Bacardi Southern Glazer's Deal Rocks Three-Tier System

Ever since the repeal of Prohibition in 1933, the American beverage alcohol industry has operated with what is called a three-tier system. The tiers are retail, wholesale, and production. Many industries have the same thing but the alcohol system is unique because it is mandatory. All three tiers are licensed and those licenses say producers may sell only to wholesalers and retailers may only buy from wholesalers. You can’t cut out the middle man. Cross-ownership is also prohibited.

Producers, obviously, are essential. Somebody has to make the stuff. Similarly, you must have retailers. The question is always with wholesalers. Do we really need them? Big chain retailers especially question their value. Big chain retailers would prefer to buy directly from producers. The producers would prefer that too.

Another aspect of the system is that it is controlled by the states. If I’m a retailer in Illinois, not only must I buy from a wholesaler, it must be an Illinois wholesaler.

Why? Because the system is all about control. Okay, taxes and control, but control is a big part of it. States feared they would have trouble bending big, national or international producers to their will. An in-state wholesaler, with valuable in-state assets, should be reasonably easy for the state to reach. That is the fundamental justification for the three-tier system.

That background brings us to two major and related news stories. First, the merger of two large multi-state wholesalers, Glazer and Southern, to form a national wholesaler. Second, the announcement that Bacardi is giving all of its business to that new combine.

It’s pretty obvious that the first event occurred to make the second possible. Although a big producer like Bacardi (second only to Diageo) would prefer to eliminate the wholesale tier altogether, dealing with one wholesaler for all of its U.S. and Canadian business is the next best thing. For even more convenience, both companies are based in South Florida.

But wait a minute, aren’t wholesalers supposed to be state businesses? Isn’t the whole idea of the system to force Bacardi to do business with 50+ state wholesalers?

Although Southern Glazer’s (the new name) is the first truly national wholesaler, both Southern and Glazer’s have been huge multi-state operators for a long time. The other big wholesalers, like the other recent mega-merger of Wirtz and Charmer, do the same thing. The state-by-state rule, as well as the no-cross-ownership rule, has long been a legal fiction. Yes, they have offices, warehouses, inventory, and a legal entity in every state, but they are a centralized, national business in fact. Everything else is window dressing.

Does a big change like this, made entirely within the established legal framework, make the three-tier system more beneficial, or more ridiculous? Big chain retailers are cheering. Although they’re not dealing directly with Bacardi, this is arguably the next best thing. Wholesalers who lost Bacardi business are griping, so are smaller producers.

It’s interesting to note that the business Bacardi is assigning to Southern Glazer’s is worth $1.3 billion. That represents only 7.6 percent of Southern Glazer’s business, so they can’t be perceived as Bacardi’s ‘captive’ wholesaler. They have too many other producers to keep happy. So what’s next? Wirtz Charmer is primed for a Diageo or a Beam Suntory to follow Bacardi’s lead. Will they? The answer isn’t obvious. This isn’t a clear slam dunk for anyone. Plenty of perils await.