Survey Says....No More Three-Tier System
The results of my reader survey render interesting conclusions (and some problems)
The beating heart of the state alcohol regulatory systems is the legal requirement in most states that suppliers only sell to wholesalers, who are the only entity that can sell to retailers. This middleman mandate, along with the separate licensing and privileges of retailers, wholesalers and producers, is the essence of the three-tier system. Why am I not surprised that a large chunk of folks in the industry believe this middleman mandate must go away?
Last week I asked my readers to take a very short survey. A bit over 200 or you did so. A central question in that survey was Which one of the following do you believe is the most needed reform to the alcohol regulatory systems? Here are the results:
More than 50% of respondents chose Allowing Producers to Self-Distribute Both In-State and Out-of-State. This is a controversial position to take, as it is a fundamental dismantling of the beating heart of the three-tier system. Allowing retailers and restaurants in a state to freely buy inventory from out-of-state suppliers is a knife to the heart of the three-tier system. It is a negation of the middleman mandate. And it’s the right thing to do. Moreover, it is the necessary thing to do.
There are a few states that already allow this. Washington famously allowed it after a lawsuit by Costco challenged that state’s law that allowed its retailers to buy from in-state producers, but not from out-of-state producers. Iowa’s retailers, too, may buy from in-state and out-of-state producers after another lawsuit challenged the in-state-producer-only-purchase law.
In 2023, Oregon also began to allow its retailers to buy from out-of-state producers after settling a lawsuit challenging its in-state producer-only purchase law.
Illinois allows small out-of-state producers to sell a small amount of wine to Illinois retailers.
Altogether, 14 states allow out-of-state wineries to self-distribute their wines to retailers and restaurants in the state. However, most states impose significant restrictions on the out-of-state wineries, such as requiring that they only deliver with their own vehicles or restricting the production size of the winery that may ship or restricting the amount of wine that may be self-distributed to the state’s retailers and restaurants in a year.
That 55% of respondents to my short survey identified lifting the restrictions on winery self-distribution tells me that either 1) my readers tend to have a similar philosophy as I have been touting for a long time, or 2) the desire to end the reign of three-tier terroir is fairly widespread in the industry, or at least among non-wholesalers.
The other issue I wanted to get at with the survey was views on the long-term health of the three separate tiers. To get at this, I asked the following question: If you were entering the wine industry today and looking for a lifelong career making a good living, which of the following sectors of the industry would you choose to work in?
The problem with this question is that responses might reflect as much of a bias among respondents for a particular sector of the industry as it does their views on the future of the various sectors. Nevertheless, no particular sector of the wine industry ran away with it as Self-Distribution did in the earlier survey question. Wine Production and Distribution were nearly even with 35% and 31% respectively.
Clearly, these results do not indicate a “I just want to say one word to you….Plastics” moment among respondents. And I’m hesitant to even try to interpret them in any meaningful way. I’ll only note this: I’m very surprised that “retail” did not have more votes among respondents.
Finally, I have to cop to messing up the following survey question:
Looking at the results of this survey question, I realized that The Economy, The High Price of Wine, The Three-Tier System, and Tariffs all have helped Reduce Overall Alcohol Consumption. So, of course, Reduced Overall Wine Consumption would be the overwhelming choice to the question of what are the greatest challenges impacting wine right now. A much better question would have been something like, Which of the following factors do you believe are most responsible for decreasing overall wine consumption right now.
Had I realized this was the better approach, I would have listed the following options for responses:
1. Inflation
2. Health Concerns
3. Anti-Alcohol Messaging
4. GLP-1 Drugs
5. Consequences of the Transition to Digital Lifestyles
What’s clear is that sometime down the road, I should do a demographics survey of my subscribers. I am nearly at 5,000 subscribers. The Survey tells me that 70% of you work in the Wine Industry, while the overwhelming majority are 50 years of age or older. However, I don’t know the breakdown of my readership by gender, what part of the industry you work in, how long you have been in the industry, how much alcohol you consume, or where you live. I have my hunches. But still, it would be good to know.
As I said in the post that launched the survey, I love both polls and surveys. One thing that would be very interesting to do is a quarterly survey of readers where the same questions are posed with the goal of trying to determine industry sentiment. If my readership were broad enough across the tiers, this might be a revealing metric for my readers.
For those of you who took the survey, thank you very much. I’m grateful.
By Tom Wark
Wark is the publisher of Fermentation, a source of commentary on the wine business that he has pursued since 2004. He is also the publisher of THE SPILL, a free, daily newsletter that curates the best consumer wine content on the web.
Tom,
I don’t read your blog much, but it uncovers a certain lack of fundamental understanding of the actual business of selling alcohol and what implications the three-tier system create at a high level. First & foremost, the three-tier system is the foundation of the many anti-trust provisions that selling any intoxicant requires and they are fundamental to both alcohol an it’s soon to be biggest competitor THC beverage. Vertical integration, hyper competition, consolidations, then a race to the bottom on price were the economic reasons that caused the social problems (and a handful of other factors) that led to Prohibition in 1919. Your suggestion that somehow removing the wholesaler as a “mandatory middleman” would suddenly make wineries profitable is at least laughable, at most terrifying.
The idea of deregulation of wine by removing the three-tier mandate and the accompanying Trade Practice Rule would essentially hand over the entire wine selling industry to its two biggest competitors and eliminate competition within 5 to 7 years. Companies like Constellation & Gallo would simply pay retailers to only stock their wines by contract and allocate the shelf space accordingly (eliminating the need for a physical sales person ie your audience). Independent winemakers & wholesalers would be financially locked out of major retailers like Walmart and Costco and consumer choices would be eliminated essentially commoditizing the category. Without regulation, WalMart & others could potentially use alcohol as a loss leader to eliminate small & independent retailers through currently prohibited trade practices like consignment sales, exclusive outlets, tied houses, & commercial bribery.
All that being said, States have a responsibility to serve the brick and mortar licensed retailers that operate the mandatory age verification system that all 50 states enjoin and treat them all the same. These retailers, whom often see aggressive law enforcement, are threatened by the Direct to Consumer models lack of reliable and cost effective age gates compounded by the high cost of inventory carrying costs. The Cash Only nature of the business in itself is an anti-trust component because it levels the playing field between large & small producers. Otherwise, large producers would simply offer consignment or lengthy credit terms to drive competitors out of major retailers.
On the other hand, major retailers would most certainly have to pick & choose partners in the event the self distribution model you propose would move forward. They may want your product, but they don’t want your delivery.
States would certainly have something to say about who operates at wholesale in the state. So some sort of state level license would be necessary unless it went through the retailers supply chain. Also remove any investment or field marketing contribution wholesalers and add the full cost to the manufacturers P&L.
By the way, the nirvana of free competition is being played out in real time in the cannabis industry and it’s not pretty. Because of its federal illegality and lack of a state and federal tax & regulation framework, the industry is overheating. Michigan is a great example: no anti-trust, no price supports for tax purposes, no mandatory minimums or trade practice rules has led to a massive tax increase by the state to slow the industry down before it burns off half the legal sellers and illicit market proliferation.
Nobody wants that.
Nobody capable of critical thinking wants the three-tier system to disappear.
Agreed, abolish the whole system and reclassify alcohol as a schedule I drug.