Is the Three-Tier System Broken?

Posted: June 13, 2011 in Commentary, Government, Stuff about beer

This afternoon, I ran across this YouTube posting from the Mackinac Center for Public Policy, a Michigan-based think tank with a decidedly free-market, somewhat Libertarian bent. Using New Holland Brewing Co. President Brett VanderKamp as its main source, it attempts to make a case against the so-called “Three-Tier System” of alcohol distribution, particularly as it is exercised in the state of Michigan.

As a Virginia retailer and a proud seller of New Holland’s products from Michigan, I’m not sure this explains the problems of the three-tier system very adequately, nor does it address how individual breweries would distribute their products if they were free of the three-tier system. OK, we get the problem of the brewery that wants to sell its products to the store across the street but has to feed them through a system that requires the beer to travel 100 miles to make the across-the-street trip. But that’s apocryphal. Or at least the exception.

For every store “across the street” from the brewery, there are literally hundreds that aren’t. Yes, “literally.” I don’t mean “figuratively” here. How would New Holland propose getting its beers to stores that aren’t across the street? How would they get to Grand Rapids or Detroit or Cleveland or Philadelphia or my store in Alexandria, Va.? Would New Holland and every other brewery each take orders from the hundreds of stores across the country that want their products? Would they employ their own fleet of trucks to deliver directly to each store?

Great. That means that instead of having to place and receive an already-unwieldy 7-10 orders and deliveries a week, I’d be looking at dozens, if not scores, of orders and deliveries from each individual brewery that I carry. Would cost be any cheaper? Would breweries be any more profitable? Would retailers make more money? Would the consumer pay less or get more variety? My guess is that if the three-tier system was smashed, it would quickly re-form like the amorphous blob it is. Like-minded breweries would for distribution systems, or they would hire new (or old) distributors whose expertise is … distribution.

I’m no great fan of the current three-tier system and the 51-or-so different iterations of it that exist in the U.S. I’m open to hearing alternatives. But just trashing the system without offering alternatives isn’t helpful. It makes as much sense as suggesting that taxes are too high and if we just cut them everything would be great. Pay no attention to that elephant in the corner telling us that fewer taxes means less funding, which means fewer government programs and necessary cuts. It’s just dishonest.

Perhaps the big argument with the three-tier system (at least as I understand it) is that most states require breweries to shackle themselves to one distributor in a given jurisdiction, then giving the distributors total control over distribution of that brewery’s products with little or no recourse for the brewery if the distributor doesn’t hold up its end of the bargain. Witness what Larry Bell and the Kalamazoo Brewing Co./Bell’s Brewery went through a few years ago when they had a disagreement with their Chicagoland distributor. His solution was unique, to say the least. But while it’s probably not feasible for every wronged brewery to do what Bell did, it points out the flaws that need to be fixed.

Non-alcoholic food stuffs can have multiple distributors in a given area. Different distributors give different levels of service, different pricing structures and other issues that give both suppliers and retailers options. Suppliers can (I assume) move from distributor to distributor more freely than can breweries under current rules. Retailer can choose which distributors give them the best deals for their circumstances. Understandably, distributors would want more stable relationships than to allow breweries to break allegiances on a whim, but that could be handled contractually rather than allowing local law to give distributors an iron-clad upper hand.

The endgame, I would hope, is to provide breweries, retailers and, ultimately, consumers, more choices as better prices, while still having robust avenues of distribution. The three-tier system doesn’t need to be eradicated, but it needs to be made fairer for everyone involved.


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