June 28, 2021
What Is The Three-tier System?
Alcohol distribution in the United States has historically been highly regulated, resulting in an inefficient system adding consumer costs. Interestingly, the added costs are not just a consequence of this structure, but actually was one of the primary goals when the system was created.
A quick look at the context surrounding alcohol regulations in the United States makes it clear that the traditional model, known as the three-tiered wine system, is antiquated and needs to be replaced.
The Creation of the Three-tier System
After the repeal of Prohibition in 1933, states were concerned about beginning alcohol sales again. As a result, the three-tiered system was created with the objective of being intentionally inefficient.
Lawmakers had two goals when creating this system. The first was to make alcohol more expensive in the hope of reducing the risks of alcohol abuse. The second was to limit the power of large alcohol producers, a goal that was important to many people, particularly in the wake of the passage of the American Antitrust Act of 1890.
While the system was well-intentioned, the result is that responsible consumers deal with substantial markups on every bottle of wine purchased in a retail setting.
What Are The Three Tiers?
The idea behind the three-tier system is that every bottle of wine passes through at least three different businesses before reaching the consumer. Here’s the path that each bottle takes in this system:
- Tier 1 is producers. These are the growers, winemakers, and wineries that actually produce the wine.
- Tier 2 is wholesalers. This is the tier where producers or importers sell to wholesaler distributors.
- Tier 3 is retailers. This includes restaurants, bars, wine shops, liquor stores, and grocery stores.
Obviously, for each business in this system to make money, there’s a markup at every step of the way. As an example, if a producer sells a bottle of wine to a wholesaler for $10, the wholesaler will then mark it up and sell it to the retailer for $20. The retailer still needs to make a profit too, so they’ll mark it up again and sell it to the consumer for $30. All of a sudden, the winemaker’s $10 bottle of wine costs the consumer $30.
Even with each state having varying laws, this general model has controlled alcohol sales for much of the last 90 years in America. It’s inherently inefficient and costly for the consumer--serving its original purpose well.
The Future of the Wine industry
Despite how antiquated the three-tiered system seems, there are some who argue that it still has some value even today. Namely, it allows small winemakers to sell nationally, giving consumers more options when it comes to wine. However, in recent years online sales have provided an alternative way to ensure that consumers get the benefits of this system without added inefficiencies and expenses.
Direct-to-consumer (DTC) sales are one segment of the market that have become increasingly popular. This model is now legal in most states as long as sales are done in compliance with shipping laws.
While DTC sales have been gaining market share for a few years, the last year saw record growth in the DTC industry. According to the Direct to Consumer Wine Shipping Report, DTC sales increased a staggering 27% in 2020 over 2019 sales. Obviously, COVID-19 restrictions and business closures impacted that growth some, but nevertheless, the industry is becoming increasingly popular as consumers appreciate the benefits that come from this more efficient--and less expensive--model.
What Is DTC?
Direct-to-consumer sales cut out the extra steps between winemakers and consumers. Sometimes DTC involves wineries selling directly to consumers, but more frequently it’s done through a business that serves as the go-between from the winemakers to the consumers. This lets consumers skip both the additional steps in the process as well as the extra logistical components, such as high freight costs, of the three-tiered system.
While this model is more efficient for all types of wines, it’s particularly beneficial when it comes to higher quality bottles. Under the traditional model, markups by both wholesalers and retailers are done on a percentage basis. This means that the dollar value of the markup is higher for more expensive bottles of wine, making quality wine less accessible for many consumers in the three-tier system.
Efficient DTC Models
At Gratsi, we work directly with winemakers, producing a product that meets our high standards. Plus, because we sell directly from winemakers to consumers, we’re able to sell this quality wine at an affordable price.
While this model led to great wine at a great price, we thought we could do even better so we rethought the packaging of our wines. Our boxes keep wine fresh, but they’re also lighter and more portable than bottles. Plus, the carbon footprint of our boxes is 80% less than glass bottles.
The result is the best of old world winemaking techniques combined with a modern selling model and packaging. It’s truly the best of both worlds. Try using a DTC model today by ordering a box of our Old Country Red or Old Country White and enjoy the savings, quality, and convenience that you get with DTC wine sales.