THE THREE-TIER SYSTEM
At the heart of the control system in all fifty states is the Three-Tier System, with the industry broken into three separate, state-regulated components:
Licensed distillers, brewers and vintners
Generally, each tier must remain independent of the other two. Every manufacturer must sell through a licensed wholesaler, and every retailer must buy from a licensed wholesaler. With very limited exceptions, including Virginia’s Consumer-Direct Wine and Beer Shipment Law, manufacturers cannot sell directly to retailers or the public, nor can they own retail outlets. Virginia’s wine wholesalers are strong supporters of the Three Tier System as a mechanism for maintaining product choice, regulatory control and tax collections.
The Three Tier System prevents vertical integration of the alcohol industry, thereby protecting competition and consumer choice from the corrosive effects of conglomerate monopolies. Why is this in the public interest? Alcohol products enjoy widespread consumer appeal, but at the same time, they generate widespread demands for regulation.
The Three Tier System effectively requires the alcohol industry to consist of a large number of competitors. Those engaged in distribution and retailing are mostly small businesses and virtually all are located here in Virginia. Thus, they are easier to regulate than huge, remote conglomerates, some of which might be located overseas. This helps ensure that every product sold in Virginia pays its fair share of Virginia taxes, collected by the licensees themselves.
Most importantly, since the distribution tier cannot be controlled by manufacturers, it is relatively easy for new products to enter the industry and gain market access through such independent distributors. Witness, for example, the Virginia craft-brewed products and wines that have arrived in the marketplace in recent years and enjoy considerable consumer appeal.
The Virginia Winery Distribution Company, established in 2007 by the General Assembly, is an example of how the three tier system can accommodate change. The VWDC, a unique public-private partnership, works with wineries and wholesalers to provide market access for products not already enjoying robust distribution.
The Three Tier System also provides “rules of the road” that guarantee consumer choice and competition by restricting unfair competition:
Retailers can operate free from undue pressure to buy (or not buy) particular products or use particular marketing techniques.
It is illegal for big retailers to pressure wholesalers for concessions not available to “mom and pop” grocery stores and convenience stores.
Wholesalers cannot be pressured to “buy” retail shelf space for wine or beer. If allowed, this would restrict consumer choice.
The independence of Virginia’s licensed wine distributors is at the heart of the Three Tier System. They are responsible for thousands of jobs, generate hundreds of millions of dollars in economic activity and annually pay or generate millions of dollars in state and local taxes.
Consumer choice is phenomenal.
No other consumer products industry distributes as many product choices as wine and beer wholesalers.
The ABC Board, for example, has currently registered more than 30,000 wine products for sale in the Commonwealth.
Competition in the beer and wine industries enables these products, despite their high taxes, to sell consistently at prices lower than inflation.