Booze Wholesalers and The Stupidity of My Species

Posted by Tom Wark on Mar 5, 2015

mitchell“UNDER SIEGE: DON’T LET A GOOD SYSTEM SINK”

No, really, let’s let that system sink…all the way to the bottom of the archaic well from which it first emerged.

That system in question is the “Three Tier System” and as you might imagine it’s wholesalers/distributors who are pleading for its continuation. In the case of the headline above, the plea comes from the NBWA: National Boxcarriers and Whiners of America….Wait…I got that wrong. I meant the National Beer Wholesalers of America.

Today the whiners are trying to make the case that it’s a bad idea for brewers to be able to sell their beer themselves to retailers and restaurants. They don’t tell us why its a bad idea, just that it’s a bad idea. The reason they don’t explain themselves is because if they did explain this contention they’d basically have to say, “Well, because it would mean we, the whiny distributors would have to provide a competitive service, would have to forgo unwarranted economic protection and we really don’t want to do that.”

In the editorial linked above, the president of the whiner’s association, Craig Purser, goes as far to say that if the three-tier system is altered to no longer give distributors complete protection from competition, America will become Mexico.

“Policymakers need only look to America’s neighbor to the south, Mexico, to see what can happen without a three-tier system. There are no real choices for retailers or consumers outside the FEMSA or Modelo brands. That is something policymakers should consider before poking holes at the American system that is working so well.”

Yes, because the U.S. is just like Mexico!!

Purser has gone so far around the bend he may never be heard from again. He concludes is rant about maintaining regulatory protectionism for distributors by…are you ready….quoting Joni Mitchell:

“As Joni Mitchell sang, ‘You don’t know what you’ve got ‘til it’s gone.’ “

All you need to do to discover what happens when the three-tier system is gone is look at California, where you may just have the greatest diversity of alcohol beverage product choice in the universe. In California, brewers are not required to sell to wholesalers. Wineries, brewers and distillers may choose to sell direct to the consumer, the retailer or a wholesaler. Prices are competitive for consumers. All is well.

Whenever you hear the likes of Purser or any other wholesaler try to make the case that retailers, producers and consumers ought to be forced to sit at the foot of wholesalers who act as product gatekeepers, ask them to make a real case for their claims rather than just quote Joni Mitchell. Whenever you here a wholesaler try to explain that the world will crumble unless wholesalers are given sweetheart, protectionist deals by enforcing a three-tier system, ask them to make their case rather than claiming without them the state will descend into some sort of Mexican Anarchy.

Whenever I hear the likes of Craig Purser or other wholesaler representatives claim the three-tier system is necessary, I think of another Joni Mitchell quote:

“My heart is broken in the face of the stupidity of my species.“

 

Posted In: Wine Legal Battles, Wine Marketing Rules

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19 Responses

  1. Reggie - March 6, 2015

    Full disclosure: I work for a wine distributor. I’m not arguing for “sweetheart protectionist deals” that you mention (but don’t explain) but I do support open dialogue and honest exchange of ideas. Your example of self distributing as seen in California isn’t viable for most of the rest of the country. Please take a poll of how many producers would want the burden of self-distribution with the same national penetration that they currently have thru wholesalers. Even just to service major markets like New York, Chicago, Vegas, Florida and Texas would be prohibitive, and you can forget about anything beyond that. I guess folks St Louis, New Orleans or Charlotte don’t really deserve a diverse selection and they should be happy with only the products from the largest of producers who can afford to reach their markets? All systems deserve continual evaluation to make sure they still serve their intended purpose, but your example of a solution only works in close proximity to where the products originate.

  2. Doug howell - March 6, 2015

    I think Reggie misses the point while making Tom’s: there are hundreds, maybe thousands of craft beer producers in many states who would like the opportunity to self distribute because, a) the local distributors choose not to carry their brand or b) the producer does not want to support the high margin wholesalers mandate to carry a brand. The California example would work in ALL other states. The problem is the option of self distribution by craft brewers, winemakers and distillers is the threat to the three tier system, which remains unchanged since 1933. Name another system established in 1933 that is unchanged? I agree that most producers would benefit from a wholesaler supporting their brand and expanding distribution. But the reality is wholesalers today are looking for the next big thing or next sure thing and are risk averse causing them to err on the side of not bringing in new things. Not having a choice, as a producer of an alcoholic beverage, of how you will distribute your product in your home state seems anti-commerce at best and anti-American at worst. If I invest my time, effort and money in starting a business, I should have the freedom to sell my products without the state strong arming me to use the three tier system, a system that may reject my product because of their agenda leaving me no alternative to market my goods.

  • Paul Hoffman - March 6, 2015

    AMEN, Doug Howell

  • Bill Haydon - March 9, 2015

    You say it would work in ALL markets, but that simply has not been proven true. It works for craft beer and craft spirits around the country because those are locally produced, which is why it works for California wineries in California. When comparing a California winery self-distributing in NYC or Chicago, it’s apples and oranges to the extreme.

    Self distribution has been legal in Chicago for years, and it isn’t even a blip on the radar. One large scale attempt of wineries cooperating to attempt to establish it there failed miserably as it imploded under the weight of logistical and sales inefficiencies with the person on the ground in Chicago walking away in disgust. If can’t work in a large, densely compact mega-market like Chicago how the hell can the sales and logistics aspects ever be efficient in a spread out multi-city market such as Texas or Ohio?

    As for changes in 1933 laws, I seem to remember this country gutting all the banking regulations (prohibition on interstate banking and Glass-Steagall) that were enacted in 1933 and consequently creating both too big to fail and investment banking backed by FDIC. How’d that turn out a few years later in 2008? Perhaps they got some things right back in ’33.

  • Tom Wark - March 6, 2015

    Reggie:

    Whether or not a winery or brewer or distiller is capable of or wants to self distribute, shouldn’t they have the right to do so IF THEY CHOOSE?

    You miss the point entirely. The “Sweetheart” deal is he REQUIREMENT in most states that producers sell to wholesalers in order to get to market. It’s no coincidence that wholesalers Always make the case that the sky will fall if self distribution is allowed. Of course they do. But the sky they are talking about isn’t the regulatory system, it’s their protection from competition that will fall.

    • Nick - May 2, 2015

      Agreed. The fundamental issue here is “who gets to decide?”. Should producers and consumers decide through the exercise of the free market and voluntary exchange…or should government bureaucrats and politicians get to decide based off of coercion and their own arbitrary notions of what is best for us?

      I will side with the free market.

  • Jim Lit - March 6, 2015

    Let me throw a few logs on the fire. I have spent 47 years in the adult beverage business, either working for a wholesaler or in the marketing end of the business. Small winemakers or craft beer makers might be wonderful at creating their product, but as I have seen in the past have no true concept of the marketing & distribution required to bring their product to the marketplace. 2nd log on the fire…..I do not think California is a good example because of the number of very small wineries in the state that only produce enough to sell directly to a handful of restaurants in the state and maybe a few off sale locations. The logistics of them having to run through a wholesaler due to the size of the state is just not a viable option and that is why what works in a state like California would not work in states much smaller in geographic size and have nowhere near the number of winery’s either. Granted the 3 tier system goes back to the repeal of the 18th Amendment, but in what I have read, the concern back then was not to go back to the liquor system that produced the excesses and abuses that existed prior to the amendment. Obviously one could go deeper into that subject, but it was a contributing factor along the additional excise taxes put on liquor that the states wanted to take control of. I expect some will disagree with my views, isn’t that what makes a good debate?

  • Doug Howell - March 6, 2015

    I totally agree that the “sweetheart deal” is the protection of the wholesale tier from competition. If I misread your position on that, Reggie, I apologize.

    My argument is and will continue to be that small producers of beer, wine and spirits should have the opportunity to self distribute if they choose. Is it viable for them all, no. Will many of them fail, yes. But isn’t that the nature of FREE enterprise? I don’t understand why the distributors are so vehemently against this, other than protecting their turf, since the small producers are spending THEIR money to market, distribute and, hopefully, build their brands. The successful ones, at some point WILL need a distributor to grow beyond a certain size. Ever heard the phrase, FREE RIDING!

    As far as the excesses of the past, just take a look at who is actually going out and selling products these days, who is providing “support” for events and marketing, who has the relationships with the retailers. I believe we are in the same position as we were prior to prohibition, with the wholesalers acting simply as fulfillment companies and the supplier driving the sales/marketing efforts.

    For the sake of transparency, I have been in the beverage business since 1986 as a distributor and supplier with multiple companies.

  • David Gaier - March 6, 2015

    Freedom to CHOOSE is the issue here. There will still be a role for importers and wholesalers and there are many excellent ones that bring consumers products that would otherwise be unavailable. Some of my colleagues pointed that out nicely. But no producer should be FORCED to use the system.

  • Joel Goldberg - March 6, 2015

    Reggie and Jim Lit, you make valid points: many wineries in many markets can and do benefit from relationships with high quality local distributors, for a variety of reasons.

    Unfortunately, that doesn’t address Tom’s argument, which is that the establishment of these relationships should be voluntary, based on the expectation of mutual benefit, rather than mandatory, based on outdated regulations kept in place by the political clout of powerful interests.

    No one (that I know of) argues for abolition of the wholesale tier. We’d just like producers (and importers) to be able to make their own decisions on whether it’s of use to them.

  • Phillip Anderson - March 6, 2015

    The crux here is choice. If the requirements for a 3 tier system ended today, the big distributors would still prosper & would still control most of the sets in major retailers. California is a clear example of this. Having a choice would open up distribution for a number of companies too small to work through the major distributors. California is also an obvious example of this dynamic. There must be some worry by the distributors that they would lose shelf space, because otherwise they wouldn’t cry about this. Whenever I hear a trade group do their version of “Won’t someone think about the children” or we will turn into Mexico I remember Cui bono. Who benefits? this is about decreasing choices & not expanding them. Distributors get no benefit by increasing the number of products available since shelf space remains the same. They just want to protect their share of the shelf any way that they can. Every other argument is just camouflage.

  • Rob - March 6, 2015

    I absolutely agree that suppliers should have freedom to choose to self-distribute instead of being forced into using a distributor; and I’m a distributor myself!

    If you use the California model that many have cited elsewhere in these comments, you’ll see the proof is in the pudding. In California, smaller producers of wine, beer and spirits, have no issue distributing locally. However, once they grow to the point where they have a desire to expand their distribution, self-distributing becomes tricky. Suppliers are now faced with issues such as warehousing, logistics, multi-state taxation, multi-state compliance, unsaleables, etc. which come with greater manpower needs and a whole new load of costs they are ill-prepared to deal with.

    In addition, if you think that retailers and restauranteurs have the time and desire to deal with thousands of supplier reps, think again. Their time is as valuable as yours, and they’d rather have a handful of wholesaler contacts than be hassled in person, over the phone and via email by every supplier who thinks they have the next big thing.

    Let’s face it, the monolithic, nation-wide wholesalers would love to have small and mid-size brands self-distribute. That would drive many of these small brands out of business, leaving the big wholesalers and their bland big brands even less competition. As someone said above, “isn’t that the nature of free enterprise?”

    Again, I believe that suppliers should have the choice to go to market with their distribution how they see fit. It should definitely not be mandated by law. However, it’s a classic example of the be careful what you wish for philosophy.

  • Henry - March 7, 2015

    Great piece! One note: unlike wineries and breweries, California distilleries are not allowed to self distribute.

  • Reggie - March 9, 2015

    Cui bono – exaclty. The intent of the creation of the 3 tier system was to attempt to create as (reasonably) level a playing field as possible for all participants in the marketplace. By requiring all producers to work through a distributor/wholesaler, the current regulations ensure that they are all subject to (reasonably) the same costs, fees, challenges as well as (reasonably) the same benefits, synergies within a certain market. By eliminating that requirement, the economies of scale would benefit the larger producers with larger budgets far more than the current 3 tier system limits the freedoms of the smaller producers.

    I don’t claim that it is a perfect system without flaws, no such thing exists, but it provides real benefits to all participants in the industry – not least of whom are the end consumers.

  • Ron Marsilio - March 9, 2015

    One of the reasons for Prohibition was the “Wild West-like” atmosphere of alcoholic beverage distribution that existed in this country for many years. One of the conditions of its repeal was the creation of the Three Tier System. Now, I know that a lot of the middle man concepts are, in many people’s eyes anti American because it restricts free trade, however, it is the lesser of two evils. I really do not think that we want to go back to the era of an everything goes distribution process. After all, we are talking about a substance that is much more dangerous than books, computers or household items. They cannot be lumped together. Colorado and Washington just legalized marijuana, why are we not talking about direct sales of that substance? I don’t think that would even be considered, and alcohol in many people’s minds is a more dangerous drug.

    These concerns are in addition to the technical problems of self distribution that Rob mentioned earlier. He is absolutely right about retailers and restaurateurs not wanting to deal with dozens of sales people, not to mention the overwhelming ad campaign that would go along with so many producers selling their own products. No, I think we are stuck with dealing with the middle man when it comes to alcohol distribution and that may not be the ideal, but the ideal hardly exists anywhere else.

  • Tom Wark - March 9, 2015

    Hi Ron:

    Actually, the three tier system was not a requirement of repeal at all.

    And I have nothing against a middleman or box carriers. However, the idea that they be required is just downright unAmerican, not to mention the entire reasons the wholesale tier has overtaken control of all alcohol regulation in the states.

    And where direct shipment of wine is concern, there are no problems with it. Minors are not using the channel for the most obvious of reasons.

    And self distribution can in fact work in certain cases, but not if there is a nonsensical requirement that producers sell to wholesalers in a state.

  • Tom Wark - March 9, 2015

    Bill,

    Whether self distribution is feasible in all cases or a small number of cases, this isn’t germane to the question of whether it ought to be allowed, which of course it should be.

    And I think I just read where you compared the wine industry to the banking industry. There’s no relationship whatsoever..

  • Ron Marsilio - March 11, 2015

    Tom, in reference to your statement that the 3 Tier system was not tied to the repeal of Prohibition, that is not entirely true. With the passage of the 21st Amendment, one of the conditions was to eliminate the practice of “tied houses”, where producers owned chains of retail outlets, thereby eliminating competition. The abolishment of these “tied houses” was debated in passing of the 21st Amendment and is one of the reasons for the establishment of the 3 Tiers, along with the collection of excise taxes and more control over the distribution of alcoholic beverages.

    Bottom line, it’s there for a reason. The powers that be, at the time of repeal, granted control to States, but they also wanted to create some semblance of order in the distribution system that was safer, more equitable and had provisions for collecting the billions of dollars in taxes that were due to the States.

  • Aaron Paddock - May 10, 2015

    As Ron Marsillo correctly points out, the three-tier system was created in order to disrupt the practice of “tied-houses.” This is a huge problem for craft beer in Mexico, and as we speak they are fighting that battle and making gains agains the duopoly that exists there.
    Allowing the market to dictate policy is a horrible idea. This will inevitably lead to deals like we saw with Green Flash buying Alpine to increase distro, or Miller buying portions of Terrapin to do the same. More and more small scale brewers seeking a larger distro footprint will find these deals quite enticing. There will be a race to buy up smaller brewers, larger breweries will need to do this to survive. Eventually you’ll have two or three options to buy beer from. Look what happened with the deregulation of Ma bell and and the cable companies. When I lived in LA I had one option for cable. Thats the market dictating. Once one of these large corporations gets large enough to buy everyone else, they do. This is a subtle argument for neoliberal policy. Removal of the system may seem very appealing, but in the long run I feel it will be detrimental. History repeating itself.