Monday, May 5, 2014
What If Distributors Were Optional?
As American laws go, the 21st Amendment to the Constitution is stunningly brief, not even 100 words and most of them are boilerplate. The first section repeals the 18th Amendment. The third section sets out the window for ratification: seven years. It's the second section that concerns us today. What it says in 31 words I can say in eight: states may regulate alcoholic beverages however they want.
Although each state does it differently, a key feature common to most is the three-tier distribution system. The three tiers are producers, distributors, and retailers. The issue with the three-tier system is not whether or not the system provides value, it's whether or not requiring the 3-step process is justified. If I can streamline the process by eliminating the middle man, what is the public policy benefit of preventing me?
Pre-Prohibition, 'tied houses' were a common feature of the retail landscape. A 'tied house' was a saloon owned by a producer. It was widely believed that when producers controlled retailers in this way, consumers and communities suffered because all the far-away producer cared about was increasing sales and profits. After Prohibition, it was believed that preventing the tied house and keeping retailers as far away from producers as possible would prevent those abuses.
Today, because so much has changed, distributors (for beer, wine, and spirits) can sometimes seem like a vestigial organ. Big producers would love to be able to sell directly to large chain retailers. Brown-Forman would love to distribute Jack Daniel's to Walmart through Walmart's distribution system, not through 50 different distributor locations in 50 states. They'd love to be able to do the same thing with TGIF and Chili's. They can't.
Big producers essentially do sell directly to national customers, but distributors have to handle the paperwork and, more importantly, physically move the product. Is there a genuine public policy justification for requiring that? Probably not.
One reason the present system seems like a waste of money is how easily most of the rules are circumvented, at least for some purposes. 'No cross ownership' is a joke. They have to look separate on paper, but distributor/producer cross-ownership is common in fact. Distributors as in-state businesses? Also a joke. Most distributors are national or nearly so, they're just separately incorporated in each state where they do business. Does it make sense that a distillery gift shop has to buy its own distillery's products through a distributor?
Okay, so if the current law makes no sense, why not change it? That's easy to say, virtually impossible to do. Most states have made very few changes to their laws regulating alcoholic beverages since Prohibition ended 80 years ago. That's because distributors and government (both the elected part and the bureaucracy) have a vested interest in the status quo. Small retailers do too.
Producers of all sizes and large retailers would like to see the distributor made optional, not mandatory.
How would small producers benefit? One of the reasons small producer products are expensive is that they need those prices to interest distributors. Most micro-producers in most places have no trouble getting distribution because at current prices it's a very profitable business for the distributor. If micro-producers could sell directly to retailers, some might be able to build a respectable business just by keeping the ten (arbitrary number) bars and liquor stores closest to the distillery supplied and happy.
It could be a kind of partnership, nothing like the tied houses of old. If the producer could charge the same wholesale price to the retailer that they were charging to the distributor, the retailer would be able to charge less and sell more. That scenario does nothing for the distributor but it could be terrific for the producer, its preferred retailers, and their customers. It's not a model that would work for everyone but right now it can't work for anyone because it's against the law.
Our interests as consumers are supposed to be paramount to the regulators, but a more efficient system would surely benefit consumers in terms of lower prices and greater convenience. More liberal laws in general would liberate the creativity of producers, in terms of better fulfillment of consumer wants and needs. Policies intended to limit the harm caused by alcohol abuse could be focused directly on the problem instead of on a very broad proxy for it.
Many of our liquor laws, directed as they are at 19th century problems, badly need a 21st century upgrade.