The Five Necessary Reforms to the American Alcohol Industry

The economic upside of enacting these reforms is so huge it's actually hard to calculate

The alcohol industry is broken. Put a better way, the industry’s ability to innovate, excite consumers and reach consumers is hampered in a way no other industry is hampered. The problem is simple. Archaic laws governing the distribution of alcohol are relics of a time and people that no longer exists. These archaic laws were once meant to deter abusive industry practices that led to immoderate consumption. Today, these same laws and regulations serve no other purpose than to protect the economic interests of a few, large wholesalers.

A complete overhaul of the alcohol industry law is necessary. Thankfully, there really is no debate over what kind of reform is necessary to assure the American alcohol industry is the most vibrant, profitable, and consumer-friendly on the planet.

Here’s what’s necessary:

1-ABOLISH THE STATE-MANDATED USE OF WHOLESALERS
This is exactly what it sounds like: the dismantling of the three-tier system. That system amounts to two specific regulations 1) separate licensing of producers, wholesalers and retailers and 2) requirements that producers sell to wholesalers who, in turn, are the only entity that sells to a state’s retailers. Just imagine the kind of transformation that would occur in states that allowed producers located anywhere to sell and distribute their products directly to retailers and restaurants. The expansion of products in that state (particularly craft and artisan products) would explode in number, making consumers very happy. Imagine the innovation this simple reform would bring to the producer sector as well as the sales process and logistics. Finally, imagine if wholesalers, particularly the largest in any give state, were actually required to compete in a free market. This reform alone would cause a revolution in the American alcoholic beverage industry.

2-ABOLISHMENT OF FRANCHISE LAWS
Franchise laws, which tie producers to a state wholesaler indefinitely and with no recourse for the producer who sees the wholesalers ignore them continually fail to meet sales goals, are invitations to laziness and intimidation. When a producer cannot threaten to leave a wholesaler for another if the wholesaler does not perform better, you have the kind of imbalance of power that simply cannot exist in any other industry where private contracts rather than state-imposed life sentences are the norm. The abolishment of state-mandated Franchises in the distribution realm would require wholesalers to negotiate with producers, rather than impose upon producers ridiculous one-sided inventory purchase prices. It would require wholesalers to actually pay attention to the producers they represent since they know they would lose that producer if they don’t perform. Producers, particularly the small and medium-sized producers, would receive more than the shoddy execution they currently receive. More importantly, the abolishment of Franchise rules would go a long way toward restoring a genuine balance of power in a number of states.

3-LEGAL INTERSTATE SHIPMENT FOR RETAILERS
This is the reform that would finally put consumers in charge. States that do not allow consumers to receive alcohol shipments from out-of-state retailers put the vast majority of alcohol products out of reach of those consumers. A state’s wholesale tier, which provides the inventory for its retailers, never represents more than a small minority of the products actually available in the national marketplace, meaning consumers only have access to a small minority of the products (particularly the craft and artisan spirits, wine and beers) in the national marketplace. Instituting this kind of reform would 1) be a catalyst for consumers and 2) provide America’s retailers with a means of fighting back against any large or intimidating online retailers that attempt to monopolize the online retail alcohol marketplace.

4-LEGAL INTERSTATE SHIPMENT FOR ALL ALCOHOL PRODUCERS
Today, given the example set by the wine industry, there is no justification for states to bar the shipment of any legal alcohol into their states, be it wine, beer or spirits. In fact, distribution of beer and spirits via producer shipment is far less likely to arrive in minors’ hands than distribution via brick and mortar sales. The only reason most state currently bar the direct-to-consumer shipment of beer and spirits into their states is to protect wholesalers and retailers who have the political clout and political campaign contribution funds to convince lawmakers to protect them from competition. Yet, imagine the expansion of small and medium-sized producers that would result if they could build their own markets and customers rather than relying purely on selling out of their premises or relying on wholesalers.

5-DISMANTLE STATE-CONTROLLED WHOLESALING AND RETAILING OF ALCOHOL
The justification for a state to control either the wholesaling or retailing of alcohol simply does not exist today. Those few states that engage in form of alcohol regulation (“Control States”) are far more likely to do a very bad job of distribution and retailing products. Moreover, they are more likely to provide their shoddy service with the help of laws that block consumers from accessing the wide and growing number of craft products produced across the country. Dismantling the archaic control state method of alcohol distribution and sales would lead to an explosion of innovation and entrepreneurship in those states that dump this relic of the early 20th century and put commerce in the hands of those that understand marketplaces and modern consumers: private individuals.

The downside to enacting any or all of these reforms is non-existent. Enacting these reforms would not lead to more problem drinking. It would not lead to less choice for consumers. It would not lead to less revenue for states. The only thing it would lead to is dismantling the current unjustified and unearned stranglehold that the largest alcohol wholesalers currently possess over the rest of the American alcohol industry. Economic expansion requires bold, ingenious, curious, and determined entrepreneurs who are willing to risk capital, time, and reputation in pursuit of a new idea. Those alcohol regulations listed above as ready for demolishment only diminish entrepreneurial pursuit and limit the potential of the American alcohol industry.