The Three Tier System in Plain English

by Katie Sloan | Last Updated: November 16, 2016

3-tier-system

How did that delicious craft beer in your tulip glass get there? Sure, you know how it was created.You are an educated homebrewer. But I am not talking about the process of making the beer. Most of us have got that down (or are working on it).

I am talking about the systems in our country that get the beer from the tanks of your favorite craft brewery to your local bar or your fridge at home. In the US this is called the three tier system.

All alcohol sales, including your delicious double dry hopped IPA, are strictly controlled by our government. (insert witty political commentary). My recent career choices have put me right in the middle of the whole thing.

So how does the three-tier system work? And how, as a dedicated consumer, does it affect you?

The three tier system was born after the very dark and sad time known as prohibition.

I am gonna keep my shit together through tears and rage and touch upon it briefly.

What were the leading causes of prohibition?

sad

Lack of restrictions in the alcohol industry

With no middle man between alcohol makers and consumers, over consumption was encouraged. The more you sell, the better, right? Which leads to the next cause.

It occurred not long after women gained the right to vote

Women of the time were looking for an increase in national attention on family values. Alcohol was seen as the driving force keeping men at bars and away from their families. Why? Because of the lack of restrictions that lead to overconsumption.

Then, happy days, it was repealed! Cue my happy dance.

Why was prohibition repealed?

Organized crime was out of control

If alcohol was back under government control, it could not be used as the income of crooks.

This country was in the grips of the Great Depression

Tax revenue from alcohol sales could go a long way to helping our economy.

Rich people wanted to drink

They had the ear of politicians, as per the usual.

What good came out of prohibition?

(Yes there was some good)

happy
  • Wiped out the older systems of alcohol sales.
  • Alcohol consumption is safer now. We know what is in our products. No surprises.
  • Over consumption was reduced.
  • Homebrewing became a thing! Breweries, to stay in business, started making malt extracts for consumers. They told those pesky government officials it was for food making purposes. But our predecessors were smarter than that. They made their own beer with it!
  • (So maybe we should all thank those crazies that thought prohibition was such a great idea, because they might have started us all down this noble path of DIY beer).

What bad came out of prohibition?

  • We lost a whole lot of breweries. There were about 1,350 breweries in the US before prohibition (1915) and only about 750 made it out the other end (1935). This is one of the reasons we had such a flat beer landscape before our current burst of creativity.
  • We lost a whole lot of style during this time. (No, not just cool fedora hats.) We went from a wide variety of styles being made to one very dominant and many would say boring style.
  • The worst for us, (in my opinion) the rise of cocktails. Why did liquor win during prohibition? Well, imagine trying to move 20 barrels of beer or the equivalent amount of alcohol of gin… Those stock cars were just not big enough. So liquor comes out doing well after prohibition, but beer, not as much.

So there we have it: alcohol and more important to us, beer, is now legal again.

But the government can’t just say “Hey you can drink again and everything’s just hunky dory.” Nope, they had to add regulations to make sure we as consumers were protected.

The new system our elected officials came up with created three layers (tiers) to set up a safe and efficient method of getting beer into your glass.

So what is the 3-tier system exactly?

1st tier — The supplier or producer

  • For our purposes, a brewery
  • This tier makes the product
  • They are responsible for making sure the liquid is safe for consumption
  • They have to follow their state’s laws on details such as packaging, ingredients and ABV

2nd tier — The distributor or wholesaler

  • This tier purchases the product from the supplier
  • They then turn around and sell it to retailers
  • Storage of the beer before sale
  • They are responsible for selling fresh product and keeping retailers lines full and pouring

3rd tier — The retailer

  • Sell alcohol to be consumed on premise such as bars
  • Sell alcohol to be consumed off premise such as liquor stores and grocery stores
  • They set prices for the products they purchase and expect to make a profit

There are a few exceptions that can be found within our system. For example, a brew pub that makes and serves beer on premise without dealing with any middle man.

Also, smaller breweries can chose to self-distribute within their local area. The ability of a pub or brewery to serve their own product without going through a distributor depends on the volume brewed yearly and the state they operate within.

For example, in New York State: Breweries that brew under 75,000 barrels a year may sell their beer directly to retailers within their area.

There are still some archaic laws on our books. As a homebrewer, I’m sure you celebrated when the last states in the union finally legalized homebrewing. (Alabama and Mississippi in 2013).

Here are a couple other strange laws that are still on the books:

  • Utah – A draft ABV limit. Beers over 3.2% ABV cannot be served on draft or in a grocery store without a special license. If you want beer over 3.2% ABV you have to go to your local state owned liquor store.
  • Indiana – No beer sales on Sundays! You can go to a brewery to get your fix though, just not your grocery store.
  • Twelve different states – ABC stores are state run and the only place that package beer can be purchased. They take the place of the retailer that sells to consumers for off premise consumption. This removes an element of competition from the equation so what does that do to the selection the consumer is presented with?

There are also groups looking to move our system forward within the laws of their state. Here are few examples:

  • Pennsylvania – The senate passed a law that will allow distributors to sell six packs directly to consumers. It still needs to be passed by their house. Is that good or bad for retailers in the state?
  • California – You need a haircut? You get a free beer! As of this January. I mean, why not right.
  • Colorado – A bill has been signed to slowly (oh so slowly) allow grocery stores to sell beer. It will take until 2037 for this law to be fully enacted. (There is a push to speed up the change).

I have worked in different tiers within this system and I think my experiences can shed some light on this system we all answer to.

First, and for the longest period of my career, I worked in the retail tier. I have worked in multiple bars around NYC.

I often went through rigorous training on how to serve customers properly and safely. I find serving safely is the first priority with education on what is being served taking a back seat.

Retail

  • Selling beer in pints and bottles, directly to consumers
  • Some bars rotate regularly and some stick to the same old
  • Most people come to bars already decided on what they are drinking unless you are the craftiest of spots
  • Only two of the three bars I worked at for an extended time, would clean their lines regularly (ugh)

Supplier

Brewery Tasting Room

  • Pints of beer sold directly to the consumer – skipping the middleman
  • Consumers wanted to be educated on the product and the process

And then we come to my current position. I am a sales representative for a brewery, which puts me right between all levels of our system.

I walk into bars all day and talk to buyers (I know, my life is hard) trying my best to convince them to purchase my products or increase their purchasing of my products.

If they agree with what I have to say, I then go to my distributor representative and ask them to order the beer I sold into the bar.

But there is so much more to it than that…

I have to communicate with logistics on the brewery side when beer is arriving to the distributor and when they send it out to all the places I communicate with.

Sometimes, I even have to walk back into their warehouse and track down my product, point to it so they see they actually do have it, get them to bring it to the entrance, throw it in my car, and hand deliver it to an account.

Based on both my experience and my research, here are the pros and cons of our 3-tier system:

Pros

  • There are multiple people attempting to sell a brand. With more people selling that double dry hopped IPA, there are more opportunities for it to be placed at bars and in stores.
  • Distributors provide space for all those kegs. If you are a small brewery with small space, this is a huge help.
  • The distributor helps to create marketing materials to increase sales. More posters and glassware with a brewery or beer logo, the more people see it, the more likely they are to order it next time they belly up to the bar.
  • A larger distribution area for smaller brands. The little guy with his three barrel system can get his beer all the way across town to that hip beer bar everyone is talking about, without having to throw it in his volkswagen van and drive it himself. Which means he can spend more time working on his brett saison with passion fruit!

Cons

  • There can be directly competitive brands all coming out of one warehouse being sold by the same salesman. For example, the sales representatives I work with sell both Allagash White and Avery White Rascal.
  • Beer freshness is competing against a shipment process that can be prolonged with a lot of stops. It can take a couple days for kegs to be checked into inventory
  • Distributors personal preferences can affect sales of brands. What if the sales rep prefers lagers to IPA’s? If small guy brewery only makes IPA’s, they may not make it a priority during their sales calls.
  • The brewery does not have control over delivery days and times. Delivery days are usually set by area. If you as a brewery rep sell a keg and the bar wants it on Tuesday, you cannot promise that, because the truck schedule is already set.
  • Once distribution contracts are set they are very hard to break. If a brewery feels like they are not well represented in the market they have almost no way to change distributors. The contracts strongly favor the wholesaler.

What are the benefits for each tier in the system?

  • Breweries can reach a larger audience than they could alone.
  • Distributors generate large profits  by buying low and then reselling at a higher price..
  • Retailers have more brand options from all over the country and the world.

What are the drawbacks for each tier in system?

  • Breweries might not be well represented by their distributor.
  • Distributors are pulled in multiple directions. How do they make every brewery happy? How do they manage to move all the product in their warehouse?
  • Retailers pay more for product that has to pass through more hands to get to them.

So is the 3-tier system good for consumers?

You are getting a wide variety of products to your tulip glass thanks to our system.

But, are you getting the variety you would pick for yourself? Probably not. The craft manager at your local distributor does not have the same taste as you. He or she might not even know how beer is made! (Gasp) Seriously I met one… (Not in my city).

Are you missing out on that amazing brewery across the country because your local distributor didn’t want or need to bring them in? Again probably. Getting beer across the country is a huge challenge only large distributors are prepared to do that and they are only going to do it for beer they really love and support.

You have variety because the system prevents the big guys from owning the whole industry. But, are you paying too much for your favorite doppelbock because of dealings between everyone who has bought and sold the product before you? One more time, probably. More pockets to fill requires more dollars.

The system is simple in concept, but can become complicated in practice. It is not all good and not all bad. As consumers are we happy with it? How can we change it if we aren’t? My opinion? Go out, research (aka have a beer), be an informed consumer and let your voice be heard!

Katie has a passion for all things beer. She worked at The Bronx Brewery as the Tasting Room supervisor and helped develop homebrew classes to be taught there. She came to homebrewing through the Cicerone® program. She is a Certified Cicerone® but does not plan on stopping there. She also has taken the BJCP exam. She teaches children’s dance classes in her spare time and used to be a professional dancer herself. Katie resides in NYC where she makes it work in her small apartment with plenty of help from her boyfriend Jon and the homebrewery cat Merlin.