Until the early part of the 20th century, the distribution system for alcohol consisted of only suppliers and retailers. The suppliers were typically more profitable, favoring retailers who sold only their own brands. Many local producers had ownership ties to the taverns, and they sold to them on extended credit terms, furnished equipment and supplies, paid rebates for pushing their brands exclusively, etc. Consequently, local brewers engaged in cutthroat competition for control of outlets, and some suppliers pushed retailers to increase sales whatever the social costs. This led to the rise of excessive consumption.
In the mid 1800's, there began a call for temperance. Some states began to implement prohibition laws, but those were soon declared unconstitutional or vetoed by state governors. World War I gave the prohibition cause new ammunition. Literature depicted brewers and licensed retailers as treacherously stabbing American soldiers in the back. Prohibitionists argued that raw materials were being diverted from the war effort to an industry that debilitated the nation's capacity to defend itself.
As a result, in January of 1920 Congress enacted the 18th Amendment to the U.S. Constitution: the National Prohibition Act. However, as a result of the lack of enforcement of the Prohibition Act and the creation of an illegal industry, an increase in crime transpired. The crime rate soon skyrocketed to nearly twice that of the pre-prohibition period. It can be argued that prohibition destroyed legal jobs, created black-market violence, and diverted resources from enforcement of other laws.
In 1933 the 21st Amendment was ratified, repealing the failed experiment of Prohibition. While Prohibition did not end alcohol consumption, it dramatically changed the conditions under which it was sold and consumed. Section 2 of the Amendment gives states authority to regulate the production, importation, distribution, retail sale and consumption of alcohol beverages inside their borders.
Federal and state lawmakers realized that Prohibition did not work, but they did not want a return of the merchandizing and sales patterns that characterized the pre-Prohibition era. Consequently, they put together a three-tier system that uses wholesalers as the insulator between brewers and retailers.
Acting like a safety net, the three-tier safeguard system provides for “checks and balances” in the way that alcohol is distributed and sold to retailers as well as consumers. Producers sell to licensed beverage distributors, wholesalers sell to properly licensed retailers, and retailers sell alcoholic beverages
to the public.
The three-tier system helps ensure that alcohol is not sold to minors or citizens who have voted to live in “dry” counties, it ensures that alcohol beverage taxes are reliably collected, and it allows smaller retailers to have a more level playing field and access to more products.
This system has four primary goals:
- To avoid the overly aggressive marketing and sales practices of the pre-Prohibition era;
- To generate tax revenues that can be collected efficiently from the beer distribution industry;
- To facilitate state and local control of alcoholic beverages; and
- To encourage moderate consumption (temperance).
The three-tier system allows the state to control alcoholic beverages through licensing. Without the three-tier system, increased government regulation and enforcements efforts would be needed resulting in increased costs.
Three Tier System (PDF)