The Three-Tier System aka The Third Wheel

 The Three-Tier System aka The Third Wheel

  Today, I thought it might be thrilling to learn a little more about the business side of beer by covering the infamous three-tier system.  The three-tier system describes a ubiquitous piece of state legislation that requires all sales of beer and other alcohol to go through a distributor/wholesaler before ending up in an off-site (package store, grocery store etc.) or on-site (bar or restaurant) retailer.  Under the three-tier system, the journey of your 6-pack is as follows:

Brewery- - - -> Distributor/Wholesaler- - - - ->Retailer- - - - ->You

Note: If your beer is foreign, "Importer" would be the next step after the brewery.

At each step, the price of the beer is marked up to satisfy each level's desired profit margin.  On top of applicable taxes, by the time you pick up your favorite brew, there have been up to three (if imported) price additions.

Break it up You Two
So why do most states have this law?  In the fun era before Prohibition, breweries had an enormous impact on retailers.  Not only did most of them own financial stakes in local watering holes, they also provided bars hardware, furniture, taps, etc. in exchange for exclusivity deals.  The more beer the bar could sell (and the drunker the patrons became) the better for the brewery and the more rewards the bar received.  As you can imagine this retailer/brewery symbiotic relationship rubbed followers of the Temperance Movement the wrong way (and really, what didn't?).  Upon the glorious repeal of the 18th Amendment via the 21st Amendment, states, which were now given the authority to regulate their own alcohol sales, adopted the three-tier system in an attempt to break up producers' influence on bars.  To stop a brewery from getting too cozy with a retailer, the three-tier system adds an awkward third wheel to the relationship in the form of the distributor.

Distributors were jealous of the steamy relationship breweries and retailers had

Because of the laws, breweries cannot directly sell any of their products to retailers or consumers.  However, they can give away their products for free to consumers.  I'm sure many of you have gone to brewery tours and "bought" beer fresh from the source.  However, that pint glass with your "free" samples is what you actually purchased.  The beer was just a free thank you gift "nudge-nudge, know-whatta-mean, know-whatta-mean?"

"That beer was free? I bet it was, I bet it was. Say no more, say no more."

 


The Courting
When a new brewery hits a market for the first time, one of the most important decision their leadership will make is which distributor they want to represent them.  A distributor provides a cooled warehouse and trucks to store and distribute a brewery's beer to hundreds of retailers in a state.  They also  directly communicate with retailers and can heavily influence what and how much a restaurant, package store, bar, or super market sells.  Distributor companies vary from state to state, and a brewery must choose a different one for each market.  When a brewery wants to debut in a market, distributors will battle each other in attempt to court the brewery.  How much time and resources these gentlemen-callers will spend marketing and pushing a beer to retailers is a key consideration for the producer.  Once a brewery chooses their suitor, the lucky distributor reps all of the producer's different labels to retailers.  It's extremely difficult and costly for breweries to change distributors midway, which adds even more importance to the initial selection. 

On the distributor's side, it's of the utmost importance to choose breweries with eclectic and, more importantly, good products.  A distributor only has so much warehouse space, so they're none too pleased when they have shelves full of  products they can't sell. 

Let's Distribute! (But how?)
1) Distribute (duh)- Distributors deliver their brands from the warehouse to all the many retailers across the state.

2) Rep and Promote- In addition to brewery reps, a label is also promoted (or neglected if a brewery chooses poorly) by the distributor. Good distributors also have in place strong relationships with retailers.  A simple recommendation from a distributor to a pal of his at a package store could get your beer on the shelve.

3) Service- Distributors directly deal with taking and filling the retailer's orders and requesting more barrels or cases from the brewery to meet the local market's demand.  They, with the help of brewery reps, also ensure customer service and suggest retail pricing.  In addition, distributors provide maintenance teams to service keg systems or other hardware issues a retailer may be experiencing.  Not selling beer due to a system malfunction is a huge no-no that distributors and breweries never want to happen. 

I know that wasn't the most exciting topic, but it's a fairly important one with regards to knowing how the beer industry works, and as we all know, knowing is half the battle!!

"You kids want to buy some beer?"