How Craft Alcohol Distribution Works: The Three-Tier System

How Craft Alcohol Distribution Works: The Three-Tier System

Prior to Prohibition, alcohol producers could sell directly to retailers. They could even own saloons or forge restrictive contracts with retailers, creating anti-competitive “tied houses.” The retailers then had to favor one producer over others.

All this changed with Prohibition’s repeal in 1933. Regulation, including taxation of liquor sales, became left up to the states. The result was a complex mosaic of differing rules, procedures, and requirements from state to state. One way or another, most states ended up with something resembling a three-part system for the production, distribution, and sale of alcoholic beverages.

These systems make it difficult for craft alcohol producers to get their products into non-local markets. Learn more about how craft alcohol distribution works. The three-tier system, while still pervasive, is slowly evolving to allow more direct-to-consumer sales in brewpubs, tasting rooms, and through limited self-distribution.

Production, Distribution, Retail

In traditional craft alcohol distribution, the three-tier system separates production from retail sales by inserting a licensed distributor between them. The producer/maker creates a contract with a wholesale distributor with warehousing capabilities (including refrigerated warehousing). Then, the distributor sells the product to retailers, who sell it to consumers.

Licensed distributors must comply with various regulations and monitor tax collection along the chain of distribution and sale. This way, the state’s control of alcohol taxation and licensure ensures distributors are conscientious about quality and other regulatory requirements.

Control States

Some states decided to retain control of the liquor sale system, acting as the distributor and, in some cases, retailer. In these instances, the state purchases the product and distributes it to state-owned liquor stores, collecting taxes at purchase. Seventeen states are currently “alcohol beverage control” states, and seven of those own liquor stores, too.

A recent example of the evolution in this space is the state of Washington, which eliminated state-owned liquor stores and allowed retailers to purchase directly from producers in 2011. The downside? Washington State has the highest liquor tax rate in the country.

Direct-to-Consumer Sales and Shipments

Forty-seven states allow some form of direct-to-consumer alcohol sales, including ordering online and shipping the product to the consumer. Most of those states restrict direct deliveries to wine, and someone 21 or older must sign for the delivery.

Many states have also eased restrictions on brewpubs and tasting rooms, allowing direct sales to consumers for products consumed on the premises. The recent COVID-19 pandemic has also spurred a lot of change in the direct-to-consumer space for craft alcohol. Unfortunately, the long-term benefit of these changes, and whether they will become permanent, remains to be seen.

The proliferation of different regulatory structures from state to state suggests that craft alcohol producers can benefit from an experienced spirits marketing agency, like the experts at The Crafty Cask. We can help you develop your brand and marketing campaigns. Also, we can aid you in identifying what to expect when partnering with a licensed distributor. Contact The Crafty Cask for craft alcohol marketing consulting today.

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