It’s Saturday night in Tacoma, WA and I’m perched in my usual spot at the bar at Tacoma Cabana. Tiki master Jason Alexander is showing me his latest well lineup. Strangely, there’s no Plantation rums, typically the core of his lineup. I ask about their omission. “Can’t get ‘em anymore” he says. How can this be?
Plantation parent company, Maison Ferrand has been a darling of bartenders and spirits aficionados for years, selling well-regarded brands like Plantation, Citadelle Gin, Cognac Ferrand, Pierre Ferrand Dry Curacao, and many others. You’ll find their brands on craft cocktail menus all over the U.S. However, here in Washington State, you’ll be hard-pressed to find any of Pierre Ferrand products on a bar menu or liquor store shelf in recent days. But only six months ago, the situation was very different–Ferrand’s products were readily available and pouring into cocktails in bars everywhere. So what gives? The answer is a microcosm of what’s wrong with how liquor is sold in the United States.
Up till recently, Washington stores and bars would order their Ferrand products from American Northwest, a regional wine and spirits distributor. Until one day a new distributor, Crush & Cooper of Washington LLC, announced they were the new Washington distributor for Pierre Ferrand. Hmmmm…. Order fulfillment shifted to Crush & Cooper, and things were running smoothly for months, till one day when the flow simply dried up. American Northwest had filed a lawsuit to prevent Crush & Cooper of Washington from selling a number of products previously distributed by American Northwest, including Ferrand’s. The end result for Washington State consumers (at least in the short term) is that a large number of spirits are suddenly unavailable in bars or on store shelves.
How is this possible? Why does who distributes a product matter? And why can only one distributor sell a product in a given market? If the answers to these questions are a mystery, you’re likely not yet familiar with the byzantine disaster known as the Three-Tier Distribution system. If you set out to design an efficient system for getting a wide variety of goods from producers to consumers, a la Amazon.com, it would look completely unlike today’s existing Three-Tier system. The number of players and regulations involved makes it a minor miracle that anybody in the U.S. has access to more than five brands. Let’s take a look at the Three-Tier, and see how it impacts what liquor you drink.
Unlike so many other problems, you can’t point your finger at the federal government and blame it for the woes of Three-Tier. Prohibition ended in 1933 with the passage of the 21st Amendment. The problematic passage is section two:
The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.
While a straightforward reading of this seems to imply that liquor can’t be imported, to the learned minds of the judicial community, it means that each state has the right to regulate liquor as they see fit. In other words, the federal government washed its hands of a large set of regulatory oversight by saying, in essence, that liquor regulation falls under state’s rights.
So imagine if you will, forty eight states (at the time), all with different agendas and ideas about how to regulate alcohol, all establishing their own regulations. In some states this meant continuing prohibition at the state level – Mississippi remained dry until 1966. As you can imagine, no two states adopted regulations that look exactly the same, and there’s a mountain of wildly bizarre state laws. For instance, liquor stores in Alaska aren’t allowed to open until the polls close on election days. In Kentucky you can purchase wine at a pharmacy, but not at a supermarket. Further confusing things, the regulations for wine, beer, and spirits are often different within the same state. For this conversation, I’ll focusing entirely on spirits distribution.
While the liquor regulations of each state are wildly different, they all have some variation of the Three-Tier system at their core. The system presents three steps that each bottle of liquor goes through before it reaches your glass. What follows is a broad overview of the three tiers—producers and importers, distribution, and retail–after which I’ll delve into some key differences from state to state. Note that the breakdown of tiers that follows may differ slightly from some online reference, but the overall concepts are the same.
Producers and Importers
The first tier is producers and importers. Generally speaking, producers are distilleries within the United States–for example, Jim Beam, St. George Spirits, Sound Spirits, South Florida Distillers, and so on. Distillers in the U.S. are heavily regulated by the Alcohol and Tobacco Tax and Trade Bureau (aka, the “TTB”), and each distiller has a government issued “Distilled Spirits Plant” (DSP) number. For instance, Jim Beam in Kentucky is DSP-KY-230. (Helpful hint: You can figure out where the producer is located in via the two-letter state code in the middle, as I explained in my post on navigating the TTB COLA registry.)
Importers are U.S. companies that import distilled spirits made outside the United States. Each imported product has only one U.S. importer. In simple terms, importers have exclusive rights to import their brands into the U.S. When you see “Imported by…” on a bottle label, that company is the exclusive importer. Some larger international brands like Campari go so far as to set up their own U.S. import company, to help maintain full control of the process. Importers are also regulated by the TTB and are assigned a unique importer number, e.g. CA-I-4520, which is Campari America LLC, based in California, hence the “CA.” Complicating matters, it’s not uncommon for a brand to switch to another U.S. importer.
Regardless of whether a product is made in the U.S. or imported, the output from the first tier is individually bottled spirts, all bearing a TTB-approved label that will be identical no matter where in the U.S. the bottle is ultimately sold.
The second tier—known as distribution–is the state specific entity that takes bottles from the first tier and delivers them to the third tier, i.e. retailers. Usually the second tier is handled by a private company, but in some states that role may be fulfilled by a government agency.
Of all the tiers, the distribution tier is the least visible to the end-consumer. If you buy a bottle of Willett bourbon at your local BevMo, you know the first tier (Willett) and the third tier (BevMo), but unless you work in the liquor industry, odds are you have no idea who distributes Willett in your state.
Bar managers don’t have it so lucky, though. There’s no coherent, centralized source for which importer distributes a particular product. Instead, bar managers rely on individual knowledge of each distributor’s current portfolio of products. Due to mergers, consolidations, and other business dealings, spirits are often dropped by one distributor and picked up by another, creating a serious headache for the poor soul who needs to keep the bar shelves stocked. The Facebook page for the Washington State Bartenders Guild is a steady stream of posts asking, “Who carries Brand X now? So-and-so doesn’t carry it anymore.”
Although distributors are regulated by individual states, some regional and national distributers operate in multiple states by having state-specific distributor subsidiaries. The largest is Southern Wine & Spirits (SWS) which currently operates in 35 states, yielding 35 sub-companies like Southern Wine & Spirits of California. Others, such as Young’s Market and Glazer’s (which is merging with Southern Wine & Spirits), operate in ten or more states. In Washington State, we have Southern Wine & Spirits, Young’s Market, American Northwest, Crush & Cooper, and Click, along with a few others. Every spirit in Washington State passes through one of those distributors.
The most critical thing to know is that in some states, distributors have exclusive rights to wholesale their portfolio of products in that state. Thus, if Appleton Rum is distributed by SWS in your state, anybody wanting to buy Appleton rum must buy it from SWS. Any other distributors in the state are contractually not allowed to carry it. In a few states, two distributors can carry products from the same producer, known as “dualing.” We’ll come back to this nuance of exclusive distribution rights later.
The third tier is retail, where the liquor finally makes it into your glass, be it at a bar, your grocery store, the corner liquor mart, or in some cases, a state-controlled liquor store. Bars must buy all of their spirits from distributors, as must retailers that sell bottles to you. In most cases, any reasonably stocked bar or liquor store ends up purchasing from multiple distributors in order to get the full set of spirits they require.
The three-tier distribution system, by tightly controlling how liquor pass passes from producer to consumer, is very good at ensuring that taxes can be collected at multiple opportunities:
- Federal excise taxes on liquor are collected at the first tier. Since there’s at most one producer or distiller for each product, it’s straightforward for the federal government to collect taxes here.
- State excise taxes are collected at the second (distribution) tier. With a relatively small handful of distributors in a given state, it’s relatively easy for state governments to keep tabs on sales from distributors operating in their state.
- State and local sales taxes are collected at tier three. This is the sales tax you pay on your bar tab or at the grocery store/liquor mart.
Along with the three tiers of distribution, almost every state has laws to prevent a company from owning more than one tier in that state. For instance, the same company can’t be both a distributor and a retailer. This is one reason why distributors are for the most part unknown and unseen to the general public –they never have any direct interaction.
While great for taxation purposes, the three-tier system is a disaster for bringing the full spectrum of spirits into the hands of consumers. In a nutshell, if a distiller/importer wants distribution in all fifty states, they in theory need to make up to fifty deals with various distributors to cover all fifty states.
Now, the reality is that in some cases there are economies of scale. A massive spirits powerhouse like Bacardi can sign a distribution deal with Southern/Glazers and solidify distribution in approximately forty states with that deal alone. With a few more distribution deals with distributors in the remaining states, they have the whole of the U.S. sewn up.
Multi-state distribution is win for massive spirits powerhouses like Diageo, Bacardi, Pernod Ricard, and Sazerac. The big distributors like SWS and Young’s Market happily compete for their business and cover multiple states in one fell swoop. Massive volumes equals massive profit – everybody wins! (Right?) But if you’re a smaller brand like Denizen Rum, Big Gin, Lost Spirits, or Avua Cachaca, the big distributor giants aren’t as inclined to work on your behalf. Why put up with the overhead of purchasing, storing, and distributing 100 cases of a niche product per year when you have Skyy Vodka selling 100 times that?
This many-to-many relationship between producers/importers and distributors is the crux of why your beloved niche rum/scotch/bourbon/amaro isn’t for sale in your state, even if you go to a high-end boutique spirits store. And it’s the same reason why bars have to frequently contort their menus around what spirits are available in their state, rather than using their first choice bottle. Many small distilleries and importers simply can’t get the attention of the big distributors since they can’t generate enough volume for them. Instead, boutique producers navigate distribution essentially on a state-by-state basis, frequently using smaller distributors who are okay with smaller volumes. In many cases, distilleries and importers won’t have a distributor in a given state. A young producer will focus efforts on first getting distribution in the bigger states like California, Texas, New York, Florida, and Illinois—population equals profits. It’s great if you live in those states–not so great if you live in a less-populated state.
Astute readers may be savvy to the fact some of their favorite watering holes proudly display all manner of exotic bottles on their shelves despite them not having in-state distribution. Imagine a whiskey, rum, or tequila specialty bar with hundreds of different bottles on the backbar. Obviously, not every bottle was purchased from a local distributor. These bottles are technically in a legal gray area, often a matter of “don’t ask, don’t tell.” The rules and enforcement around non-distributor procured bottles are different in every state. Those special bottles are almost certainly not used in the bar’s well. They’re typically only served as stand-alone pours or in special off-menu cocktails. These bottles are typically procured via out-of-state trips, mail order, or regular customers who “mule” bottles to the bar.
The presence of these special bottles is part of what makes a high-end bar unique. While this is a great way for bar customers to sample spirits they might otherwise have access to, these gray-area bottles are a tiny fraction of what a bar uses. I’ve heard that regulators in some states don’t hassle bars that have these non-distributor acquired bottles, whereas in some states like Texas, compliance is rigorously checked.
There are a few small ways where the three-tier system is bypassed. The most well-known example is in states where local distilleries may sell a small number of bottles direct to consumers at the tasting room. Surprisingly, Kentucky with all its bourbon distilleries doesn’t allow this, instead forcing distilleries to ship their own products to a distributor, who in turn delivers it back to the distillery’s gift shop for sale.
Control and Franchise States
With just this general understanding of three-tier, you can see how it creates a challenge for any producer/importer that’s not a big player. But it gets worse. Now let’s look at the issues of control states and franchise states.
The generally accepted definition of a control state is one where the government acts as the sole operator of a given tier, be it distribution or retailing. The most well-known example is where the state operates liquor stores directly, colloquially known as “ABC stores” (Alcoholic Beverage Control). Currently these states are: Alabama, Iowa, Idaho, Maine, Michigan, Mississippi, Montana, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia, West Virginia, and Wyoming.
The fundamental problem with control states is that there’s very little incentive for a government agency to bring in wide breadth of spirits. Of course they’ll stock the top five selling bourbon, vodka, rum, and tequila brands, but if you’re looking for that exotic mezcal or that limited-edition bourbon release, you’re out of luck. Sure, you can request the state carry something you desire, but in the absence of competition, there’s a large amount of inertia to overcome.
I remember well just a few years back when Washington State had ABC stores. Most of them looked straight out of a 1970s Soviet-era government office – depressing as hell inside. They were frequently wedged into a small space in a strip mall, making space a premium, which drastically reduced the breadth of products they could carry. After all, they have to keep room for all those top selling Grey Goose, Fireball, and Jose Cuervo bottles, right?
Franchise states, on the other hand, are states where the laws require an exclusive relationship between producers/importers and the distributors. Referring to my earlier example, in a franchise state, if Appleton rum is distributed by SWS, then bars and liquor stores can only purchase Appleton rum from SWS. Brands who are managed as part of a larger portfolio—for example, Appleton is just one small piece of the Campari America portfolio, which also includes Skyy Vodka, Wild Turkey, Campari, Aperol, Cabo Wabo, and many more –are highly likely (but not required) to be distributed by SWS in that state.
The franchise requirement may not be inherently bad, in and of itself. However, the laws in these states make it very difficult and/or costly for a producer/importer to terminate its franchise agreement with a distributor. Thus, a distributor who fails to promote a brand can stymie sales for producers who don’t have the ability to easily take their business elsewhere –producers/importers are locked in to a poorly performing business deal with little recourse. The issue with Maison Ferrand in Washington State referenced earlier is directly traceable to franchise laws.
The reason for these franchising regulations originally was to prevent giant producers (especially in the beer and wine space) from dominating and decimating small, independent distributors by taking their business elsewhere. However, that thinking was from an era predating the micro revolution – microbreweries, micro wineries, and micro distillers. The problems the franchise laws tried to advert are now reversed – small producers can’t easily switch away to a distributor more in tune with their brand needs.
A complete, up-to-date listing of franchise states can be a challenge to come by, especially given there’s no consistent definition of what constitutes a franchise state. I believe this list to be a good starting point: Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, Virginia, Washington, and Wisconsin.
As you can imagine, even super-sized spirits producers aren’t a fan of these franchise laws, wanting the flexibility to move their business among distributors as they see fit. Diageo, for example, has launched a legal challenge in Missouri to dismantle franchise relationships.
Beyond the formal players in the three-tier system, it’s worth understanding that there is also a fourth group of people involved, the brand representatives. These are folks who work for the spirits producers and importers like Diageo, Campari, and Beam Suntory. You’ll find most of them near the bigger urban areas, representing their brands directly to the retail tier. Although they can’t be directly involved in the distribution of spirits, they function to educate current and potential customers, as well facilitating necessary communications among all three tiers. They’re roughly akin to a government lobbyist – not formally part of the legislative process, but intimately connected to how the sausage is made.
These days we’ve become accustomed to near effortless availability of almost any product we want. Companies like Amazon, UPS, and FedEx have woven together supply chain management and logistics to make it incredibly easy to learn what’s available and have it on your doorstep in twenty-four hours or less. Yet spirits distribution in the U.S. remains stubbornly stuck in dizzyingly complex web of state and local regulations. Crazy as it sounds, there are still dry cities and counties in the U.S. where spirits can’t be purchased. (Oh, the horror!) Consumers aren’t being protected by these laws. Instead, producers are effectively locked out of certain markets, and consumers have far fewer choices in what they can legally purchase.
As consumers looking for a broader choice in spirits, there’s no easy answer. Obviously living in a populous state like California, New York, and Illinois affords you more choices at your local liquor mart than say, living in South Dakota. Mail order can offer some relief in certain situations, however laws regulating liquor shipments between states are also incredibly inconsistent. Some mail order retailers seem more aware of the laws than the others. And just because one mail order retailer in a state won’t ship to you doesn’t mean another won’t. You’ll need to do your own homework in that regard. As a last resort, you can use travel as an opportunity to pick up some prized bottles, otherwise unavailable to you. The three-tier disaster isn’t going away anytime soon, but by understanding it you at least know why your favorite bottles aren’t available, and possibly how to work around the system.