The benefits of the three-tier alcohol manufacture

Etudes

The benefits of the three-tier alcohol manufacture, distribution, and sale in Georgia
James Beveridge
Georgia Department of Revenue
Abstract
This research surveys the perceptions of Georgia Department of Revenue Alcohol and Tobacco employees as it relates to the benefits of the Alcohol three-tier manufacture, distribution, and sale system that is used throughout the state of Georgia. This same type of system is in place throughout many other states across the country. These employees are tasked to ensure that alcohol manufacturers, wholesale distributers, and retailers adhere to Georgia’s requirements that are in place for licensing of business’s that produce, distribute, and sale beer, wine, and distilled spirits. The Department of Revenue employees that are assigned to the Alcohol and Tobacco Division were surveyed with 54 of 65 completing the survey with many responding with additional comments. The data indicates that in all three questions posed, over 76% of employees believe that the three-tier system is beneficial to the industry and fosters a competitive and healthy system with the alcohol industry.
The benefits of the three-tier alcohol manufacture, distribution, and sale in Georgia
Before we begin to understand how the three-tier alcohol distribution system works we must first understand how the country came to need this system. The simple answer is “prohibition”. The idea of “Prohibition” came to light as a part of the Temperance movement. The theory was that the uncontrolled consumption of alcohol and the results of its use, that including intoxication were the foundation of the current state of crime across the country. Crimes such as robbery, assault, theft, and murder as well as other negative aspects of society.
There was a concerted effort across the country to, among other things to pressure the population to consume alcohol and intoxicating beverages in moderation. As the movement grew the push moved towards pressure to agree to stop drinking completely. The movement began with its members being mostly women who at the time were dealing with the results of their husbands non-stop drinking that in some cases lead to unemployment. It came to pass at that time that these organized groups began to blame most if not all of society’s problems on alcohol. Problems such as health issues, crime, and destitution. Employers began to blame low morale in the work place on the abuse of alcohol as well.

Temperance movements existed in other countries, but it really began to pick up steam in the United States around the eighteen hundred’s as religious organizations began preaching of societies downfall and demise because of the ill effects of alcohol consumption. They spoke not of just family values deteriorating but also of social ills such as slavery, neglect and ill-treatment of marginalized people. By the twentieth century the temperance movement was represented in all most every state and had produced many laws prohibiting the use of alcohol all together.

The results of this movement were the ratification of the 8th Amendment of the constitution in 1919 which prohibited the manufacture and sale of alcohol throughout the United States. In that same year, the Volstead Act was passed to clarify the amendment to include all intoxicating beverages such as beer, wine and malts beverages. The act also prohibited the ownership of items designed to manufacture alcohol.

Another result of the temperance movement was called the “Prohibition Party”. This party was formed in 1869 and consisted of American political candidates that were in favor of removing alcohol from the country. These people believed that this goal could not be maintained by current leadership within the government. The “Anti-Saloon League” was also formed in the late 1800’s. This organization was represented throughout the nation and began to push for nationwide prohibition of alcohol. They also played an important role in electing prohibition supporters into Congress.
The results of the early years of support and growth of different anti-alcohol movements began the years of local prohibition. States and counties across the United States began passing local prohibition laws and ordinances. Many of the first established laws came from the rural south due to the growing population because of the influx of European immigrants.
Based on the above, the era of Prohibition began. The 18th Amendment to the United States Constitution was ratified on January 16, 1919 and took effect one year later. The amendment required that one year after the document was signed, the manufacture, sale, or transport of alcohol into or out of the United States was prohibited. In effect the 18th Amendment abolished the rights of every brewer, distiller, wholesaler, and retailer of alcoholic beverages in the country to continue to produce their product.
The National Prohibition Act of 1919 was passed. This act gave the authority to enforce prohibition to the “Commissioner of Internal Revenue, along with his assistants, agents, and inspectors”. One of the difficult issues was that although it was illegal to manufacture or distribute alcohol, it was not illegal to possess it for personal use. This allowed citizens to possess alcohol in their homes and drink if it stayed inside and was not sold or given away.

After the 18th Amendment went into effect there was a definite decrease in the use of alcohol. Initially this made people hopeful that this new prohibition was going to be a success. As the decade continued, illegal supplies increased, and a new generation began to ignore the law and reject the attitude of self-sacrifice. More Americans once again decided to indulge.
Advocates for Prohibition thought that once liquor licenses were revoked, reform organizations and churches could persuade the American public not to drink. They also believed that “liquor traffickers” would not oppose the new law and saloons would quickly disappear.

There were two schools of thought among prohibitionists. One group hoped to create educational campaigns and believed that within 30 years American would be a drink-free nation. however, they never received the support they were looking for.

The other group wanted to see vigorous enforcement that would essentially wipe out all alcohol supplies. This group was also disappointed as law enforcement could not get the support they needed from the government for an all-out enforcement campaign. With only 1,500 agents nationwide, they could not compete with the tens of thousands of individuals who either wanted to drink or wanted to profit from others drinking.

After a short time, Americans began to find their own unique ways to obtain liquor in some form or fashion. From home distilleries that produced moonshine and “near beer” to bootleggers, rum-runners, and even the rise of speakeasy’s (underground bars).

Eventually, despite the prohibitionist’s propaganda, governments began to realize that Prohibition was never popular with the American public. Americans enjoyed drinking and there was even a rise in the number of women who drank during this time. This helped change the general perception of what it meant to be “respectable”. Prohibition was also a logistical nightmare in terms of enforcement. There were never enough law enforcement officers to control all the illegal operations and many of the officials were themselves corrupt.

Eventually Repeal was at hand. One of the first acts taken by the Roosevelt administration was to encourage changes to the 18th Amendment. It was a two-step process; the first was the Beer Revenue Act. This legalized beer and wine in April of 1933. The second step was to pass the 21st Amendment to the Constitution. With the words “The eighteenth article of amendment to the Constitution of the United States is hereby repealed”, Americans could once again drink legally.

On December 5, 1933, the nationwide Prohibition was over. The new laws left the matter of Prohibition up to state governments. All the states have delegated the decision to prohibit alcohol or not to local municipalities. As a part of the repeal of Prohibition, the federal government enacted many of the regulatory statutes on the alcohol industry that are still in effect.

States began using alcoholic beverages as an important revenue source. As a revenue source, it was imperative that the states enact laws and adopt regulations that allowed for ease of verification of shipments and sales. The states had a responsibility on behalf of their citizens to collect the proper amount of tax, enforce the laws for the public’s safety, insure products available were of good quality and promote voluntary compliance.

Individual states enacted laws specifying how alcoholic beverages would be sold in their state. Currently states generally fall within one of two categories: control or license. There are currently 18 control states and 32 license states in the United States. Georgia is a license state.
Control states, at some level, own and distribute the alcoholic beverages themselves. The State of Washington is a control state. The state is the wholesale dealer for liquor within its borders. If you are a retailer in the State of Washington, you purchase your stock of liquor directly from the state. Twelve control states also control sales at the retail level for beer, wine and/or liquor.
License states rely upon private enterprise to produce, import, distribute and sell beverage alcohol within their borders. However, this may not be done without first obtaining privilege licenses and under strict oversight of the government. In Georgia, both the local and state governments must issue licenses before a business may engage in the beverage alcohol business at wholesale or retail. The local and state governments establish the regulatory framework within which private enterprise operates.

Georgia developed its version of the three-tier system. The initial tier is the manufacturer, distiller, brewer, etc. The next tier is the wholesale dealer. The third tier is the retail dealer or retail consumption dealer. These three tiers, while linked by business necessity, are required to remain distinct and separate entities. Manufacturers shall have nothing more than a strict business relationship with any wholesale dealer, retail dealer or retail consumption dealer. Wholesaler dealers shall have nothing more than a strict business relationship with any manufacturer, retail dealer or retail consumption dealer. Retail dealers and retail consumption dealers shall have nothing more than a strict business relationship with any manufacturer or wholesale dealer.
This system serves well because, by intricate design, it allows and requires an efficient “paper trail” for beverages produced by the manufacturer to be accounted for as being shipped to a wholesale dealer which, in turn, is accounted for as being shipped to the retail dealer or retail consumption dealer. There are multiple checks, balances and cross references built into the system. Because of the built-in accountability, the rate of voluntary compliance with both local and state excise tax filings and payments is very high. It is relatively easy to trace shipments from manufacturer to ultimate retail locations.
This system includes the concept of “exclusive territory”. This concept requires each manufacturer to obtain approval to first ship a product into Georgia while at the same time designating one wholesale dealer for a specified area. That wholesale dealer is the only legal source for that product in that specified area. Market forces of competitors’ products help keep prices among brands competitive. This concept forms a significant part of the checks and balances system for both taxes and enforcement. If a product is found in a licensed business within a specified area, an invoice for the delivery of that product should be on file with the designated wholesale dealer and retail dealer or retail consumption dealer. If not, the product is not lawfully possessed and subject to seizure.

The three-tier system is intricately and delicately balanced to provide the local and state government with an efficient tax collection system, to provide quality products to consumers, to assist enforcement concerning public safety issues and to promote voluntary compliance through a clear and distinct line of responsibility. Any change in any one component of the system intrinsically requires change in several other components of the system. Removal of any one component of the system seriously impacts and jeopardizes the delicate balance of the entire system.

Based on the establishment of the three-tier system and the question of its benefit to the alcohol industry, this writer prepared a survey that was utilized to verify a hypothesis which stated that the three-tier system was in fact a benefit to the manufacturer, distributer, and retailer within the industry.
The survey identified three questions that were presented to 65 Georgia Department of Revenue, Alcohol and Tobacco employees via a survey distribution program. The survey was sent out via email to all employees on three separate occasions within the span of two weeks with 54 employees responding. The survey was sent out in the below format:
Effectiveness of the Three Tier Alcohol Distribution System
Top of Form
* 1. The Three Tier alcohol distribution system is a benefit to alcohol suppliers. w 0
Strongly Disagree Disagree No Opinion Agree Strongly Agree
Strongly Disagree Disagree No Opinion Agree Strongly Agree
Comments:
2. The Three Tier alcohol distribution system fosters working relationships between brewers, wholesalers, and retailers for mutual growth and profit. w 0
Strongly Agree Agree No opinion Disagree Strongly Agree
Strongly Agree Agree No opinion Disagree Strongly Agree
Comments:
3. The Three Tier alcohol distribution system should be abolished in Georgia. w 0
Strongly Agree Agree No opinion Disagree Strongly Disagree
Strongly Agree Agree No opinion Disagree Strongly Disagree
Comments:
The results of the survey along with all posted comments from the participants are listed below:
.

Comments:
The three-tier system is a tremendous benefit to all alcohol suppliers. Manufacturers – One of the main benefits enjoyed by manufacturers is the ability to focus what they do best, which is working to create an excellent product. The manufacturer does not have to be concerned with purchasing a fleet of trucks for shipping, maintaining additional personnel, or dealing with thousands of individual retail accounts. Wholesalers – The main benefit is similar to that of the manufacturing tier. The benefit is the ability to focus on one aspect instead of hundreds. The wholesalers need only focus primarily on product distribution and promotion. Retailers – Retails benefit from the three-tier system because of the healthy competition it provides. The alcoholic beverage marketplace has never been more robust than in today’s times. The product offering has never had a greater variety, and retailers (as well as all tiers) benefit from an increase in consumer interest and consumer purchasing.

It seems to be a fair system for all parties.

It ensures that customers have a wide variety of products that are fairly priced.

It depends on what level of manufacturing, for example, Brewpubs are beneficial due to the ability to manufacture locally and provide directly to the retailer and customer under the same roof in most situations.

The three-tier system keeps everyone honest and prohibits monopolies.

More of the distributors and start-up manufacturers that cannot afford distribution.

Ensures a market of demand based on sound principles which can be legally enforced.

The 3-tier system was not at all designed to benefit alcohol supplies, rather to assist Georgia in controlling alcohol distribution throughout the state. I think suppliers would be happy to be able to dominate the market without responsibility.

If by suppliers, you mean the retail outlets.

Comments:
The three-tier system does foster and promote good working relationships among the tiers. All tiers are required to work closely together in order to maintain the efficiency and effectiveness of the three-tier system. Without cross-tier cooperation, the three-tier system would likely falter, and the businesses would lose all the benefits they currently receive as a result of an effective three tier system.

They work well together during legislation, so I think it does foster a working relationship for mutual profit.

I’m sure the word foster is meant in a positive manner but I’m also certain that manufactures would possibly love to eliminate the middle man (distributor) and sell directly to retailers where they could monopolize the market using their lobbyists and financial strength.

There seems to be a weighted advantage to the distributor level of the system. The distributor can dictate which products are distributed in their area and how frequently to deliver based on their profitability rather than need of the customer. However, the middle tier does provide ease of distribution and decreased logistical costs to the end user.

I believe retailers seek more competitive pricing from wholesalers.

Placing individuals in a mutual benefiting “contractual” environment ensures cooperation which “tends” to lead to better working relationships.

Comments:
The three-tier system is critical to the safe and efficient regulation of the beverage alcohol industry in Georgia. The safety aspect, being the most important, is showcased daily. The three-tier system nearly eliminates the potential for tainted or unsafe products to enter the marketplace and become available to consumers. With the three-tier system in place, any unsafe or counterfeit alcohol that may enter the market would be easily identifiable as not coming from a proper manufacturer or wholesaler. Also, through the three-tier system, legitimate products can be easily tracked and removed from store shelves should the need ever arise. Additionally, the three-tier system is a highly efficient way to collect the required taxes on alcoholic beverages. In most cases, wholesalers/distributors pay state taxes based on the amount of alcohol delivered to certain areas. If this mechanism for tax collection were to be abolished, we would rely on thousands of businesses to individually report on the amount of alcohol they each make, ship, and sell and remit the appropriate tax amount. By comparison, that model of tax collection has its demonstrable share of shortfalls, as reflected in the problems that arise in the reporting and remitting of sales tax. Additionally, the three-tier system prevents oversaturation of the marketplace (as seen in other countries without a system of regulation, or in countries that previously had a system of regulation and then de-regulated the industry – see “The Danger of Alcohol Deregulation: The United Kingdom Experience” by Pamela S Erickson). Oversaturation is prevented by the promotion of healthy competition in the alcoholic beverage marketplace. The competition and variety of products helps to keep prices from being too low and increasing product availability to a previously unseen level. Without the three-tier system, the large manufacturers would own the entire marketplace, as seen just before Prohibition. This would mean only a few select brands/types of alcohol would be available (as in the soda marketplace – majority of products are all either coke or Pepsi), and the prices of the alcoholic beverages would be extremely low.

Abolishing the system would be to the detriment of small producers as well as causing problems with fair and efficient tax collections.

The tier system allows for a fair market. I do not review it as a monopoly like some do as there are different wholesalers throughout Georgia.

Not completely because the original intent was to equalize the system as a form of enforcement and to prevent monopoly. It is slowly being eliminated but some form of direct control must be in place to maintain checks and balances, and to give the little man a chance to exist.

The three-tier system works well in Georgia. However, I do believe there should be tweaks to the system to allow smaller businesses to be competitive. For example, allow a retail beer and wine gas station in a rural area to purchase (In a limited capacity) wine at retail store to be able to offer the product as a convenience to their customers when distributors only make limited deliveries to the area.

This would cause chaos and foster corruption. No way to regulate
The majority of benefactors of the three-tier system, microbrew and distillers seem to believe they would function better without distributors but fail to appreciate the initial startup they received through established distributors. Excise tax would be overly complicated, and though competitive pricing has a benefit, it will eventually drive down the profit margin of the retailers.

Without the system in place, the fair and equitable distribution, pricing and small business growth will become nonexistent. Only large corporations will survive a “bull” type market.

Not without other controls in place for alcohol distribution. In today’s society of internet sales, Georgia does need to establish clearer, tighter alcohol laws which assist with the sales alcohol through the internet. However, removing the three-tier system may tremendously drop the price of alcohol to the consumer and create a destructive state of alcohol abuse with the state and possibly surrounding states, as well as, allow companies to monopolize in the market. Unless Georgia plans to gain complete control of the distribution, it would remain beneficial to the state and its population to keep the system.
Additionally, below is attached the breakdown of percentage of answers to the questions by individual question:
Q1
The Three Tier alcohol distribution system is a benefit to alcohol suppliers.

Answered: 54
Skipped: 0
4
012345678910
 
– Strongly Disagree – Disagree – No Opinion – Agree – Strongly Agree – Total – Weighted Average –

(no label) 5.56%
3 1.85%
1 11.11%
6 50.00%
27 31.48%
17  
54  
4.00
Comments(9)
Q2
The Three Tier alcohol distribution system fosters working relationships between brewers, wholesalers, and retailers for mutual growth and profit.

Answered: 52
Skipped: 2
012345678910
 
– Strongly Agree – Agree – No opinion – Disagree – Strongly Agree – Total – Weighted Average –

(no label) 17.31%
9 50.00%
26 9.62%
5 5.77%
3 17.31%
9  
52  
2.56
Q3
The Three Tier alcohol distribution system should be abolished in Georgia.

Answered: 54
Skipped: 0
012345678910
 
– Strongly Agree – Agree – No opinion – Disagree – Strongly Disagree – Total – Weighted Average –

(no label) 7.41%
4 1.85%
1 14.81%
8 37.04%
20 38.89%
21  
54  
3.98
Comments(9)

Based on the results of the survey, this writer feels that the suggested hypotheses have been confirmed. Although some within the industry might suggest that Georgia’s three-tier system was designed in a manner that does not allow free trade within the industry its self, the hypotheses shows that this three-tier system actually keeps the large companies from being able to monopolize the industry as well as keeping the process from manufacture to distribution to retal sales legal.

References
The United States Prohibition of Alcohol, January 16, 1920 through December 5, 1933, by Colleen Graham
William J. Rorabaugh, The Alcoholic Republic: An American Tradition (New York, 1979),
William J. Rorabaugh, The Alcoholic Republic: An American Tradition (New York, 1979),
William J. Rorabaugh, The Alcoholic Republic: An American Tradition (New York, 1979),
William J. Rorabaugh, The Alcoholic Republic: An American Tradition (New York, 1979),