Is the 21st Amendment Hurting the Alcohol Industry?

By Gustav Vincoeur |

Our in-house contrarian ponders whether Repeal Day is really a cause for celebration…

Today is Repeal Day. Bars will offer drink specials. Friends will seize the excuse to gather and drink. You might even see some ad campaigns hailing the 84th anniversary of the passage of the Twenty-First Amendment. The Amendment repealed alcohol Prohibition, but also birthed a complicated legacy–not necessarily helpful for the industry. Repeal can be thanked for a industry power shift away from small producers as well as the creation of the infamous “three tier system.”

The amendment is short, three sections, each one sentence long. The first section simply states, “The eighteenth article of amendment to the Constitution of the United States is hereby repealed.” The third section is a clause noting that the 18th must be ratified within seven years of being handed over to state conventions. (Don’t worry, it was.)

However, the second section still defines the way that the alcohol industry in America operates. The text dictates, “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.” The words sound simple enough, but in reality, they heralded a paradigm shift.

Essentially, what this seemingly innocuous phrase achieves is taking the regulation of alcohol out of federal control and handing it over to the states. Before Prohibition, a distiller (or brewer or winemaker) could just take their product and sell it to whoever they pleased. Likewise, an importer need only clear the federal redcap and fees. However, after Repeal, local regulations emerged, the three tier system was created, and the process of getting booze to bar became much more complicated. To this day, American alcohol enthusiasts and professionals are still must traverse a consequent mountain chain of regulations with a different peak in each and every state. The result is, at times, devastating to the industry.

The most obvious effects of the distribution of power can be seen in states with limited access to alcohol. Currently, there are 17 so-called “control states” where state run monopolies, akin to a Scandinavian system, are the only means to buy spirits (and sometimes beer and wine.) Other displays of state power were even more overt: Mississippi was completely dry until 1996; in fact, the Magnolia State along with Kansas and Tennessee is still dry by default, meaning a county must specifically authorize the sale of alcohol; even left-leaning New York includes dozens of towns barring drinking anywhere outside of a private home.

However, to industry insiders, the glaring effect of the 21st amendment is the notorious the notorious “three tier system.” After Repeal, states sought a means to maximize the tax revenue from their new power and devised the current system which dictates that alcohol sellers must fall into one of three slots: importers or producers, distributors, and retailers. Only an importer or producer may sell to a distributor; only a distributor may sell to a retailer; and only a retailer may sell to a consumer.

The system is often criticized for disadvantaging small producers (although some winemakers successfully sued for the right to sell direct to consumers in specific circumstances.) Some critics maintain that the legal need to land a distribution contract raises nearly insurmountable barriers to entry for newcomers and often forces them to lock themselves into bad deals with shady distributors. Others note that the inclusion of the wholesaler only serves to increase the price and slow down delivery.

The three tier system is why your favorite cognac is only available in 16 states, but Hennessy is available nationally. Large brands and importers have the capital to deal with pushing paperwork in 50 states at once for a new product whereas independent producers must pick and chose where they want to focus their limited resources. A self-perpetuating cycle often emerges: Big Liquor is the only brand licensed in a state; so, the bartender sells it because they have no alternative; consequently, more money gets dumped back into Big Brand’s pocket making them bigger and making it more difficult for anyone else to compete.

In much of the world, brands and importers can sell directly to bars and restaurants which creates a different dynamic. Bars regularly benefit from incentives created by the producers who must compete directly for their business. Conversely, advocates of the system point this incentives out as a negative. Critics contend that brands should not be able to exercise that much control on the retail level.

The good news is that over time, the three tier system has weakened. Numerous lawsuits have challenged provisions of the system and some exceptions have been carved out. Brewpubs can sell directly to customers on-site. Many wineries can now ship directly to their patrons. Still, the three tier system is not going anywhere. So, as we raise our glasses to the right to drink, remember that we may also be paying more for a smaller range of drinks to put in that glass.

 

The opinions in this piece reflect only the opinion of the author, not the opinions of Neat Pour or the Neat Pour editorial board.

Read Next