Post-Prohibition alcohol laws, implemented to straighten out the flawed and corrupt system of the late 1800s and early 1900s, had the unintended effect of creating a monopoly in the alcohol market. Today, those laws are struggling to adapt to the fast-paced, globally integrated market. Many breweries have been denied the opportunity to take advantage of the e-commerce boom of the 21st century, with most alcohol sold wholesale through regional distributors and not directly to consumers. But that landscape may finally be changing.
The United States Tax and Trade Bureau (TTB) is currently taking public comments concerning the status of the alcohol market and the legal framework supporting it in the United States. Per the 21st Amendment, each state is the primary regulator of alcohol, with the Federal Alcohol Administration Act (The FAA Act) setting some general rules across the board for industry conduct.
Most of the “general rules” applicable in both state and federal systems are a product of the time immediately after Prohibition ended — and have remained largely unchanged since their origination in the 1930s. At that time, large manufacturers (and organized crime syndicates) dominated the industry. Both preyed on small, independent retailers, unduly influencing the retailers to sell the manufacturers’ products only or no products at all, using legal or illegal means.
To combat this problem, called the “tied-house,” the government created a new distribution tier — a mandatory middleman between brewers and retailers — with strict separation and tight rules governing conduct among all three tiers.
Nearly 100 years later, the industry looks markedly different.
There are large and small businesses at all three tiers of the system, but time and influence have allowed the distribution tier to become the dominant player in the industry. By law, most states force a brewery to sign with one distributor and remain with that distributor forever. In many cases, the distributor may terminate the relationship with relative ease, but the brewer is trapped — unable to end the marriage unless the distributor completely fails to uphold its end of the deal (and yet, sometimes that is not enough).
The largest distributor today is present in 44 states, and two of the top 10 distributors merged in 2019 to create their own massive footprint. These large distributors partner exclusively (by law) with the largest brewers and largest retailers, then spend more time and money on the big accounts, pushing smaller brewers to the side.
Smaller, more localized wholesalers are an option for craft breweries, but carry with them higher costs of doing business, smaller market potential, greater difficulty to market entry, and slower growth or expansion.
To make matters worse, large distributors have been buying out their local competition, further limiting the options available to smaller craft producers. Dented Brick Distilling is one disheartening example: The owner was able to build a relationship with Walmart in four states, then a big company acquired his distributor and immediately terminated his account in one of those states. Walmart wants his liquor, he wants Walmart to have it, but he cannot get a middleman to move the product.
There are two solutions to this problem for craft brewers: self-distribution — brewers selling directly to retailers — or direct-to-consumer shipping (DTC).
Self-distribution gained traction in 2020 and 2021, but DTC has been slower to catch on in state legislatures around the country. In many states, breweries may sell beer to consumers from the immediate premises of the brewery (i.e. brewpubs). This can help a craft brewery increase revenue, but it largely does not help breweries reach new markets, particularly in new states.
The next logical step is DTC through e-commerce. It is only a matter of time, and updating old laws, before someone cracks this market. Websites like wine.com have created a model infrastructure with wine, but most states do not allow DTC shipping for beer and spirits.
Currently, 13 states plus Washington, D.C., allow DTC beer. Some states have taken the extra precaution to limit this privilege to craft breweries to prevent big companies from dominating the market. Next, brewers need to sort out the logistics of shipping a product which is much more sensitive to temperature and pressure changes than the typical product. The USPS, by policy, refuses to knowingly carry alcohol. FedEx and UPS require alcohol producers wanting to utilize their shipping services to sign contracts stating that all shipments are compliant with state and local laws. Without those options, the remaining options for delivery will likely be private couriers or brewery employees.
Cue Amazon, which offers a small business partnership program.
Businesses with fewer than 100 employees or under $50 million in revenue can use the Amazon platform to make sales. Amazon handles shipping and provides a boost in marketing by promoting small businesses on its website for a percentage of the profits. Amazon boasts that half of all units sold on its website come through small business partners.
However, before brewers get too excited, Amazon owns Whole Foods, which sells beer and wine — a “retailer” for three-tier purposes. If Amazon partners directly with a brewer in a “profit-sharing” arrangement, then the eyes of the law would view that as a “tied-house” — presumed to be an ultra-large brewer unduly influencing the business of a small retailer just like before Prohibition. It’s a painfully ironic situation for craft brewers.
But not all hope is lost. Online wine stores have a strong infrastructure, disconnected from the retail tier, that provides a direct-to-consumer shipping option for smaller wineries, which otherwise would be prohibited by cost from entering the e-commerce market. If Amazon, or a similar service, could (legally) operate a similar platform for craft brewers, then the potential for craft brewery growth is tremendous. The key is for state lawmakers to find the balance between opening this new path to market for craft brewers, while limiting potential for larger, more dominant brewers from using their influence to dominate the new sector.
Natural market forces would likely encourage consumers to utilize e-commerce for craft brewery beers as opposed to beers from large industry leaders. From the perspective of a consumer, beer ordered online and shipped to their door would inherently cost more due to shipping expenses. Consumers would be more likely to favor traditional retail for typical beers from big breweries, but would be willing to pay the premium to get their favorite IPA or saison from a specific craft brewery in another state.
In the wake of the COVID-19 pandemic, consumer demand for alcohol delivery and shipping is through the roof. Many comments to the TTB’s recent request encourage the adoption of some DTC framework to give small brewers greater access to the market and increase competition. Amazon alcohol might not be launching in the near future, but an Amazon for alcohol just might be.
Rachel Schaffer Lawson is an of counsel attorney at Dickinson Wright based in Nashville. She has over 10 years of experience in serving more than 300 businesses in a wide scope of industries, including the alcohol and hospitality sectors. She offers a range of legal services including Business Formation, Litigation, Trademark Search and Registration, Contracts and Agreements, and Beer and Liquor Licensing. With an educational background in entrepreneurship, marketing, and law, Rachel has dedicated her practice to advocating for businesses and carving out a specific niche in hospitality and alcohol law.
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