Why 3 Tier Doesn’t Work Properly

unbalancedI planned on getting this up this morning, but the sun is out today so I decided to go play on my bike instead, and just upload later.

On Saturday I wrote about how the 3 tier system is built and supposed to function. But as Robert Burns said, “The best laid plans of mice and men, oft go awry.”

The beauty of the 3 tier system is it’s transparency. It’s supposed to eliminate the shady area between the brewer and the retailer by breaking it into basic steps. The problem arises when one of the 3 tiers gains power over the other two. When this happens we’re back to the same corruption we wanted to eliminate.

Back in the days of the big brewers this situation wasn’t as common. If you distributed on a national level you only carried the big beers. Local beers were generally carried by local distributors. The problem is the market has changed, alot. Now there are constantly new beers trying to get shelf space nationally. One thing you often encounter though is that distributors want to carry beers that are easy sales, not necessarily great beers. To compete with this alot of smaller brewers went through smaller distributors. This increased competition between brewers. Another issue is that the distribution networks for the big brewers want to keep their clients happy.

The later issue of keeping BMC happy is one of the interesting ones. Back in the early days of the craft brew industry the big brewers came up with a solution for shutting the little guys out. Since exclusivity contracts where a brewer dictated what you carried were not aloud they decided to offer incentives to distributors that shut the little guys out. This was shady, but perfectly legal, and could have worked. The problem was that as people became interested in craft beer, and public opinion turned against the BMC’s, distributors began to opt out in order to cash in on craft beer. To cope with this the big guys came up with another solution. If you allowed them a decent stake in your company then you got access to their distribution networks. Distributors liked this because they got the perks from the big guys, and they still got to sell craft beer. The problem is now the incentive for distributors to carry the new guys is lessened.

Another issue is what if you have a brew pub? Well according to the 3 tier you have to pay a distributor to legally move your beer from your brew house to the bar. Seem wrong to you too? To overcome this some states have laws that allow brewers to self distribute. The problem comes about when you have a brewery that operates their own pubs. Let’s enter the land of theory real quick. Here in Oregon we have a chain called McMenamin’s. McMenamin’s brewery is located in Portland, but they have breweries and local bars all over Oregon. Now with a self distribute law they could theoretically move beer to all their bars without once paying a distributor. This allows them to sell their beer cheaper at a higher profit. Now what happens to the little guy that wants to get into local bars? He has to go through a distributor while the pub chain doesn’t have to. This raises the price of his beer. Now the local bars that his beer goes to have to compete with a pub that can offer cheaper beer. It is very difficult to preserve the simplicity of the 3 tier system while trying to keep it fair. The more fair it is, the less transparent it becomes.

Remember at the beginning where I alluded that the distributors have power over breweries and retailers? Well here’s where that comes in. While there are laws that prevent distributors from offering incentives to bars this doesn’t always happen. Some distributors have started offering bars things like extra tap lines if the bars will use them as their distributor. While this is illegal it’s sometimes overlooked. This can hurt competition among distributors. Also it doesn’t take imagination to see where distributors who favor breweries can help hamper the competition. This makes distributors some of the most powerful entities in the beer industry. Remember, breweries are required to use distributers.

The biggest issue is one inherent in all things in our country. While the free market isn’t bad when it’s combined with the 3 tier system it makes a difficult situation for brewers. Distributors will inherently carry, and buy more of a beer that sells easy. This is where the selection issueI talked about comes in. With only so much space available for retail distributors won’t be as willing to push your new breweries product while they are carrying known sellers.

This system creates a market that isn’t always friendly to the little guy. So how can the system be improved? Let’s hear some ideas. Should we break it down into more tiers? Less tiers? Get rid of the tiers? Give me some feedback, because I still haven’t thought up a system that’s fair to everyone, and I’m beginning to think it’s impossible.

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2 Responses to “Why 3 Tier Doesn’t Work Properly”

  1. Carlos says:

    We all pay a lot of taxes at each level, about Evenly Spread Out.

    If the consumers relied on the breweries to delivery product to the retailers, there would be many out-of-stocks and back rooms that were backed up from so many vendors making deliveries.

    Also, retailers such as Safeways and Fred Meyers usually cut back on labor, so on a hot weekend beer shelves would be empty due to no one merchandising product out of the backroom. Or, the store employees in charge of ordering don’t order effectively and have out-of-stocks that way as well. It’s been tried before on a small scale and the results were ugly.

    Typically, people arguing against the 3 tier system don’t know anything about the second tier ( the distributor), and due to that mis-understanding, they simply pick on the second tier because it appears to be the easiest from an outsiders perspective.

    This is my understanding of it since my wife works for a distributor and I am around these guys alot and they hear both side because they are in the middle.

    I like the three Tier it make the best sense. Now is it always fair? Is another question in itself, but really when is life fair??

    LOS!

  2. Jared says:

    Hey Carlos,

    I agree that the 3 tier makes the best sense, although the EU doesnt think so. Also I agree that the breweries shouldn’t be in charge of their own distribution. That being said like any system there are holes. My goal in writting the two posts was to explain how it’s supposed to work, and then show the problems that people are complaining about. Like I said though the more fair it gets the more complicated and nightmarish it gets. This second part wasn’t meant to damn distributors but show what the complaints are from brewers. Although I don’t like that brewerys are required to use them by law. I’d be interested in your wifes or any other distributors perspective on the system. I’m sure there could be just as many complaints leveled at the breweries and retailers for the issues they cause. The problem is the distributors aren’t as vocal as everyone else.

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