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Value of the three-tier system
Alcohol as a controlled commodity
- Alcohol has been a fixture of almost every human society for thousands of years – from social to religious and even medicinal purposes. Proving old beliefs true, new and growing scientific research links the moderate consumption of alcohol to good health, from fighting heart disease to slowing the aging process. However, as much as alcohol is an enduring part of human culture and can be beneficial, it is dangerous in the wrong hands. Every society has recognized the critical need to limit the access to and use of alcohol.
- Alcohol – like prescription drugs or firearms – is no ordinary commodity. In fact, alcoholic beverages are the only commercial products specifically named in the United States Constitution. Because our society recognizes the importance of controlling alcohol use and access, alcohol has always been treated differently under the law than most other products.
- Before Prohibition, alcohol manufacturers either owned or controlled most retail outlets. This led to irresponsible and unaccountable practices – illegal sales practices, monopolistic behavior, and easy access to alcohol – which resulted in high levels of alcohol abuse and underage sales.
- After the repeal of Prohibition in 1933, the three-tier system was created to strike the right balance between control and access of this socially important but potentially harmful commodity.
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Distributors provide more than 39,200 good jobs to Minnesotans
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How the three-tier system works
- In all 50 states, alcohol is sold through a three-tier system. In the system, beverage manufacturers, distributors and retailers each occupy a different level. Manufacturers (breweries, vineyards and distilleries) supply distributors (wholesalers); distributors in turn supply retailers. Under the laws which created the three-tier system, each level of the system is independent of the others – ensuring accountability to the public as well as the benefits of healthy competition.
- Under the three-tier system, distributors play the key role. It is no exaggeration to say that without distributors there would be no three-tier system at all. Distributors are the indispensable buffer between manufacturers and retailers, protecting the two other levels of the three-tier system from the abuses of the pre-Prohibition period.
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Benefits of the three-tier system
- The three-tier system is designed to prevent vertical integration within the industry, thereby promoting moderation in the sale of alcohol.
- By preventing tied houses (i.e. retailers that sell the products of only one supplier), the three-tier system limits the number of retail outlets and therefore promotes moderate consumption.
- Limited access is tied to moderate, more responsible consumer use. In turn, moderate use ensures lower levels of excessive drinking, underage drinking, and drunk driving.
- By requiring that all alcohol pass through a state licensed distributor subject to Minnesota regulatory authority, the three-tier system ensures that alcohol is only sold to licensed retailers in a manner that is consistent with applicable law and that the proper taxes are paid.
- At a time when society is demanding more effective regulation in other industries, the three-tier system has been effectively ensuring transparency and accountability in the beer, wine and spirits industry for 75 years.
- The best method of regulating alcohol does not necessarily come at the greatest convenience or lowest cost for individual consumers. However, it does ensure that consumers have appropriate access to alcohol at the lowest cost to society and with the least harm to its members. The incidental regulatory burdens associated with the three-tier system provide greater retail choices for consumers, as well as transparency, accountability, and limited access to alcohol.
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Minnesota's system not only works – it is the ideal
- In addition to the three-tier system, Minnesota has other longstanding laws that safeguard consumer choice, regulate who can be served and who cannot (namely minors and intoxicated individuals), and protect small retailers.
- Although grocers are currently permitted to sell alcohol if they abide by the regulations imposed on other retailers, they are currently asking to be exempt from the most important of those regulations with regard to the sale of wine. In addition to public safety concerns, such an exemption for grocers would jeopardize the viability of smaller retailers – including the 226 municipal liquor stores across Minnesota – and limit the variety of choices presently available to consumers. Proponents of Minnesota's three-tier system believe that grocers would inevitably also ask to sell beer and spirits.
- In recent years, deregulation proponents have suggested closing municipal liquor stores, an idea that threatens the fiscal health of already hard-pressed local governments and property taxpayers.
- Recent studies suggest that the sale of alcohol by grocers would result in an increase in youth alcohol access problems. In addition, grocers typically offer only a small selection of products and cannot provide selection advice to their customers; both of these factors hurt rather than help consumers.
- Even a slight increase in alcohol use would result in public safety and law enforcement costs that offset the dubious economic savings alleged by deregulation proponents. This is why the Minnesota Alcohol and Gambling Enforcement Division – the lead state agency for alcohol regulation – opposes any change in the regulatory system.
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Distributors' role in the three-tier system
Overview
- Minnesota has 76 beer, wine and liquor distributors, all of which are family-owned businesses.
- These alcohol beverage distributors are the middle tier in the three-tier system, separating manufacturers and retailers to ensure that manufacturers do not exert undue influence on the retail sale of alcohol. The three-tier system is the best and only viable way to meet the public's expectations for limiting access to and use of alcohol.
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Value of distributors
- Distributors serve several important functions, including:
- Providing products to licensed retailers only
- Helping provide a wide selection of products from manufacturers of all sizes
- Delivering and rotating stock to ensure that only the freshest, highest quality products are sold to consumers
- Marketing, advertising, and record-keeping for the products they carry
- Educating retailers and servers about the products they carry
- Protecting retailers from excessive manufacturer influence
- Because retailers work directly with distributors – not manufacturers – retailers are not pressured by manufacturers' desire to sell their products. This puts manufacturers of all sizes on a more level playing field, because large manufacturers cannot control the marketplace. In turn, there is healthy competition among the manufacturers, helping ensure that consumers have a broad choice of affordable products, and that smaller manufacturers remain in business.
- Without distributors and the three-tier system, alcohol beverage manufacturers could be in a position to exert excessive influence over retailers.
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Distributors' economic impact
- The state's 76 distributors have a significant economic impact across Minnesota – through jobs, support of small businesses, and an expanded tax base.
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- In 2006, the Minnesota beer industry as a whole provided more than 39,200 jobs and paid nearly $700 million in taxes.
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Fact Sheet Sources
Health
- A 2001 survey found that the total number of deaths (resulting from all causes) in light- to moderate-drinking males (those who consumed less than two drinks per day), was about twice as high if they had periodic occasions of heavy drinking.
- Thomas Babor and others, eds., Alcohol: No Ordinary Commodity (Oxford: Oxford University Press, 2004), 62.
- The estimated costs of alcohol abuse in Minnesota exceeded $4.5 billion in 2001, according to a 2006 legislative auditor report.
- James Nobles, "Evaluation Report: Liquor Regulation" (St. Paul, MN: Office of the Legislative Auditor, 2006), 49.
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Youth access/drinking
- In a study conducted on American youth in grades 9-12, researchers found that youth in states with more limited access to alcohol (states with monopolies) had lower drinking rates than those in other states.
- Ted Miller and others, Retail alcohol monopolies, underage drinking, and youth impaired driving deaths (Calverton: Pacific Institute for Research and Evaluation, 2006), 1165.
- A 2005 Rand Health study, supported by the National Institute on Alcohol Abuse and Alcoholism, found that adolescents who more frequently viewed beer advertisements in grocery store displays and convenience stores were more likely to start drinking than peers who viewed fewer displays.
"It appears that it's a combination of message and venue that helps influence adolescent drinking," said Phyllis Ellickson, the Rand Health study's lead author. "Advertising that links alcohol with everyday life – such as supermarket store displays – appears to have more influence on drinking initiation."
- Phyllis Ellickson and others, "Does alcohol advertising promote adolescent drinking?" (Santa Monica, CA: Rand Health, 2005).
- In a study of U.S. alcohol prices compared to youth alcohol consumption, researchers found that increases in the full price of alcohol (including retail and other costs such as transportation) resulted in reduced drinking among youth.
- Thomas Babor and others, eds., Alcohol: No Ordinary Commodity (Oxford: Oxford University Press, 2004), 108.
- According to a 2007 study sponsored by the National Institute on Drug Abuse, 44.4% of high school seniors had consumed alcohol in the last 30 days from the time they were surveyed. This number was 36% lower than in 1982.
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Drunk driving
- A report by the U.S. Department of Transportation found that the number of drunk driving fatalities was 36% lower in 2006 than in 1982.
- In 2007, there were 158 alcohol-related traffic deaths in Minnesota – a 6% increase from the previous year.
- Jim Adams, "Drinking-and-driving deaths rose in 2007," Star Tribune, 28 August 2008.
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Three-tier system/regulation
- In a study conducted by the National Beer Wholesalers Associations, respondents favored federal, state and local officials having some control of regulating beer in the U.S.
- National Beer Wholesalers Association, Promoting the Roles of Beer Distributors (Alexandria, VA: Consumer Research, Spring 2006).
- A 2006 report by the Minnesota Office of the Legislative Auditor found that by adopting less restrictive retail laws, consumers would save about $100 million each year. However, these law changes would harm existing private liquor stores and municipal liquor stores, which provide $16 million annually for city services.
The same report found that eliminating exclusive territory laws (which restrict retail competition) for beer and wine would lower prices, but would result in reduced product selection and reduced quality/freshness.
- James Nobles, "Evaluation Report: Liquor Regulation" (St. Paul, MN: Office of the Legislative Auditor, 2006), 40-43.
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Economic impact
- The nation's more than 1,900 beer distributors create more than 92,000 jobs and generate $7.6 billion in wages and benefits for employees.
- John Dunham and Associates, Economic Impact Study (New York City, 2005).
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