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What is this Three-Tier System? What is tied-house?

July 25, 2013

If you are interested in craft beer, then you have probably heard someone refer to the “three-tier system” and/or “tied-house” prohibitions.  Let me give you the low down on it.

Let’s talk about tied-house prohibitions first.  The term itself, “tied-house,” comes from a practice in England where a bar would be tied, by ownership or contractual obligations, to a specific manufacturer.  Alcohol manufacturers frequently had some sort of ownership interest in the taverns that sold their products. Sometimes the manufacturers would have a direct ownership interest. It would be like, if today, Red Brick owned several taverns, Monday Night owned several of its own taverns, SweetWater owned several of its own taverns, and so on. And the Red Brick taverns only sold Red Brick beer; Monday Night taverns only sold Monday Night beer, and so on.

But manufacturers also would indirectly control “independent” taverns through various ways, such as furnishing them with equipment and supplies, selling to them on extended credit terms, charging low or no interest, and paying rebates for pushing their brand or carrying it exclusively.  In essence, the taverns or retailers became dependent upon the manufacturers.  This is where the term “tied-house” comes from – the taverns were tied to the manufacturers – if a tavern didn’t push a manufacturer’s product, the manufacturer would take back the equipment or stop extending credit.  As such, taverns did whatever they could to please the manufacturers.

Competition for control of taverns was extreme, and tremendous pressure was put on retailers to sell, sell, sell without regard for the welfare of the customers.  For instance, you know how some bars offer complimentary salty snacks because salty snacks make you thirsty, and, if you are thirsty, you buy more beer?  Well, that concept went supersonic during the pre-Prohibition era.  Manufacturers would require taverns to offer free lunches.  The taverns, in turn, would really push alcohol sales on patrons to make up for the lost revenue as a result of the free lunches, for example. Drink more, drink more, drink more was the name of the game. Such marketing practices encouraged intemperance (so the argument goes).

These tactics led to a campaign to prohibit drinking nationwide.  It’s hard to imagine, right? Outlaw drinking?  But, in 1919, the 18th Amendment to the United States Constitution was passed and the era of Prohibition commenced.  It didn’t last long, though.  In 1933, the 21st Amendment repealed the 18th Amendment and gave states the right to regulate the production, importation, distribution, sale, and consumption of beverage alcohol. In other words, when it came to booze, the Feds were no longer the top dog.

As such, the states began to come up with ways to regulate and control the alcohol industry in an effort to curtail the excess consumption that led to Prohibition in the first place. Additionally, the states were keen on coming up with a way to collect taxes on alcohol producers – money, money, money.  So, some states thought that prohibiting shared interests, i.e., tied-house, between producers, distributors, and retailers would help.  Tied-house prohibitions were created primarily to address two broad dangers: (1) unfair competition, and (2) intemperance.

The three-tier system is closely related to tied-house prohibitions.  The three tiers are producers, distributors, and retailers.  Basically, the states inserted independent distributors between the producers and retailers, and required that a producer may only sell to a distributor who then sells to a retailer who then sells to consumers -the brewery may not sell directly to a retailer.

Today, many folks vehemently oppose any changes to the three-tier system out of fear that excessive consumption will return; other folks think that many of the regulations are antiquated and should be amended.  There is truth in both positions.  One point that many people misunderstand is that a tweak to the three-tier-system of distribution does not mean a change or easing of tied-house prohibitions.  Currently, many states are struggling with whether to allow breweries to sell pints on-premises and/or to sell cases for off-premises consumption.  The struggle over whether to allow these things stems all the way back to pre-Prohibition days.  Needless to say, it is a very interesting time in the world of beverage alcohol.

If you want to read a good book on this topic, check out Repealing National Prohibition by David E. Kyvig.

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