Revisiting Mandated Three-Tier System for Alcohol

What is the deal with the Three-Tier system (3TS)? No, this isn’t the beginning of a Seinfeld joke, it’s a legitimate question about 3TS, or a government-mandated monopoly that forces brewers to use wholesale services as the sole middlemen between brewers and retailers – a system propped up by the Wholesale Association lobby and a system that quite frankly gives wholesalers a bad name.

The 3TS was implemented across the country after prohibition ended in 1933 by most states to control the sale of alcohol. The “stated” design was to keep breweries from selling directly to the consumer, stop tied houses from opening, limit consumption, and promote small brewers. The 3rd party wholesaler was mandated as a middleman to be the only way brewers could reach market with their product.

Wholesalers do provide considerable value when producers are able to voluntarily contract their services as the brewer’s growth necessitates it, but that’s not what the debate is. The issue has been to indulge the talking points of a mandated 3TS as if they were beneficial. The idea should be revisited by examining what were its original goals and what this system has truly created some 84 years after its implementation.

There is a quote about bad policy, “Great in theory, but awful when practiced in reality.” The 3TS not only rings truth to this statement, it goes a step further. The theory’s given for the 3TS were never the intent and reviewing the unsupported claims should shed light on the reality it creates; promoting big beer and the status quo at the expense of the small entrepreneur brewer.

Claim No. 1: The Three-Tier System is the reason for the large number of breweries available today.

The facts support just the opposite: The large numbers of breweries in the U.S. are in spite of and shows no correlation with the forced use of the 3TS.

In 1900 there were 2.38 breweries per 100,000 people in the United States; today there are 1.55 breweries per 100,000, with some 5,000 breweries to choose from. The ups and downs along the way are revealing.

Between the year prohibition was repealed in 1933 and today, there have been an average of 0.31 brewers per 100,000 people. A time period uninterrupted by the mandated use of the 3TS.  After the initial jump in breweries the year prohibition ended, from 1941 to 1978 there was an 89 percent drop in the total number of breweries, with only 10 percent of the total number surviving after 37 years under the mandated 3TS.

In the 37 years since 1978 to 2015, the number of breweries increased an astonishing 5523 percent, to a total of 4,269 breweries. These two starkly different results of identical time span under a mandated 3TS reveal that at best the system has no relationship with selection. At worst, it may actually hinder brewery growth. The correlation grows when a comparison is made between states that have no self-distribution cap, and those states that limit or ban it.

This dramatic growth in brewer choice closely related to national legislation legalizing home brewing – which in time drew hobbyists into the business – alongside numerous states reducing regulatory burdens on brewers. For instance, some key states for beer production allowed brewers to sell their own product at market and allowing complete voluntary choice for brewers when they decided to use wholesalers.

Claim No. 2: Without the mandated 3 Tier System, ‘tied houses’ would take over the country.

There is a faulty argument here: The advocates and beneficiaries, the Wholesalers Association, of the 3TS are sounding an alarm that any tied house is evil. A tied house is a bar owned by the brewery that will sell only the owning brewerers products. In an email exchange, researcher Jarrett Dieterle of the R Street Institute said;

“There is no inherent evil in Tied Houses. Tied House fears are anachronistic in today’s economy, which features many examples of producers selling their products directly to consumers without any harm. WE allow Apple to sell their computers in Apple Stores, and many alcohol producers even sell their bottles of alcohol in their tasting rooms.”

The problem in the past 84 years has been the lobbying efforts of giant breweries and wholesaler associations advocating the 3TS status quo. The only brewers active after Prohibition were the corporate giants capable of weathering the drought making other products. These big companies, such as Budweiser and Miller, also had the lobbying power to endorse a system that would keep out competition, thus the mandated use of a middleman under 3TS. Which based on the historic trend in brewery numbers, has done quite well.

It is revealing there was more choice with tied houses per capita before prohibition than any point after and still to this day.

Note:“Breweries/100K people” in blue, is considerably lower than during any point before prohibition, while consumption rates have remained similar or higher before and after prohibition.

Claim No. 3: Consumption rates were incredibly high before Prohibition, and the Three-Tier System controls/ limits the sale of alcohol.

This is “the” case of Bootleggers and Baptists – occasions when one group actually benefits from laws intended to hinder it.

The best part about Claim No. 3 is that it is in complete contradiction to a wholesaler’s business model and claim “[The 3TS] provides the best method for smaller breweries and wineries to get their products into a diverse marketplace.” If this statement were 100% true the law would not be needed. Wholesalers benefit by using government to coerce brewers to use their services by law; meanwhile, temperance groups, oftentimes associated with religious organizations, endorse the 3TS for the sake of limiting the consumption of alcohol. Wholesalers are able to benefit from the temperance claims while distancing themselves to say they are the best way for a brewer to sell their product.

This contradiction aside, perhaps the mandated 3TS does promote large brewery consumption. Using data from the National Institute on Alcohol Abuse and Alcoholism, the highest point of alcohol consumption after 1850 in the U.S. was between 1973 and 1985 – a period that saw the smallest number of breweries per capita than any other time besides Prohibition.

In addition, comparing 18th and 19th century consumption to 20th and 21st century use may be like comparing cider to Orange Belgium Ale. Alcohol was more so socially acceptable because of its necessity for survival. With little to no access to sanitary water, Americans and alongside the world used alcohol to fend off disease. Consumption rates in any area with poor sanitization should be taken with a grain of salt, or, if I may, an ounce of rum.

Final Thoughts

Be on the lookout for additional unsubstantiated claims by the Wholesaler Association advocating for the forced use of their service. These top three arguments of the wholesalers reveal it to be a forced system wrought in cronyism, sustained by lobbyists, and persistent in misleading claims. These unfounded claims need to stop being promulgated as fact.

A system of free choice and association does not necessitate that small brewers win out, but it does ensure consumers receive the value they desire, wholesalers attract business based on the value they provide, and entrepreneurs have equal access to markets free of coercion based on the value they produce.

*Graph information is derived from the NIAAA, Brewers Association, and US Census Data.

Booze Equality for Distillers

Jarrett Dieterle, the governance project fellow with the R Street Institute and a fellow alcohol policy expert, breaks down the issues at hand in future distilling battles. Virginia has some of the most onerous restrictions on distillers than any other state and is stifling the growth of multiple award winning companies by overzealous regulations. When we think of

Virginia has some of the most onerous restrictions on distillers, more so than many other states and is stifling the growth of multiple award winning companies by overzealous regulations. Regulations promoted by special interest lobbies using the law at the expense of the little guy. When we think of whiskey a few big names come to mind, but why won’t we let local entrepreneurs succeed in their own way?

Be sure to check out Jarrett’s recent article Fighting for Booze Equality on ‘Alcohol Alley’