Ensuring Safety and Independence: The Three-Tier System of Alcohol Distribution

HISTORY
There has not always been a three-tier system of alcohol distribution. In fact, until the 18th century, the distribution system for alcohol consisted of only manufacturers and retailers.

Manufacturers were typically more profitable, favoring retailers who only sold their brands. Many had ownership ties to the taverns and sold alcohol for extended credit terms, furnished equipment and supplies, and paid rebates for pushing their brands exclusively. Consequently, local manufacturers engaged in cutthroat competition for control of outlets, and some even pushed retailers to increase sales without regard to social costs, such as excessive consumption.

Saloons, which were very different from today’s bars, pubs, and taverns, began appearing – not coincidentally – close to factories and other blue-collar industry sites targeting the lower classes. These saloons offered “free” salt-laden sandwiches at lunchtime to attract workers. Gambling, excessive drinking, and other assorted activities not considered respectable were also prevalent.

Due in part to this irresponsible behavior, there began a call for temperance. Put simply, temperance as a goal for society meant moderation in alcohol consumption. To achieve temperance, several states began to outlaw the manufacturing or sales of alcohol within their borders.

In 1917, the U.S. Congress passed the 18th amendment to the U.S. Constitution: the National Prohibition Act. The act prohibited the sale, manufacture, and distribution of alcohol in all 50 states. It was then sent to the states for ratification and went into effect on January 17, 1920.

In the meantime, Congress passed the Volstead Act in 1919, which provided enforcement of prohibition. Though the newly created special Prohibition unit of the Treasury Department employed some 3,000 agents, who made thousands of arrests and destroyed a considerable amount of alcohol, they did little more than slow the flow of booze. As a result, organized crime flourished, and large-scale bootleggers like Al Capone built criminal empires out of illegal distribution efforts. Consequently, federal and state governments lost billions in tax revenue.

On December 5, 1933, Prohibition was repealed, giving states the authority to regulate the production, importation, distribution, retail sale, and consumption of alcoholic beverages inside their borders.

All 50 states then worked to create a system that would ensure that the undue pre-prohibition influence manufacturers had over retailers and the irresponsible consumption it led to, would be avoided.

This system is still in place today and is known as the “three-tier system” of alcohol distribution. For nearly 90 years, every state in the nation has benefited from the three-tier system and its ability to provide orderly markets, moderate consumption, efficient tax collection, and the flexibility and control for each state to create their own rules and regulations to govern alcohol. Additionally, consumers benefit by greater choice and variety in the marketplace, along with safeguards against counterfeit or poisonous alcohol, which is prevalent in other countries that lack an effective regulatory structure.

WHAT ARE THE THREE TIERS?
The three-tier system of alcohol distribution provides a separation of the manufacturing tier (i.e., brewers and suppliers) from the retail tier (e.g., grocery and convenience stores, restaurants, hotels, bars, and taverns) to provide accountability and avoid the issues that led to prohibition. It inserts a middle tier of independent, licensed distributors. The tiers are further separated by other laws and regulations prohibiting manufacturers and distributors from having any financial interest or influence over retailers.

WHAT ARE THE GOALS OF THE THREE TIER SYSTEM?
The four primary goals of the three-tier system are:

  • Orderly Markets: to avoid the overly aggressive marketing and level of control exerted by manufacturers over retailers during the pre-Prohibition era.
  • State Control: to give states the ability to create their own rules and regulations that govern alcohol beverage control.
  • Efficient Tax Collection: to guarantee the full and efficient collection of state and federal excise taxes by collecting at the distributor level.
  • Temperance: to provide a marketing environment that encourages moderate consumption.

WHAT IS THE ROLE OF THE DISTRIBUTION TIER AND WHAT BENEFITS DO THEY PROVIDE?
While the independent distribution tier serves as a valuable bridge between manufacturers and retailers, the positive effects of distributors can be felt across all tiers, by consumers, and North Dakota as a whole.

BENEFITS TO MANUFACTURERS
Beginning with product acquisition, distributors purchase beer from federally registered manufacturers and suppliers. Distributors use their own infrastructure, capital, and personnel to assist these brewers in more efficiently reaching an extensive network of state-licensed retailers.

Distributors aid small local craft manufacturers, large nationally recognized suppliers, and every producer in between by providing equal access to market. This creates a healthy and competitive marketplace where consumers can enjoy an incredible assortment of brands at North Dakota’s retail stores, bars, and restaurant menus.

BENEFITS TO RETAILERS
Retailers save countless time and money by partnering with distributors who offer a vast portfolio and education on brands large and small.  Without distributors, retailers would have to obtain their products from thousands of different manufacturers. While providing an abundance of choice to licensed retailers, distributors also offer education on the brands they carry so retailers can make informed decisions about what may appeal to consumers in their respective areas. They are free to make these decisions without manufacturer influence or retribution, as existed pre-prohibition.

Once a retailer has selected product(s) from their distributor partner, distributor personnel then work to monitor the retailer’s shelves and rotate or replace products as necessary. They assist with merchandising and stocking of these products, as well as point-of-sale advertising. Distributors clean keg and tap lines making sure that each sip of beer tastes its absolute best.

All told, distributors effectively reduce retailer operating costs, which translates into dramatic annual savings for retail outlets far and wide.

BENEFITS TO CONSUMERS
By serving as the vehicle to a fair and healthy marketplace for brands large and small, and by providing these brands to retailers more efficiently and cost- effectively, distributors ensure that consumers can enjoy an incredible selection of beer in the United States. As a stroll down the beer aisle in your favorite supermarket may show, consumers enjoy more choice and variety with beer than virtually any other retail product.

Before those products hit shelves, distributors work to educate retailers on the specific attributes and legal requirements of the brands they carry. They assist with materials, such as signs, stickers, or posters, that educate retail employees on selling only to those of legal drinking age as well as consumers on drinking responsibly.

When a consumer purchases their favorite beer, they can rest assured knowing that distributors provide these products under a system of transparency and accountability. The clear chain of custody, created under the three-tier system, helps protect consumers from counterfeit or poisonous alcohol, which is prevalent in other countries that lack an effective regulatory structure. Distributors only purchase from licensed manufacturers and sell only to licensed retailers. This is the exception and not the rule around the world. This is why you’ll commonly see headlines regarding other countries similar to these:  “At Least 70 Dead in Mexico From Drinking Tainted Alcohol,” “India’s Death Toll From Counterfeit Alcohol Rises To 86,” “Hundreds poisoned by bootleg alcohol in Russia.”

By ensuring product comes from reputable and licensed sources, and then tracking each stage of a product’s journey
through the distribution chain, distributors take pride in delivering authentic, quality beer to North Dakota’s consumers.
Thankfully, consumers across the United States enjoy unparalleled safety thanks to the state-based three-tier system of alcohol distribution, in which beer distributors are a critical link.

BENEFITS TO NORTH DAKOTA
Beer distributors in North Dakota employ hundreds of men and women. From warehouse, transportation, and delivery personnel to sales, accounting, graphic design, and information technology professionals, distributors provide a multitude of solid, quality jobs with excellent benefits. Working in a culture where professionalism meets fun, many of the employees working at our local, family-owned distributorships enjoy long-lasting careers.

Aside from providing nearly $32 million in wages and salaries to local North Dakotans, beer distributors directly impact North Dakota’s economy through $130.5 million of production. When including indirect effects on other industries, capital investment spending that is different from other wholesaling operations, and charitable activity, North Dakota’s beer distributors provide a total economic impact of $261 million.

The same system of transparency and accountability that provides consumers with safe products also provides North Dakota with an efficient means to collect taxes on alcohol products. Monitoring beer from the time it leaves a brewery until it arrives at a licensed retailer, distributors are the best equipped to collect state taxes and help the state enforce alcohol laws. For this reason, it is more efficient to collect taxes from our distributors than from each of the 1600 retail establishments that sell alcohol products.

North Dakota’s independent distributors take great pride in giving back. Many of these family-owned distributorships were established in their local communities many generations ago. They support numerous community events and a wide array of charitable activities totaling nearly $470,000. In addition, they play a vital role in responsibility efforts that help reduce drunk driving, alcohol abuse, and underage drinking through alcohol awareness and education initiatives.

NDBDA promotes the general welfare of those persons, firms, and corporations engaged in the wholesale distribution of beer and ale in the State of North Dakota