On the Value of the 3 Tier System

Most of the alcoholic beverages sold in the US are distributed through what is called the “3 tier system”.  Simply put, this means that there are separate business entities that manufacture the products (suppliers), take the products to the market (distributors), and sell the products to consumers (retailers).  This system (legally mandated in most areas of the country) is certainly far from perfect, but it has been for the most part extremely effective in developing and maintaining the great diversity of beverage products available to the consumer.

Recently the 3 tier system has been under attack by various interests – either by large retailers who want to bypass the distributors and buy direct  (eliminating the distributor margin and improving their profit margin and price competitiveness) or by consumers who wish to purchase direct via the internet (usually high end wine not normally available in their market).  While at first pass these incursions against the 3 tier system seem innocent enough, there are potentially some unintended consequences which could have far reaching negative effects on consumers.

For example, in my opinion, if large beer (or wine) manufacturers are able to sell direct to the large retailers of the world (Walmart/Costco), it is my opinion that they have enough economic clout to push the smaller suppliers (who would be forced to still deal thru a distributor) right off the shelf.  The consumer might see slightly lower prices, but also a much smaller selection of products available. Indeed, it is the very existence of healthy, economically viable SMALL distributors that has made today’s vast array of wines, beers, and spirits available.  Without a healthy middle tier, I think this goes away.

Also, somewhat implied by the above, to maintain variety and price competition in alcoholic beverages ultimately requires the existence of “small” – small suppliers, distributors, and retailers.  If we only have large retailers, large suppliers, and to the extent that they still exist, very large distributors, the focus will be on streamlining operations – getting the most amount of profit from the smallest number of products.  Large suppliers cut deals with large retailers and consumer choice becomes limited to the products the large suppliers want them to have.

We have already seen this scenario present itself in many industries.  The small family owned hardware store is gone, independent restaurants are being pressured by the chains, and retail has changed dramatically with the Walmarts of the world.  I am not smart enough to know whether all this is ultimately good or bad.  But I do feel strongly that in the arena of alcoholic beverages the breadth of variety that today exists is a good thing for the consumer – and that is largely because there are many small suppliers.  And small suppliers generally do better with small distributors who will actually take an interest in making sure these small brands continue to grow and thrive.  So in my opinion, flawed as it may be, the 3 tier system actually does the consumer a favor.  And I for one want to make sure it continues.