Singing the Praises of the Three-Tier System
Liquor attorney Rob Tobassien talks to Liza B. Zimmerman about the ups and downs of the three-tier liquor model.
Interview by Liza B. Zimmerman
September 17, 2018
Robert Tobiassen is legal consultant based in Virginia. He spent 34 years working for the federal service with regulatory, taxation and administrative and judicial enforcement experience within the domestic and global alcohol industry.
He was chief counsel at the Alcohol and Tobacco Tax and Trade Bureau (TTB), US Treasury Department, from 2003 to 2012. He holds degrees in political science from the University of California, Berkeley; a J.D. from the Lewis and Clark College, Portland, Oregon; and a LLM in Taxation from the Georgetown University Law Center, Washington, DC. He also received the 2012 Distinguished Service Award from the Secretary of the Treasury.
It is fascinating to understand what the TTB’s former chief council thinks works best long-term about the three-tier system. All responses have been edited and condensed for clarity.
Do you think the three-tier system really balances interests and effectively distributes wine and spirits products at a fair price?
Yes. It provides an orderly distribution system throughout the United States whereby wineries, breweries and distilleries can make their products available to consumers. It respects the concurrent jurisdiction of both the federal and state governments.
It provides a “closed, distribution system,” under which the federal government can prevent unlawful and illicit products from entering the channels of commerce and ensure collection of the taxes. It gives state governments solid, local controls over the distribution of alcohol beverages within their borders in a manner that reflects the culture and public policies of the consumers in their home states, as well as facilitates the collection of taxes. This is consistent with the philosophical underpinnings of the 21st Amendment which repealed Prohibition in 1933.
Around 34 percent of adults in the United States are complete abstainers and many have strong views about the presence of – and methods of access to – alcoholic beverages in their communities. Within the bounds of constitutional protections and limitations, the 21st Amendment recognized the importance – in the alcohol arena – of local and community values both those cultural and political.
Is the distribution system we have as a legacy of Prohibition? If so why and how?
The three-tier system is, in part, a legacy of the Prohibition experience in the United States and – in part – the reality of the United States marketplace at the time of Repeal. People may tire of hearing about the “social evils” that took the nation down the road to Prohibition and those people may consider them antiquated notions of a past age or era. Yet at the end of the 19th Century and start of the 20th, there were very valid public policy concerns that the existing alcohol distribution system that resulted in excessive alcohol beverages being “pushed” on consumers by the upper tiers of the industry.
The failure of the Prohibition experiment clearly showed that regulated access to alcohol beverages – rather than no legal access – was clearly the better social policy. The individual States then set up a distribution system of three independent tiers that acts as a checks and balance against each other. The federal government did not set up the three-tier system; rather, the federal regulatory approach reflects the fact of the three-tier system as established by the States.
Yes, there is a price tag to the third-tier system in the context of economics but sometimes public policy dictates the more expensive solution.
The reality of the nation-wide marketplace also required a business tier of local distributors because wineries and distilleries, in particular, were local and regional in their production operations and hence needed a web of wholesalers in other markets to sell their products to the local retailers.
What would the US spirits and wine sales market look like without it?
It would be chaos for retailers if they had to deal with sales contacts by each producing industry member. According to the TTB Annual Report for Fiscal Year 2017, there were 8949 breweries; 13,107 wine production and storage facilities; and 2982 distilleries, the bulk of which are small. So there are an enormous number of brand names and product types out there competing for retailer and consumer attention.
Are more products actually available as a result of the use of the three-tier system in the United States?
The range of available products is a result of the decisions of the producers and importers. A wide range of products is available to consumers because of the three-tier system.
Do they cost more bottom line?
While the price to consumers is probably higher as a result of the distribution costs inherent in the three-tier system, this is the result of a public policy decision recognizing that alcohol beverages are different than many other commodities due to their potential for social harm and public health risks. So the lowest possible price is not always the benchmark goal.
Supreme Court Justice Ruth Bader Ginsburg said about alcohol and the alcohol industry that, “Both its historic association with corruption and the general belief that cheap and plentiful alcohol is not an unmitigated social good [as opposed, say, to cheap and plentiful heating oil or shoes] suggest that the alcohol industry requires special oversight and regulation.”
Would smaller producers actually benefit in terms of both cost and volume if they were able to distribute their own product themselves?
They might benefit in their local community market but the investment costs in trying to distribute to retailers nationwide would be enormous in the long run. They also would include not only the cost of the infrastructure but also that of identifying and getting the attention of the retailers in distant markets.
Do you think the jobs supported by the wholesale tier justify potential cost increases for bottom-line products?
Jobs are always important to the community but their existence alone is not a reason to justify a business. Nevertheless, it cannot be discounted that the middle tier of the three-tier system does employ a large number of people and contributes financially to many community charitable efforts. It is a good neighbor.
How has the wholesale tier kept problematic wines and spirits off the market?
It depends what you mean by “problematic” products. If “problematic” products are adulterated, counterfeit, surrogate alcohol and fake alcohol, then “yes” the regulated wholesale tier has helped keep these types of products from entering the lawful channels of commerce in the United States.
Do the Tied House laws – which prohibit wine and spirit production and sales entities from exerting undue influence over retailers – work anymore? Or should everyone be able to distribute liquor, as the Berkshire Hathaway-owned McLane would like to do in Texas?
Tied house laws are designed to prevent a producer, importer, or wholesaler from unduly influencing the brand purchasing decisions of a retailer. They are based on the notion that a retailer’s decision on what brands to purchase should be based on a “pull” by consumer demand and not by a “push” from the upstream tiers of the industry.
These laws are pro-competitive because they support the approach that quality and price are what sells the product and not some other artificially created demand or pressure on retailers.
How do you make sense of laws that allow wineries to ship into the bulk of the states but do not allow retailers to do the same thing? What are the laws protecting the consumer from?
When the system was created retailers were intended to be locally monitored and weren’t involved in interstate wine and spirits sales. Wineries were initially allowed to ship over state lines as many smaller ones could not find wholesalers who would handle their products either because the winery could not guarantee a sufficient and constant supply and inventory or because there are simply too many SKUs for the wholesaler to fit more into its offerings to retailers.
This rationale has no application to retailers selling to consumers in other states. Alcohol beverage retailers are local in nature, even if they bear the name of a larger corporation like Total Wine & More or BevMo or Walmart.
Or are large chains ready to destroy independent retail as we currently know it by opening in almost every state and supposedly attracting customers to discount products that risk running smaller retailers out of business?
This reflects the reality of “big box stores” across the commodity lines and is not unique to the alcohol industry. What perhaps is unique, however, is whether a “big box store” is benefiting from an arrangement with an alcohol industry member that might run afoul of an unfair trade practice law or regulation.
Do you think the wholesaler is providing the US consumer with a larger or smaller selection of wine?
Clearly the three-tier system is providing a wide-range of choice of products for consumers.
If wineries were better able to self-distribute would it be harder or easier for them to pick up sales in more markets?
Larger wineries would be better able to accomplish this than small wineries. Bottom line, setting up a distribution scheme can be expensive if it is to be effective.