What’s The Three Tier System and Why is It Corroding?


August 29, 2014 Blog » Wine News & Entertainment » What’s The Three Tier System and Why is It Corroding?

The wine you buy in America goes through a number of hands before it gets into yours. This system is called the 3-Tier System and it’s starting to corrode.

What Is The Three Tier System?

Wine, Beer, Spirits three tier system of distribution

Each step on the 3-Tier System for alcohol distribution in America increases the final cost of a bottle of wine. This system is called the 3 Tier System and it was created after prohibition as a way to control consumption in America.

Purposefully Inefficient

The 3 Tier System is purposefully inefficient; it has multiple steps between producer and imbiber. It was developed on the heels of the American Anti-Trust Act from the 1890’s. The system was intentionally built to:

  1. Increase the minimum price of alcoholic drinks to control alcohol abuse.
  2. Decrease the potential political power of large producers who could create a monopoly in the market and limit consumer choice.

Despite the good intentions, the 3 Tier System has created some negative effects:
 

Mark Ups Compound By Percentage

Bulk Wine Mark Up vs Quality Wine Mark Up

The price increases from distributors and retailers are by percentage, which means that the prices compound the higher they are. Since small producers generally have a much higher cost of goods, their wines are at a greater disadvantage coming in.
 

Unequal Pricing

Retail Wine Prices vs. Restaurant Wine Prices
Besides mark ups being higher on the higher priced wines, different types of establishments charge different rates for a bottle or a glass of wine.


The Internet is Disrupting the Three Tier System

Buying wine online has blown up into a multi-billion dollar industry. While several states still do not allow direct shipping, the potential to have greater access to more wines and lower prices through direct shipping is taking some of the wind out of the archaic system.

Wine Flash Sale Sites

flash-wine-sale-websites
Flash wine sale sites are capable of negotiating greatly reduced retail prices with wineries to offer their large captive audience of potential buyers. The low prices offered on these sites are justified by the volume of sales. The end result is greatly reduced prices of typically higher quality wines to the consumers.

 


Online Wine Marketplaces

Online Wine Marketplace
Amazon recently came into this space with an online wine marketplace that operates differently than a traditional retail site. Instead of maintaining a warehouse and shipping wine to customers, they offer wineries (and importers with retail licenses) the ability to offer wine through the site and then fulfill the order themselves. You can find thousands of small US wineries offering their wines through amazonwine.com.
 

Winery Direct and Importer Direct

Winery Direct and Importer Direct Wine
A more recent phenomenon has been for independent importers to create their own online merchant sites to sell directly to customers. For an importer to do this they have to set up several sub-licenses that pay taxes for every step of the Three Tier Process. Overall the costs and margins are much lower and should be passed along to you. If you would like to see an example of this, check out fatcork.com


Sources
A great article on the true cost of wine from the Oregonian
A fabulous comparison on the three tier system to the UK vertical monopoly in Washington Monthly
A report from Ship Compliant on 2013 statistics on online sales.


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By Madeline Puckette
I'm a certified wine geek with a passion for meeting people, travel, and delicious food. You often find me crawling around dank cellars or frolicking through vineyards.