Policy Documents

Research & Commentary: Mandated “Three-Tier” Distribution of Alcohol

June 30, 2014

Alcohol products (beer, wine, and spirits) are some of the most tightly regulated consumer products in the United States. After the repeal of Prohibition, state governments were granted explicit authority to regulate alcohol sales and distribution within their own borders through Section 2 of the 21st Amendment. Subsequently, many states mandated the “three-tier” distribution system as a form of regulation.

In a three-tier distribution system, manufacturers (brewers and distillers) sell to wholesalers/distributors; wholesalers/distributors sell to retailers; and retailers sell to consumers. Proponents of this arrangement, namely the wholesalers/distributors, claim it protects consumers, limits consumption, and provides an efficient and dependable method of tax collection. This arrangement has created a deep-rooted lobbying interest among distributors and wholesalers with a significant financial interest in ensuring the existing set-up remains. Another argument made in support of this system is that without a mandated “distribution tier” the industry would be controlled by monopolized factions of manufacturers and retailers.

Mandating this type of distribution system, however, has created barriers to market entry, higher prices, and fewer options for consumers, with no discernible benefit to the public. The burden of costly distribution regulations can overwhelm start-up companies, causing them to close down or never open to begin with. The current system also promotes monopolies between large manufacturers and distributors. Distributors may refuse to ship the products of smaller manufacturers at the demand of large brewers, thus leaving start-ups with nowhere to turn. This reduces competition in the industry, giving consumers fewer options at higher prices. Some argue the higher prices restrain intemperate consumption, but no credible research supports that claim.

At present, 13 states prohibit any type of direct sales and shipping of alcohol products, but some states have granted exceptions to their mandated three-tier distribution systems. Texas and North Carolina, for instance, allow a limited amount of product manufactured per year to be sold in on-site brewpubs and wineries and to retailers. Others, such as Wyoming, Michigan, and recently South Carolina, allow direct sales on-site. These are steps in the right direction, but arbitrary limits on the market unjustifiably harm consumers.

Distributors and wholesalers can be a valuable resource to manufacturers, and in turn consumers. They can provide distribution networks, marketing, and brand development that a manufacturer may otherwise be incapable of. However, manufacturers and retailers should be able to decide voluntarily on whether to use their services. Most will use distributors if they serve a purpose, so mandating the system is not unnecessary. To allow consumers to have more choices at lower costs, elected officials should repeal laws mandating three-tier distribution systems. 

The following articles examine the “three-tier” alcohol distribution system from multiple perspectives.

 

Ten Principles for Improved Business Climates

http://heartland.org/policy-documents/ten-principles-improved-business-climates
The business climate of a nation, state, or city is the combined effect on businesses of public policies, natural endowments, and other assets that affect business start-ups and profitability. A good business climate encourages existing businesses to grow, people to start new businesses, and national and international businesses to invest. A poor business climate does the opposite.

Bottling Up Innovation in Craft Brewing: A Review of the Current Challenges and Barriers

http://heartland.org/policy-documents/bottling-innovation-craft-brewing-review-current-barriers-and-challenges

Matthew Mitchell and Christopher Koopman of the Mercatus Center examine the current set of restrictions enforced by states that hinder the growing craft beer industry. The study concludes, “Eliminating regulatory burdens for all firms would allow brewers to succeed or fail on the basis of their ability to provide the greatest value to consumers at the lowest cost to society.”

Avoid a Beer Monopoly by Setting the Market Free

http://heartland.org/policy-documents/avoid-beer-monopoly-setting-market-free

Michelle Minton of the Competitive Enterprise Institute details the harm caused by the “three-tier” distribution on the alcohol industry. Minton notes, “More freedom, not less, will make it easier for small brewers to start up and stay in business, resulting in better beer choices for consumers.”

Don’t Forget the Beer

http://heartland.org/policy-documents/dont-forget-beer

Writing for the Competitive Enterprise Institute, David Scott argues against the state of Pennsylvania keeping the three-tier distribution system for the beer industry in the state. The system “was designed by Prohibitionists of another century to increase costs and make distribution of alcohol more difficult. Lawmakers should resist efforts to revive that approach,” Scott writes.

Alcohol Distribution Laws Bottle Up Options for Consumers and Retailers

http://www.georgiapolicy.org/alcohol-distribution-laws-bottle-up-options-for-consumers-and-retailers/

In 2001, a study committee in the state of Georgia’s House of Representatives examined complaints raised by the state’s alcohol retailers about some businesses practices on the part of alcohol wholesalers. The Georgia Public Policy Foundation conducted a review of the findings and concluded the study “brought to light serious questions about the structure and value of economic protections provided to the wholesalers.”

Bill to Force Florida Brewers to Buy Their Own Beer Falls Flat

http://news.heartland.org/newspaper-article/2014/04/15/bill-would-force-florida-brewers-pay-distributors-their-own-beer

The Heartlander magazine reports on a bill introduced in Florida in the most recent legislative session that would require brewers to sell their products to wholesalers before buying them back to sell on-site. Florida, like every other state except Washington, has a three-tier system for distributing alcohol that separates producers, distributors, and retailers. After passing the Senate, the bill failed to reach a vote in the House.

The Michigan Liquor Control Commission and the Three-Tier System

https://www.youtube.com/watch?v=m7qq-b1BmTQ&feature=player_embedded

This video from the Mackinac Center for Public Policy documents the harmful effects the mandatory three-tier system for alcohol distribution has on small brewers in Michigan.

Halting Beer’s March to Monopoly

http://heartland.org/policy-documents/halting-beers-march-monopoly

In states and regions that mandate a “three-tier” distribution system, smaller craft brewers are vulnerable to market exclusion by distributors who are forced to deal exclusively with macro-manufacturers such as InBev. This white paper from the American Antitrust Institute documents the harm done by such a system.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Environment & Climate News Web site at http://news.heartland.org/energy-and-environment, The Heartland Institute’s Web site at http://www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Heartland Institute State Government Relations Manager Alex Monahan at amonahan@heartland.org or 312/377-4000.