beverage Control) board runs the package liquor stores known as ABC stores. These stores control both high alcohol beverages, (Whisky, Gin, Vodka) along with low alcohol beverages (wine and beer.)  According to the National Alcohol Beverage Control Association, there are 19 monopoly states controlling alcohol distribution and/or retail sales in some manner.  About one-quarter of Americans live in a monopoly state.

Regardless of the distributors rhetoric, this is NOT about the possibility of selling alcohol and it being delivered by Fed Ex or UPS to minors – those under the age of 21.  That is another touchy issue to be considered another day. But it is interesting to note  that distributors and their political groups spent over 60-million dollars in a six year period, from 2000 - 2006, in state elections to maintain this status quo.

But wine consumers and wine producers are fighting back.  The voters and consumers in the state of Washington voted last year to do away with the three-tier system in their state.  As of June 2012, retailers may bypass distributors and purchase directly from producers.  They can then store the product themselves and negotiate volume discounts that can save the consumer money, while still paying the producer a favorable amount for the product.

Free the Grapes! is an organization that supports both winery owners and wine consumers.  It represents over 2,000 wineries in the U.S., and a countless number of wine lovers who simply want the right to purchase wine from a favorite winery across a state line or across the country, without needless rules and legislation.  As stated on their web page, “We believe wine lovers, not special interests, should choose which wines to enjoy”.

Another group is the Specialty Wine Retailers Association SWRA) which represents the wine retail industry and its consumers.  They support the unrestricted movement of wine across state lines, both for producers selling to retailers directly, and for consumers purchasing from retailers.  In other words, an adult consumer should be able to legally purchase wine from any retailer in the country.

As an American wine drinker and former winery owner, I do not agree with individual states regulating what we can and cannot drink.  Nor do I fathom how a structure like the 3-tier system is still in operation in the 21st century.  Maybe it’s time for a grassroots movement made up of consumers, wineries and retailers – all seeking to remove state restrictions that still prohibit consumers from purchasing wines directly from wineries and retail shops - to form.

All across our country there is a movement to Occupy Wall Street – maybe its time we now Occupy Wine Street and take back our rights as wine consumers to purchase what we want, when we want it, from where we want it, at a fair price to enjoy anywhere we are!

Let the wine revolution begin!

~ Joy

If you’re interested in finding out where your state falls in regard to Control States, alcohol laws and consumer rights, visit