A Brief History of The Middle Tier

This is part 2 of a series on Distribution of Craft Beer in Northern Colorado, to catch up on the first, click here

From 1920-1933 more alcohol was consumed in the US than any other decade previous. However, the production, transport and sale of alcohol was illegal. Prohibition, spurred by the Temperance Movement and the Anti-Saloon movement,  created a vastly different market for alcohol in America than before. In an attempt to prevent the problems that prompted Prohibition in the first place, the 3-tier system was created. The intention of this system was to do 3 things; regulate the production, transportation and sale of alcohol, give these powers to the state to decide, and provide an avenue for state and federal governments to collect revenue.

Before prohibition many bars were owned or controlled by breweries, distributionoldknown as a “tied house”. When fees and taxes were raised in the name of temperance, bars who couldn’t make the cut asked breweries to help foot the bill in exchange for only serving their product.  This created a backlash of price fluctuation  and over consumption as prices dropped. One intention of the three tier system is to prevent this sort of favoritism and allow for a more open and fair  market.  While the intentions are good, there is only so much shelf space and SKU’s (Stock Keeping Unit) available, especially with the boom of craft beer. Distributors such as American Eagle, High Country Beverage and C.R. Goodman are all competing for the same set of tap handles and have more than enough brands to fill them creating a competitive and intense sales environment. If you visit bars in Fort Collins, you will probably find bars who carry more of one companies brands than another.

The repeal of prohibition left most regulatory decisions up to the states. These included self-distribution, franchise laws and even regulations on the ability to provide incentives. Each and every state is different. Most Southern states including Alabama, Georgia and Florida do not allow breweries to self distribute. In California breweries can not only self distribute their own brands, but also others as well by owning a distributor. This is known as vertical integration. Here in Colorado, breweries must hold a wholesaler’s license but are able to self distribute their products. Brewpubs (who also hold a retailers license) are limited to distributing less than 300,000 a year, but no regulation exists for those without a retailer license. Colorado also allows vertical integration.

Colorado breweries are not subject to strict franchise laws, either. Some states, once a brewery and a-b-loading-trucksdistributor enter into an agreement, the brewery is “married” to that distributor. This means that the brewery cannot fire their distributor without just cause, and possibly even a hearing by a regulatory board. If there is just cause, such as a distributor neglecting a brand, a brewery can choose another distribution company. But this is a long and hard process, promting breweries to be very careful about their first choice of distributor. While the franchise laws are lax, Colorado is subject to an “at-rest law”, meaning that the beer must “rest” at a distributor between the supplier and the retailer, which slows down the process of distribution.

Distributors are usually the ones who collect the most taxes than any other branch of the 3-tier system. Currently in Colorado, according to The Northern Colorado Business Report, distributors in Colorado contribute $215 million in taxes. An additional $124 million is paid in alcohol excise taxes. Colorado has one of the lowest levels of excise tax, a law that hasn’t been changed since the 70’s. Also since the 70’s the number of distributors in the US has decreased from 4,699 to less than 2,000. While brands and SKUs are multiplying, distributors are consolidating. This is forcing the distributors that are still around to adapt to the rapidly growing and changing market, creating a whole new way of doing business.

Be sure to check out the next edition in the series to learn more on distribution in Northern Colorado 

May 16:  The Brewery and the Sales Guy

May 23:  The $1million Warehouse Upgrade

May 30:  Rosie the Distributor

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