How a beer gets to you: Clarifying the three-tier system | Beer Hopping | Indy Week

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How a beer gets to you: Clarifying the three-tier system



Pliny the Elder, a double IPA, is the best beer in America for the third consecutive year, according to a readers' poll in Zymurgy, a magazine for home brewers. Sadly for North Carolina beer lovers, it's not available here. Neither is Deschutes' The Abyss or New Glarus' Belgian Red, which appear on the list of winners.

If these acclaimed products were, say, hot sauces instead of beers, an enthusiast who wanted to taste them could probably order a case to be shipped directly from the producer. Not so with beer. This is about alcohol, a substance that is as tightly regulated in this country as any legal product can be.

Layers of legislation, most of it invisible to the consumer, stand between the brewery and you. Most were enacted in 1933, once the U.S. emerged from the 13-year mess that was National Prohibition. The 21st Amendment allowed once again the manufacture, sale and transportation of "intoxicating liquors." It also had the effect of giving the states the authority to regulate alcoholic beverages.

Most states mandated a system requiring that alcohol pass through three separate tiers: the first tier being the supplier who makes the beverage; the second being the wholesaler who distributes it; and the third being the retailer who sells it to the public in a store, restaurant or bar. It has become known as the "three-tier system."

There are exceptions. North Carolina has a three-tier system for wine and beer, but it is a "control state" when it comes to spirits, with the state acting as both distributor and retailer via our drab ABC stores.

Individual states have also written legislation to accommodate brewpubs, which, in many respects, belong to all three tiers. A brewpub makes its own beer, may make it available to other retailers and also sells it directly to the consumer. This is why specific legislation had to be enacted to allow brewpubs to operate.

Many states also allow smaller breweries to avoid the expense added at the wholesaler tier by letting them "self-distribute," delivering their own beer to retail outlets. Other exceptions have been made to allow, with limits, the shipment of beer or wine directly from the producer to the consumer.

The three-tier system, with its perplexing variations from state to state, is a uniquely American institution. Readers who have visited Europe will recall taverns and pubs that are "tied houses": properties that are owned by the brewery. That was the case in the U.S. before Prohibition. Breweries owned taverns outright, or sold directly to taverns, a cozy connection that was perceived to be vulnerable to abuse.

Initially, the purpose of creating a wholesaler tier after Prohibition was to build a buffer between suppliers and retailers, so the former couldn't unduly influence the latter.

However, what has emerged is a much broader role for wholesalers. They bear most of the responsibility and expense for beer freshness. They ensure that adequate stocks are maintained and offer retailers a wide selection of brands. Without wholesalers, most small breweries could never afford to distribute as widely as they do.

But the relationship among the three tiers isn't always smooth. They share an ultimate goal—to see beer in the glass of a satisfied, paying customer—but for purely structural reasons, brewers, wholesalers and retailers occasionally find themselves in conflict. All three tiers use lobbying muscle and influence to tilt things their way. Some disputes play out in legislatures and courts at the local and federal level, often to the bafflement of consumers.

Imagine, for example, the vulnerability of a wholesaler who takes on a new beer and devotes expense and staff time to establishing it in the local market, only to see the brand yanked away by the brewery and placed in the hands of a larger competitor. That threat led wholesalers to demand legal safeguards to make it hard for a brewery to get out of a distribution contract, and a guarantee of exclusive territories for the brands.

Then imagine the brewer's nightmare. He places his brand with a distributor, only to realize that the distributor's main goal was to capture the brand and remove it from competition with more established beers in the distributor's portfolio. The new beer will receive little support, and the contract is nigh unbreakable. And no other distributor is allowed to take up the brand.

Or picture a big-box retailer whose distribution network is vastly larger and more efficient than that of the relatively small local distributor the retailer is legally obligated to deal with. Wouldn't it be easier if laws allowed a retailer of this size to bypass the second tier altogether, and deal directly with the brewery?

Consumers are promised free markets, wider choices, lower prices or respect for local values, depending on whom they listen to. And all they want, somehow, is a chance to purchase what is currently the best beer in America.

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