Why craft brewers and craft beer drinkers should thank the three-tier system

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The following is a guest post from John Conlin of Conlin Beverage Consulting, Inc. Conlin Beverage Consulting offers merger and acquisition expertise and management consulting services for the beer and beverage distribution industry. The company focuses on M&A, operational improvement and driving corporate change.

Since I have a knack for stating the obvious, let me state that craft beers/brewers are the prettiest girl at the dance… and they know it.  My blog has recently been discovered by a number of craft beer and craft brewer web sites… places like the Craft Brewers Association … And Beer News … And Guys Drinking Beer, got to love that name, says it all… and then there is Aleheads

After my Who’s Your Buddy post, I noted a lot of visits from this place called Aleheads.  If you recall my Who’s Your Buddy post suggested that MillerCoors fully embrace the craft beer world, using their strength and “their” distributors to help this market flourish.

I must admit I hadn’t heard of Aleheads before but I don’t generally visit beer geek websites (and I truly say beer geek as a compliment).  But please do go to these sites and you’ll find many more great craft beer sites to visit ….  I went to Aleheads to see what was up and lo and behold there was an article with my lovely picture under the headlineAll Hail the Conlin  It was a pretty good article – with a title like that how could it be anything but?  ;-)

And for beer distributors it is rather insightful on what even dedicated beer fans know (or don’t know) about beer distributors and this industry… I have to admit I sent the link to that article to a few friends and most thought I had written the thing!  It’s the title-thing… my friends know me and my ego.  I have henceforth requested all who communicate with me begin their speech with a hearty “All Hail the Conlin” but have found compliance is very poor, to say the least.

Well back to these craft beer drinkers and brewers.  I communicated with a few of these folks and thought I’d directed a post more to them… to give them at least my take on the history of the beer business and why they have the opportunity to exist.  That last part might have more than a few thinking what does that mean?  Opportunity to exist?  Some probably believe this market opportunity just popped up, like most do, and not the result of an industry structure set up long ago.

Well Sherman, let’s take the Way Back Machine and see what things were like about 100 years ago in this country regarding beer and alcohol.  In a word, things were bad ;-)  Not from a consumption viewpoint, consumption was rocking and rolling.  That was the problem… there were many excesses prior to Prohibition… many.  Ken Burns in his three part piece on Prohibition called this a Nation of Drunkards… you can watch his film on your computer at this link. Pretty good stuff if you can ignore his liberal worldview… I know, I can’t keep off my political soapbox ;-)

Anyhow, prior to Prohibition most bars/taverns were what are called “tied houses”… a tied house was a tavern or bar that was partially or totally owned by the local brewer (pretty much all brewers were local then, and there were A LOT of them).  In a tied house you could only purchase that specific brewer’s products.  Tough luck if you and your buddy liked different beers, you wouldn’t be drinking together at the same tavern… it wasn’t possible.

Competition for customers was fierce and the brewers found owning the individual taverns helped them in their search for customers.  Showing the law of unintended consequences cannot be fought, some cities raised the cost of a liquor license in the hope of stamping out what they considered were too many bars.  This move just pushed the retailers even further in the tied house direction.  This took many forms…they sold to “their” taverns on extended credit terms, provided the equipment and supplies, sometimes charging low or no interest, often paying rebates for pushing their brand or carrying it exclusively.   Or they took the whole enchilada and owned the place outright.  The focus being on maximizing sales… period.  Things like gambling and whore houses on the second floor were initially introduced as draws to sell more product.

Now these tied houses weren’t the only reason for “A Nation of Drunkards”, but they certainly did contribute to the problems… and these problems contributed to that failed experiment call Prohibition.  As it became quite evident that Prohibition was a pretty bad idea, many ideas were considered… the people had clearly spoken and they prefer legal alcohol… but what to do to ensure the pre-prohibition excesses don’t again raise their ugly head?

As a political solution the 21st Amendment to the Constitution was passed.  This amendment repealed Prohibition and also gave states the authority to regulate the production, importation, distribution, sale and consumption of alcohol beverages within their own borders.  Yeah for state’s rights!!

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26 thoughts on “Why craft brewers and craft beer drinkers should thank the three-tier system

  1. I call bullshit (and I’m a proud vocal liberal, can’t get off my soapbox either). What irks me about this same tired argument, which is additionally surprising from a supposed “libertarian” who should be supporting free markets, is that the laws supporting the three tier system are anti-competitive. When Apple decided to open up their very, very successful retail stores, were they handcuffed by anti-competitive three tier laws that tied them into their distributors who were “representing their brand”? Nope. They were free to do so based on any business agreements they had signed with their existing distributors. No big distributor lobbying firms gaming the laws so they could not do so.

    This is about choice, which I believe is one of the pillars of a free market society. As a brewery, if I choose the hard path of dealing with the costs and arduous work of distributing & marketing my own product, like Apple does, then I should be free to do so, no hitches. Most craft breweries don’t have the capital and know how to do self distribution, but they should ALWAYS have the CHOICE.

    I personally feel that distributors USUALLY provide much value to a beer brand, but then again, there are plenty of breweries out there who self distribute and make more money because of it, including Sun King out of Indianapolis who were instrumental in getting the out of date anti-self-distribution protectionist three tier laws changed in Indiana to do so. Someday maybe they’ll decide to go the traditional three tier route, but if not, then they make the best CHOICE for their business model.

    The three tier system is corrupt, protectionist, and outdated. It should be one of many business model CHOICES but shouldn’t be declared law. And if you want to thank anyone in craft beer, thank the craft beer breweries. You know, the ones who are actually taking chances?

  2. Wow, I was really impressed with your article until the last part. Fresh beer? I applaude your efforts to educate us on the benefits of distributors, but many craft beers not only benefit from aging, some actually require it. We beer geeks actively seek out older versions of stouts, barley wines and sours — even some Imperial IPAs. You display your lack of knowledge when you suggest that all craft beers need to be kept fresh. Only the macro brews push “fresh” as a necessity because their beers begin to turn after a mere few months and are downright undrinkable after six months. Please do a little more research next time you want to lecture us.

  3. Let’s all take this time to observe a moment of silence for a departed friend, Sanity.

  4. While I tend to agree with this partially, I fully agree with Gary Gully who advocates the brewer having a choice in the matter. If you look at the history of where craft beer has flourished, it concentrates in the area where both two- and three-tier can be found.

    Also, be aware that tied house laws can and do exist in both two- and three tier systems.

  5. Just more entitlement attitude from the middlemen. While it’s all fine and great that you think distributors are so valuable to brewers and consumers, you don’t really have all that convincing of arguments for your benefit to anyone besides yourselves. The three tier system is an outdated system for dealing with a problem that no longer exists today. It’s wonderful that you think taking advantage of a good business opportunity somehow qualifies distributors as “responsible for emergence of craft beer and improved choices”. This is more coincidence than anything. People are consuming differently than they did 10, 20 years ago. Artisan products are more in demand. It may have taken longer (see the SE), but craft beer would have grown regardless of the 3 tier system (and has in places where 3 tier is absent). This is just more nonsense justifying archaic laws which benefit few. If distributors are so invaluable, Conlin should be all for letting the “Free Market” decide for itself.

  6. Interesting distributor POV of history of the three-tier system.

    I would have liked to have seen a discussion of why tied-houses still exist in many European countries. The tied-house system in the US gave too much control to the breweries pre-prohibition, but post-prohibition a lot of this control was transferred to the distributors.

    While the number of American craft breweries has increased exponentially in the past 20 years, the number of beer distributors remains relatively concentrated. American distributors determine what beer is sold in a particular area and it isn’t always determined by how good a beer is.

    In more and more cases, it’s determined by how much money the brewery gives said distributor. See Chicago Bells fiasco, this recent BeerNews post http://beerpulse.com/2012/02/flying-dog-rep-alleges-millercoors-is-guilty-of-dc-bar-tap-line-payola/, etc.

  7. Craft beer should absolutely be fresh when you get it. Sure, some big beers can benefit from a little aging, but the vast majority are best, and closest to what the brewer intended, when they are fresh, especially the most hop-centric brews. If establishing better relationships with distributors is what keeps tap lines clean and beer in stores freshest, then that’s what needs to happen. If you can self-distribute and keep an eye on that, then go for it. Otherwise, I completely agree with the author on that part of the article. I don’t know how many beers I’ve passed up repeatedly because they are way past their prime according to the date on the bottle. And as for the undated stuff, well, that’s a risk every time to me, so it’s all about brewer reputation at the point. And what is that based on?

  8. “For without the three tier system, those brewers would not exist and therefore neither would their succulent craft beers.”

    This is a false dichotomy, and his insistence and repetition of it undermines the rest of the article. Getting rid of the three-tier system does not necessitate reverting to pre-Prohibition laws. Just as the current system was designed to reduce the problems associated with tied houses, so could a new system be designed to address the flaws in the three-tier system. This is a little thing that is sometimes called “progress.”

  9. Conlin, your conclusion doesn’t follow the premise. a TWO-tier system would be a more logical conclusion for the elimination of tied-houses. This I suspect you know. But hey, you were hired for a different job.

  10. The craft-oriented Brewers Association website at http://www.brewersassociation.org/pages/government-affairs/self-distribution-laws notes that in the majority of states some form of self-distribution is allowed for small or all breweries, yet it’s safe to say that most breweries in those states distribute, at least in part, through “middle tier” wholesalers. Brewers want to be in the business of making beer, not running warehouses and transportation/delivery services.

    In NJ (long a s-d state), which has one of the best selections of craft beers in the nation., a retailer may have to deal with 4-6 beer distributors. Unrealistically ignoring the financial inefficencies of self-distribution, does anyone think that selection would increase if instead of a statewide distributor like Hunterdon http://www.hunterdonbrewing.com/?page_id=19 carrying the many brands over 50 domestic breweries, there were 50 different vans running around the state? Instead of one bill and one weekly delivery of 10 cases up to a pallet or two of craft beers that retailers would want 50 bills and 50 different deliveries all week long of 2-10 cases at a time?

  11. Similar comment regarding false conclusion. Three tier system hurts breweries, it’s well known that Budweiser owns half the distribution trucks and refuses to deliver anything not from AB-Inbev. That is flat-out anti-competitive and interests nobody but AB-Inbev. Similarly, the beer distributors are one of the largest lobbyists in Congress. Why do you think they constantly need to remind the politicians, with fat wads of cash, just how great of a system it is? What if they were forced to prove that on its own merits?

  12. @jesskidden. “Brewers want to be in the business of making beer, not running warehouses and transportation/delivery services”. Maybe so, but the choice should be up to brewers themselves, not mandated by Prohibition-era laws created for other purposes. For some breweries, especially smaller ones, self-distribution can make more sense paying a middleman.

  13. False dichotomy. This is like saying the Roman Empire was simply too big to ever fall. Complete nonsense.

  14. You make no sense, the three tiered system gets taken advantage of by the mega brewers ie, miller/coors and anheuser busch. They use their millions of dollars to make sure that most craft brewers stay local and cant expand out of their home state. It makes it near impossible for a craft brewer to get their name out there because of the restrictions on how much they are able to brew and sell on site, brew too much and you have to go through a distribution process. Luckily some craft brewers have found a way around this by creating their own distribution centers. Two Brothers owns Windy city distribution as one example. If prohibition never happened I’m sure the free market system would have evolved into what it is today minus the need for a middle man to get your beer into the hands of your customers.

  15. A major underlying assumption of this piece is that major brewers of the scale we are familar with today would have emergeded without the three tier system. Prior to the emergence of the three tiered system brewers were much more concerned with vertical integration all the way up the supply chain. The end result were tied houses.

    Would this trend have continued without the three tier system? Advancements in refrigeration, transportations, and national media might have created the sort of large ubiquitous brands we know today without the three tier system. It also possible that vertical integration may have positioned others brewers to be able to compete on a smaller more local level thereby stunting the growth of larger brands.

    Maybe without the three tier system many more breweries and beer styles would have flourished. In this scenario there would have never been a need for craft beer revival since a wide selection of an array of styles would have never ceased to exist.

  16. Conlin’s main premise is flawed. The three-tier system was not necessary to end the practice of tied houses, yet he explains that it was a ban on tied houses that allowed craft beer to flourish. So how, exactly, can he point to the three-tier system as the reason craft beer exists today?

    Also, in this editorial setting, considering his audience, Conlin should avoid emoticons if he wants his argument to be taken seriously.

  17. I fail to see how the destruction of the laws forcibly upholding the three tier system would suddenly end distributors and send us spiraling 100 years backwards. I think distributors would still exist, still be very powerful and the benefits posited in this article provided by a large distributor with connections nationwide would still very much exist. The relaxing or restructuring of these laws would simply provide an option for manufacturers that want to eliminate the middle man. I still believe the middle man would be in a very convincing position to remain an option for brewers. I do not believe most producers would choose to self distribute. The relaxation or complete destruction of the three tier laws would simply remove an artificial government mandated crutch given to the distributors. It would provide opportunities for brewers to by pass the system that in some cases may be unfair to them, the distributor model would still be valid and provide a great deal of flexibility in the market. Yes, corruption would still be rampant, and such changes would make the distributor’s job more difficult in some circumstances but I do not think their value to the industry would be diminished, nor do I think they would disappear. America is a far different place than we were during the pre prohibition years and I simply do not see the removal of legal barriers to distribution as a step towards the tied-house system.

  18. I am sorry if that rant did not make a lot of sense. I just do not believe that the three tier-system is the great hero of the craft beer movement. I believe it helps in many circumstances but if the three tier system was so great to small independent producers why didn’t this revolution in brewing happen 60 years ago?

  19. “Waaahh, I give my distributors great margins but they simply don’t focus enough on my brands. First this is a complaint from everysupplier in any distributorship with more than one supplier.”

    Let me give it to you from the perspective of a retailer. The salesman from the distributor only cars about his bonus which is based on how many cases of light american lager he pushes. The retailer I work for also sells homebrew supplies. You think the salesman would remember that the longshot six packs from Boston Brewing company would be a natural fit. Hell if we don’t farking ask for it we’ll never see it. Now there ARE independent distributors that are not tied to the majors and they do a pretty good job but the distributors tied to the majors don’t do them any favors.

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  21. Well put Gary Gulley. I’d also add to the end of your post that arrogant people like Mr. Conlin should also thank craft brewers for providing them with a product that customers want, putting plenty of money into THEIR pockets.

    I say Mr. Conlin is arrogant because of the thanks he demands from the people that have no doubt made him plenty of money. Arrogant to think that the laws that help small brewers wouldn’t exist without the 3-tier system. Tied houses weren’t made illegal BECAUSE of the 3-tier system, they were made illegal because they gave larger breweries an unfair edge. The 3-tier system merely helps to prevent that unfair edge.

    Brewers should have choice. If they choose to do business with you it should be because you are willing and able to help them, not because the law says that they must use you if they want to do business in a particular area. As for those slotting fees in retail chains, if the National Beer Wholesalers Association didn’t exist, that fight would have been fought by the brewers themselves or any number of associations they belong to. Again, more arrogance.

    A distributor should be forced to prove it’s worth to the breweries it buys from and the retailers it sells to. Promote my brand better than the other guy will. Maintain my share of the shelf space better than the other guy will, and make sure my product doesn’t stay past it’s prime on that shelf. If the retailer can’t sell it before it expires, DON’T sell him more unless the sub-par stuff is removed. DON’T force retailers to buy stuff they don’t want just so they can get the products they do want. All that does is allow products that don’t sell to sit around past their prime and that doesn’t help the brewer, the retailer or the retail customer. The brewer and the retail customer are better off in the long run. Brewers can stop producing so much of that stuff that sells poorly and increase production of the stuff that sells like crazy. You forcing retailers to buy products they don’t want, muddies the waters and doesn’t let the brewer know the real driving force behind their sales. The sooner they learn that beer “A” is sitting around unsold, the sooner they can slow production on that and increase production of beer “B” which will make everyone more money and make customers happier now that they can get what they really want.

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