Taxes and the 3-Tier System (Why Wine Costs So Much!)
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?
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.
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:
- Increase the minimum price of alcoholic drinks to control alcohol abuse.
- 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:
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Mark-Ups Compound By Percentage
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.
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.
Fortunately, The Internet is Disrupting the 3-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 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
Sites like Wine Searcher, and apps like Vivino and Drizly are hoping to fill a new space called “DTC” or direct-to-consumer. They act as the go-between the consumer and winery (or actual wine warehouse).
Amazon came into this space too with a 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.
Unfortunately, when the Amazon purchased Whole Foods they had to shut down Amazon wine on December 31st, 2017.
Winery Direct and Importer Direct
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
So, what else goes into the true cost of wine?