The Basics of the 3-Tiered System
Anyone who wants to make, sell, import or supply alcohol needs to be aware of the 3-tiered system. After the prohibition, the U.S. government decided to mandate the process with a set of laws that helps control consumption, prevent monopolies, and estimates taxes. Regardless of where you fall, you'll need to understand the system to ensure you are getting the most for your adult beverage company.
The 3-Tier System for Alcohol Distribution
The 3-tier system is an economic system designed and regulated by the federal government about the producing, distributing, and manufacturing beers, wines, and spirits.
Tier One - The Producer: The producer is inclusive of anyone who makes or packages alcohol. Everyone who produces or packages falls under this category regardless of size. So, you're looking at Anheuser-Bush/InBev and your local brewer being tucked under the same tier-one umbrella.
Tier Two - Distributor: This category includes suppliers and importers of alcohol. There is a bit of a fine line for importers. Importers could technically fall under tier-one as well, but they often appear in this category. Distributors would include companies such as Lipman Brothers or Allied Beverage. Tier-two is another demonstration of breadth and will consist of any company from an international brand to one that is locally owned and operated.
Tier Three - Retailer: Tier three comprises of wholesalers or distributors for "on-premise" and "off-premise" retailers. On-premise retailers are bars or restaurants that sell alcohol to a customer and then allow them to consume the beverage on their property. An example of off-premise would include liquor stores, convenience stores, and grocery stores.
Why There is a 3-Tiered System
After Prohibition legislation was introduced to protect consumers and retailers from becoming a "tied-house." A tied-house referred to retailers who were under an exclusivity agreement of some kind with a manufacturer to sell only their alcohol before the prohibition. After the repeal, lawmakers worried this monopoly would reintroduce negative behaviors and wanted to create a fair market. Enter the 3-tiered system. While most of it is controlled on a federal level, states do have the rights to make amendments to who is falls under specific tiers.
State Laws and the 3-Tiered System
The beauty of American democracy is the federal government gives states some freedoms to control areas of legislation and utilize amendments to encourage a healthy local economy. After the prohibition, states were allowed to define whether or not brewers were also allowed to become distributors. But, because some states had bigger markets than others and the post-World War II lead the way to the development of national brands, laws were introduced articulating a separation between being a producer, distributor, or seller. Many states still employ a two-tiered system that allows brewers, for example, to also sell directly to their consumers. Some mandate the rights based on the size of a brewer or distiller, but either way, it means these producers can also have a dedicated space to sell their beverage directly to patrons.
Advantages and Disadvantages of the System
Understanding the disadvantages would benefit from a look into the advantages. Small distilleries, wineries, and brewers would find it somewhat challenging to afford the warehouse space and transportation needed to service a larger area. A 3-tiered system opens the playing field for other businesses to take charge of this need for distribution and become industry players with an opportunity to take the financial weight off others while still having a chance to earn money. The system also encourages healthy competition and room for growth. When a retailer isn't contracted to one producer, it gives other wine, beer, and spirit brands a chance to compete is a broader market.
Additionally, multiple distribution companies help retailers meet demand. Depending on the volume of business, some sellers would benefit from numerous deliveries per day, so they don't have to order surplus quantities. Disadvantages impact larger retailers who are used to working directly with manufacturers. It could be a challenge for some distributors to keep up with the demand from larger chains.
How to Navigate the Tiered System
The legislation of the 3-tiered system is hotly debated but not going anywhere soon. So, there are a few things to help you navigate where your alcohol business stands. The system is in place to manage taxes, prevent monopoly, and regulate alcohol consumption. The first thing you need to do is understand your state's regulations of the tiered system. Do they offer the chance for producers to become suppliers? If so, it will open up a new revenue stream if you are a brewer, distiller or winery. It contributes to a branded experience that has been prevalent in the wine community for ages but is recently becoming popular with beers and spirits. State laws might also allow self-distribution which could improve brand awareness. If you work on a national level, you’ll need to ensure you are complying with each state’s laws about the selling, producing, and distributing of alcohol.
Alcoholic Beverage Consultants
The 3-tiered system can be complicated if you are just getting started or acquiring an alcoholic beverage brand. At Brindiamo Group, we're here to help you make sense of the operation and offer guidance and best practices to promote healthy business growth. You can read more about our expertise in the alcohol beverage industry by visiting our website.