Taste cannot be
controlled by law.

-Thomas Jefferson

TJ and the Three Tier SystemWell we had a few technical difficulties in launching our crowdfunding campaign today. So we will have to delay it until the problem is fixed. As TJ would say “Delay is preferable to error.” But we still want to take this opportunity to touch on something that will be an integral part of our funding campaign. We’d like to share our position on the State Mandated Three Tier System. Who better to reference than the OG rebel on his Birthday. Thomas Jefferson.

He has famously said “In matters of style, swim with the current; in matters of principle, stand like a rock.” Well the current has shown that preferred taste and style in the beer market is moving towards craft. However, the law is not in line with the principles of freedom. We are left with a system that no longer serves the market and the consumers, and those who wish to keep it in place do so only because ‘Big Beer’ is losing ground to the smaller guys. So they use the unprincipled system of crapitalism (crony-capitalism) to maintain their advantage through the force of the state.

So what is the Three Tier System?

Put simply it was a law put in place after the repeal of Prohibition mandating that alcohol manufacturers could not sell directly to the public. They must sell to a middle man, the distributor. This effectively broke up the market into three tiers that are not allowed to overlap, Producer, Wholesaler and Retailer. There were three prevailing arguments in favor of this law. Let’s see if they’re still relevant.

I. It was intended to prevent large breweries from buying up wholesale distributors and retail locations to shut out their smaller, scrappier and more nimble competition.

The reality is, it hasn’t stopped large breweries from doing just that. The largest distributors in the country are now owned by the largest breweries in the country.  What? A law that did the exact opposite of what it intended? Unheard of! That’s not to say they shouldn’t be free to own a logistics company though. It’s the lobbying that has allowed them to do that which is the moral hazard.

II. There was also an aspect of appeasement to the temperance movement. The argument was that it would artificially increase the cost of booze to make people less likely to over drink.

The reality is, you can buy an 18 pack of Natty Ice for the same as what it costs to buy a sixer of craft beer. Or you can down a bottle of Bacardi 151 and win a trip to the hospital. All that higher priced craft beer will do is persuade the lowest common denominator from actually trying good beer.

III. Oh and then there is the fact that it was put in place to make the wholesalers the tax collection arm for the industry.

The reality is, when the government functions on such logic as “Cigarette taxes reduce their sales, but income taxes in no way reduce people’s motivation to work hard.*” the question is, do they really need more of our hard earned money? Sheesh… You’d think sales tax would be enough. (*That’s also case-in-point against argument II.)

Where do we stand?

Distributors provide a vital service for the industry. They are the natural extension of the division of labor that makes the market so efficient. Wholesalers allow brewers to focus on what they do best. Brew! But if the brewer wants to self distribute their product then more power to them.

When free to choose and free to associate, transactions only take place if everyone involved wins. However, when one party in a transaction has the luxury of the law on their side the deal is no longer fair. Imagine it this way… I am an ice cream man, which is fortunate for me because there is a law on the books in my state (Bureaucropolis) which mandates that whenever I come around blaring ‘Pop goes the weasel” you have to come out and buy some ice cream. Are my prices going to be the same as if you bought that Rocket Pop because cost aligned with the benefit you saw of eating some cold wet sugar? Certainly not!

What we see happening is distributors demanding as much as 30% of the brewers revenue. This puts unneeded financial stress on the brewer and forces them to raise their prices, which you end up paying for. This 30% is nothing for the massive producers but is stifling to smaller and start-up breweries. Then there is the fact that with so many new breweries popping up there is no way for a distributor to represent them all, so they will be inclined to push their easy sells and higher margin products.

Luckily we are in California where there is no limit on how much a craft brewery can self distribute. So if we were to work with a distributor in the future we would be able to negotiate fairly. Not all states have that liberty though. In some states the cap is as little as 20,000 barrels on self distribution as is the case in Arizona. And in Georgia and Mississippi brewers are prohibited from selling directly to the public. In some states you are even monetarily penalized for ending a relationship with a distributor even if they are providing horrible service.

The position we take is this. We want to see craft beer spread across the country and across the world. To do that breweries need to be free to sell their product as they see fit. We feel there is no limit to the amount of market share craft can take from the macro-breweries. Conversely and controversially, the strategy the macro-breweries should take is not to lobby for tighter regulations against their competitors, but rather, they should purchase craft breweries who have their sights on massive growth and add them to their portfolio of products. The market will decide if those mergers were good ideas based on adherance to the craft breweries values that made them popular in the first place.

So what are we going to do about it?

As a brewery we are interested in being profitable, growing and getting our amazing beer in as many people’s hands as possible. That means we will maintain control of our distribution as long as possible. If the need arises we will only align with distributors to expand our reach when the negotiations are allowed to be win-win. Unfortunately that means we may not reach some states for a long time.

Therefore it is in our best interest, hell it’s in every bodies best interest to educate people in the states where regulation remains high to change their local laws. This will mean we sell more beer and you get more variety, more cheaply. To that end we will be actively speaking out against these laws and will provide a knowledge base and resources to take action in your state to liberate the craft beverage industry!

We will even use and promote disruption in the industry such as online sales, alternative distribution models, and perhaps some future technology that forever decentralizes distribution. In fact, we plan on testing out some alternative distribution during our forthcoming crowdfunding campaign! Now that’s WIN-WIN! Be sure to sign up for updates and follow us on social media for all the details.

The thing we know for sure is that the solutions exist in the market as long as the micromanaging regulators get out of the way.

On this, the 274th birthday of ol’ TJ we think he’d proudly agree.

We invite you to leave your thoughts in the comments below. Are you with us? Think the Three Tier System is A-OK? Think we’re to soft on “Sell Outs”? Let the community know in the comments below!

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