How to distribute alcohol in the US – Why is the three-tier system in place?

Before the repeal of Prohibition in 1933, the legitimate alcohol industry was nearly non-existent. Not only was it illegal to possess distilled spirits, but tequila distilleries also couldn’t manufacture it either without breaking federal law. 

But that all changed with the ratification of the 21st Amendment to the US Constitution, which brought the Prohibition era to a close.

Nonetheless, the challenge at the time was building a long-term regulatory framework that would protect both consumers and the tequila industry at large.

Introduction to Tequila

Ultimately, the system we use today – the three-tier system for alcohol distribution – won the day, so here are the essentials you need to know before you create your own tequila and distribute it in the US.

How does the spirits industry operate in the US?

To understand why this system exists in the first place, you have to appreciate how the US Constitutional Republic works.

Essentially, the federal government can’t impose broad nationwide regulations on States because the Constitution restricts such power. If the Constitution doesn’t specifically say what the federal government’s role should be, authority passes onto the States to decide what’s best.

In the end, the three-tier system came to light as a way to regulate alcohol manufacture and distribution, mainly at the state level. Federal laws exist, but the majority of rules come from individual states.

For instance, you can’t sell liquor and spirits on Sunday in Texas, but you can sell alcohol and wine across the state past noon.

That’s the difficulty – figuring out which laws will affect your new company’s business model and which won’t apply in certain States.

So, the next question is this: why did the alcohol and spirits industry need this kind of regulation?

Why do regulations exist?

Before the end of Prohibition, distilleries and breweries could collude with retailers to promote their products instead of competitors’ products. The name for these storefronts was a tied house, which basically made alcohol manufacturers part owners of a consumer-facing enterprise.

That’s unfair – period. But why?

If large corporation-run distilleries could distribute directly to retailers, the only result would be less competition and higher prices for consumers.

Still, the three-tier system eliminates this risk. It bans unfair business practices between alcohol producers and the companies that sell to consumers, whether it be a tequila private label or a microbrew.

The three-tier system also provides a way for governments to tax alcohol at each level rather than a tax only on the sale of the product. The federal government receives an excise tax, and states receive sales taxes as well as excise taxes.

Without a way to enforce violations, the three-tier system would be useless, so that’s why the taxes exist – to force the industry to follow the law for the sake of public safety.

What's the benefit of following these regulations to sell tequila in the US?

Before the three-tier system was in place, it was common for tainted black market alcohol to reach consumers. The demand for safe alcohol and spirits also contributed.

Yet, that’s not the most significant benefit of the three-tier system.

Simply put, without this kind of layered framework, startups and small distributors would have no way to compete with corporate brands.

The three-tier system ensures fair market access since distributors and retailers can’t team up to drive up prices.

Another benefit is that a new business like a tequila private brand doesn’t have to open in a state with more restrictive statutes. There are States in the US that regulate alcohol loosely, but there are others that have far stricter regulations.

From the distillery’s point of view, operating separately from other tiers gives them access to a broader pool of customers, meaning wholesalers and distributors.

For instance, startup tequila distilleries can choose to partner with a distributor who specializes in quality spirits instead of choosing a corporate partner.

Overall, the three-tier system makes the market for tequila private brands more viable for newcomers and upstarts alike.

Still, true maestros tequileros can rise if they choose a reliable distributor.

Reasons to partner with a reliable distributor

At a minimum, the US has 50 different regulatory frameworks for alcohol sale and distribution since there are 50 States.

So, the main benefit of partnering with distribution is that you won’t have to navigate complex laws on your own. The distributor’s operations will follow all applicable laws; all you do is ply your trade and make a fantastic tequila private label.

An additional benefit is that you can have the distributor pitch small-batch liquors and spirits to businesses, restaurants in particular.

Indeed, the three-tier system makes it illegal for distilleries to market to retailers, but that only means distributors must fill the role.

Some of the most successful distributors in the US actually have sales and marketing teams visit bars and restaurants to introduce new items.

That’s one reason why it’s so vital to partner with a solid business and marketing strategy because you won’t be able to promote your product directly.

Instead, you’ll have a much more versatile way to expand your market share. If you open up in the right location, your brand could skyrocket once it grows in popularity.

Best of all, there are specialty distributors that only deal in fine spirits and foods, so that’s another option for tequila private brands.

Ultimately, the three-tier system is a blessing for the alcohol industry in the US in several ways, mainly increasing market access and fair business practices.

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