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Three-Tier Beverage Distribution System: How Your Favorite Alcohol Beverages are Distributed

Jul 2, 2008
Prohibition marked a unique period in American history. Between 1920 to 1933, the sale, manufacture, and transportation of alcohol for consumption were banned nationally as mandated by the 18th Amendment to the United States Constitution. Temperance movements throughout the U.S. during the 19th century brought about significant pressure on lawmakers and some states had already enacted statewide prohibition prior to the ratification of the 18th Amendment.

However, as the Great Depression wore on, Prohibition became increasingly unpopular, especially in the large cities. When repeal was finally enacted in 1933, Prohibition had brought about several notable effects: The first was the significantly lower number of breweries that re-opened - only half - than had existed prior to Prohibition. Wine historians point out that the Prohibition affected the fledgling U.S. wine industry as thicker-skinned grapes that could be easily transported replaced wine-quality grape vines. Lost too was the collective knowledge of wine makers who either emigrated to other wine-producing countries, or left the wine making business altogether. The post-Prohibition period, however, saw the introduction of the American lager style of beer, which dominates today. Most interestingly is the belief by some historians that the alcohol industry accepted stronger regulation of alcohol in the decades after the repeal, to reduce the return of Prohibition.

Benefits of the Three-Tier System
Following the repeal of Prohibition, a three-tier system of alcohol distribution was set up in the United States. The three tiers are producers, distributors, and retailers. A producer sells to a distributor who must sell only to a retailer. According to the Beer Institute, each state has created a three-tier system of beer distribution. Producers can include brewers, wine makers, distillers, and importers. The distributor tier is made up of more than 2,500 licensed businesses that store and deliver beer at the local level. The retail level represents hundreds of thousands of outlets that sell beer to the public.

The three-tier system enables states to track the actual movement of beer from the producers and importers to consumers through licensing requirements and legal obligations on companies who transport, deliver and sell beer. This system of checks and balances eliminates the economic incentive for illegal manufacturing, diversion and distribution of beer. Finally, consumers benefit from the healthy competition and facilitation of a wide selection of brands in the marketplace - from big-name breweries to specialized, small-batch operations.

Central to the system are America's beer distributors. Typically, producers give distributors exclusive rights to market their product within a geographical region to restrict two distributors of the same product from competing against one another. An important link to sustaining America's beverage licensees in every state, distributors add value to every product handle. For instance, every $1 spent on beer distribution generates .25 cents in federal tax revenue and nearly .14 cents in state and local taxes. Distributors help raise more than $5.2 billion in federal state excise taxes on the product itself.

Beer distributors also help businesses grow by reducing expenses and expanding profitability. In total, distributors reduce retailer operating costs by nearly $50 for every $1,000 spent on beer by consumers. For example, a store chain comprised of 1,000 stores can realize a saving of $17,318,007 in retailer costs. Those savings can be reinvested by retailers into job creation, business expansion, and customer savings.
In addition to benefiting retailers, the economic contributions of distributors also reaches packaging manufacturers, shipping companies, and the agricultural sector.

This system of checks and balances also extends to the community. The brewing industry spends more than $50 million annually promoting responsible consumption through a variety of efforts aimed at servers, parents, teachers, and communities. For example, CITY Beverage-Chicago, an Anheuser-Busch distributor, sponsors the "Street Smart" program in Chicago-area high schools. The programs are strategically timed for the period immediately before the high risk season of proms and graduations. Distributors also distribute training and point-of-sale material for the successful "We ID" campaign, helping to reinforce the message that checking IDs at retail outlets is critical to limiting youth access to alcohol.
About the Author
Soave Enterprises diversified management and investment company founded by Detroit businessman Anthony L. Soave that provides strategic planning, financial and other management resources to its affiliated business ventures in the real estate, automotive retailing, beer distribution, scrap metal, industrial services and transportation industries, among others. For more information on Anthony Soave and Soave Enterprises, please visit the website.
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