While we can’t speak for everyone who ever dreamed of starting a brewery, we can convey the consensus of the members of our organization: The Alabama Brewers Guild supports an independent three-tier system, with the following caveats:
- Direct sales, where a customer buys directly from the brewery at the premises, are a common and reasonable exception to a strict interpretation of the three-tier system. Direct sales are legal in every state, including Alabama.
- Laws that restrict a small brewery’s ability to enter into enforceable contracts with their chosen distributor have nothing to do with the three-tier system.
We’re going to do something that probably no else has been able to do for you – briefly explain (in understandable terms) the history and operation of this three-tier system and how it applies to today’s world of craft breweries.
While we view the three-tier system as a reasonable regulatory scheme to protect the public interest, no one is going to believe that a business association has purely egalitarian motives. So here are some purely selfish and greedy reasons why we love the three-tier system:
- We got into this business to brew beer, not to manage a warehouse and trucking business.
- It is illegal for retailers to ask us for money to put our beer on the shelf – which used to be a big problem prior to the three-tier system.
- We often don’t even hear from the thousands of retail accounts that carry our products – the wholesalers deal with most of that for us.
- We have one customer – a distributor – for huge geographic regions, and they buy our product by the truckload.
What is the three-tier system?
The three tiers are manufacturing, distribution, and retail.
In most circumstances, the three-tier system says that the retailer (bars, stores, and restaurants) cannot buy beer directly from the brewery. Instead, the retailer must buy beer from a licensed distributor, who buys beer from the brewery and sells to the retailer.
The “tied house” system had all the vices of absentee ownership. The manufacturer knew and cared nothing about the community. All he wanted was increased sales. He saw none of the abuses, and as a non-resident he was beyond local social influence.
–Toward Liquor Control
Why the need for a system at all?
Before Prohibition, one of the perceived social ills of alcohol was the tied house – a saloon that was under the direct or indirect control of a single brewery. As Prohibition was being repealed, an influential public policy book called Toward Liquor Control explained the concern with the tied house system.
The distaste for tied houses predates the repeal of Prohibition. As early as 1911, Governor Emmet O’Neal of Alabama declared that “the brewery and the saloon must be separate.” Prohibition was a miserable failure, but both the federal government and the states decided that the tied house should not return.
The purpose of the three-tier system is to prevent tied-houses: to protect the independence of retailers such as bars, restaurants, and stores
Enter the three-tier system
The regulatory framework that emerged to prevent the tied house came to be known as the three-tier system. In addition to strict controls on the business interactions between manufacturers and retailers, many states such as Alabama mandated that an independent wholesaler be used to serve as a middle man between the manufacturer and the retail outlets.
Direct sales in the three-tier system
A direct sale is a sale from the brewery, to the customer, at the brewery. It is a common and reasonable practice, especially if there are appropriate restrictions. The thousands of licensed retailers in Alabama – from big box stores to chain restaurants to the locally-owned craft beer bar – continue to be independent if the manufacturer conducts direct sales at its location.
Franchise law in the three-tier system
One additional aspect of Alabama’s law is often confused with the three-tier system – the beer franchise law.
Briefly, these statutes make it extremely difficult for a brewery to modify, terminate, or fail to renew a territorial agreement with a distributor. It has absolutely nothing to do with the three-tier system. It was codified decades after Prohibition to protect wholesalers from large suppliers.
Throughout the seventies and eighties, the number of breweries in the United States shrank with consolidation and a small number of breweries dominated the manufacture of beer in the country. In many cases, distributors sold only one brand of beer. To protect the local distributor from the whims of these mega-breweries, a few states such as Alabama passed these franchise laws.
Franchise laws were designed to protect distributors from multi-billion dollar a year international brewer conglomerates. The Alabama Brewers Guild supports an exception to the franchise laws for small brewers.