Three Tier Distribution Is Bad?

Image borrowed without permission from Fermentarium

Image borrowed without permission from Fermentarium

With the recent release of “Beer Wars” there seems to be a lot of junk floating around out there about the three tiered distribution system. First off I haven’t seen “Beer Wars”, and I have no desire to see it. Secondly I am not a brewer, distributor, or retailer. So realize that when I talk about the system I’m neither commenting on Beer Wars, nor talking from experience as one of the three tiers. I’m just a lowly consumer who’s spent the day combing through complaints (mostly on wine forums) and doing research on it.

So what is a three tier system and how does it work? The current system comes out of the haydays of alcohol prior to prohibition. Now allot of micro brew enthusiasts will rail on about how great it must have been back in the day when every community had their own brewery. The problem with this is it isn’t true. Well not in the sense that the facts are wrong, but in the sense that it misrepresents the way things were then. The truth was while lack of refrigeration limited the reach of breweries, it didn’t make this utopia situation where the little guy thrived. I won’t get into that except where it has to do with distribution. I will stay focused! Anyway, back then breweries distributed their own beer. Makes sense right? I make my beer, then sell it to the bar, and the bar sells it to you. What could go wrong?

Well alot went wrong. Most people think that people who made alcoholic beverages didn’t really start getting into strong arm tactics until prohibition, but they did, long before. One way breweries did this is similar to the way coal mines operated long ago. In a coal mine you used to rent your home from the company. You also bought all your tools and food, regardless of price, from the company. This was because company money was only good at the company store. Well if you wanted to open a bar or pub back then you went to the brewery. The brewery would help you finance the bar (furniture and the works), and give you beer to sell. In exchange you only sold that breweries beer, and the brewery had control over your bar. You didn’t want to sell the breweries beer then that was fine, they owned the loan on the bar, and you would be replaced. Also in order to retain control of your bar you had to keep the brewery happy. This meant that your sales were supposed to go up, up, and up some more. In order to remain in compitition and increase growth bars had to get your butt in the bar, and they had to get you to drink more, and more beer. Considering this fact, and the overindulgence in alcohol that resulted, it’s not hard to see why many Americans supported temperance. In fact before prohibition many states had decided to dry up on their own because of issues with alcoholism in their communities.

After the 21st amendment was passed to repeal the 18th the ATF went from a police force, to revenue collecting for the government. In order to make it easier to collect taxes, and in order to prevent the abuses that occurred before, they came up with the three tier system. This now meant that the brewery had to sell their beer to a middle man who then sold it to bars, restaurants, and markets. The distributor would also pay the taxes on said beer after purchasing it from the brewery. Another rule was that distributors wouldn’t pimp merchandise from one particular company like the old days. The brewers would pay for all products that were used to get a beer in the hands of a retailer (like samples) and the distributor would only be in charge of shipment. This prevented the person who sold you beer from being able to decide how you run your establishment, or provide incentives for you to carry certain beers.

So under our current system the retailer buys beers from several breweries, then the distributor pays taxes on the beer. Next the distributor goes out and finds establishments that will carry the beer using promotional material payed for by the brewery. The distributor then sells the beer with a mark up to the retailer. The retailer then uses the promotional material that either they bought from the brewery, or were given by the brewery in order to get you to buy the beer at yet another mark up. Did that make sense? Good, because that’s the way it should look in a perfect world. In reality it doesn’t work quite that way, which makes things even messier.  I’ll get around to explaining why this doesn’t work around Monday hopefully since that’s also another lengthy post.

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4 Responses to “Three Tier Distribution Is Bad?”

  1. Zoe says:

    looking forward to the rest of the story..and dose every preson in the prosses of this have to pay tax?

  2. Jared says:

    That’s a good question. From what I’ve read the alcohol specific and transport related taxes are paid by the distributor. Sales taxes and such are paid by the consumer. I’m not sure what the specific taxe situations from state to state are. Carlos could probably give more insight I think.

  3. Charlie says:

    Ugh, I liked! So clear and positively.

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