7.2: The USA’s Three Tier System Flashcards
What is the Volstead Act?
Between 1919 and 1933, the Volstead Act prohibited the production, sale and consumption of alcohol in the USA (with the exception of wine to be used for religious purposes)
At a high level, why was the ‘Three Tier System’ introduced?
- To prevent a return to the pre-prohibition ‘saloon’ days of gambling, prostitution, crime and drunkenness
- Many saloons were in effect tied houses, required to buy all products sold from a particular brewer or distiller
With the ‘Three Tier System,’ what is avoided? What is the effect on prices?
- prevent direct sales from the producer/supplier to the retailer
- avoids producer monopolies
- increase prices
What are the three tiers?
- Producer/Importer
- Distributor (including wholesalers, brokers)
- Off Premises Retailer (e.g. supermarkets, wine specialists) or On Premises Retailer (e.g. bars, restaurants)
Can a retailer also be a producer/importer or distributor?
Laws generally limit or completely prohibit cross ownership between most retailers and the upper two tiers
Can the producer be an importer? If so, give an example.
Yes
- e.g. E&J Gallo
Can the producer be a wholesaler? If so, give an example.
No
Can the wholesaler be an importer? If so, give an example.
Yes
- e.g. Republic National Distributing Company
Why do many states have very different alcohol laws? Give some examples of the differences.
- after the repeal of Prohibition in 1933, the government passes control to the states
- some states remained ‘dry’ (manufacture, distribution and sale of alcohol prohibited or tightly restricted at county level)
- some states established state alcohol monopolies
What is one strength of the three-tier-system?
- distributors specialise in logistical efficiency
- the largest distributors service huge areas of the country
- provide trained sales force and marketing materials
- provide a producer with exposure that would otherwise be extremely costly
What is one challenge of the three-tier-system?
- consolidation
- In the last two decades, the number of distributors has decreased by ~2/3
- the number of US wineries seeking entry to the market has increased by a factor of five
How does the three-tier-system affect smaller producers?
- may find their products lost among the massive portfolio of brands held by major distributors
- distributor reduces producer’s control over the marketing and business-to-business selling of the product
- can seek out smaller specialist distributors that may be better equipped to sell low-volume, boutique brands
Why are conglomerates attractive under the system?
- conglomerate provides attractive array of products for a large distributor
- large distributor needs only to deal with one large company to gain a range of desirable brands that need limited hand-selling
- the multiple retailer can provide a range of products for their customers whilst only dealing with one or two large distributors
What is the downside of working with a smaller specialist distributor?
- tend to be more limited in their scope, without coverage across so many states
- distribution contracts can be hard to break (so even if the producer feels they are not well presented by a distributor, they may not be able to be distributed by someone else)
What has consolidation stimulated? What regulation changes has this lead to?
- activity in the direct-to-consumer category (both shipping to consumers and cellar door sales)
- gradually, state by state, restrictions are being loosened
