U.S. Alcohol Beverage
Industry Structure

White Paper Series No. 2015-1
A Guide to Distributor Bill Backs

 

 

 

 

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Copyright 2012. All rights reserved.

Printed in the United States of America. No part of this paper may be used or  reproduced in any many whatsoever without written permission.

The following provides a basic overview of the US alcohol beverage industry. It is intended for new suppliers and international importers in order to familiarize them with those unique characteristics of the U.S. alcohol industry which impact – directly and indirectly – distribution, taxation, permitting, pricing and the general structure of alcohol sales.

INTRODUCTION 

As background, upon the repeal of the 18th Amendment (“Prohibition”  1920 – 1933) the Federal Government established two principles that would  uniquely shape the U.S. alcohol market. First, alcohol sales would go through  a three-tier supply chain consisting of suppliers, wholesalers and retailers;  generally, a company’s activities in the alcohol industry would be limited to  only one of these three possible roles. Second, states would self-regulate the  movement of alcohol beverages within their boundaries (that is, its distribution  and sale).

Consequently, the U.S. alcohol market has become one of the most complex  and heavily regulated in the world. This is due, in no small part, to the  significant revenue generated through alcohol beverage taxes at all levels of  government.

But the complexity of the U.S. alcohol regulations had an unexpected and  exciting consequence. Within the U.S. small, boutique brands can take hold  and grow in a way that is not possible elsewhere in the world.

Each of the following sub-sections is a more detailed review of a these core  aspects of the U.S. alcohol system and includes a discussion as to how it  impacts your sales and marketing strategy.

THE THREE-TIER SYSTEM 

The U.S. government identifies three different roles in the supply of alcohol  beverages: 1) supplier/importer, 2) distributor/wholesaler, and 3) retailer. By law, a supplier sells to a distributor who sells to a retailer AND it is illegal to  own more than one link in the supply chain, although some specific exceptions  exist.

These limited roles prevent monopolization by large companies. For example,  a large spirits company may not own a restaurant chain that forces the sale of  its products to the exclusion of other products. Complicating the matter is the  fact that states can also impose their own limitations.

There are some exceptions to the three-tier system. For example, in some  states beer and wine producers are allowed to have a restaurant co-located  with the production facility (e.g. winery, brew house). For spirits, the regulations  are stricter.

In addition to federal regulations, individual states have the authority to regulate  the manufacture, import, transport, sales, promotion and serving of alcohol  beverages. These regulations can extend down to the municipality level. As a  result, what is considered acceptable practice in one state can be a violation in  another. Additionally, some states may reject a company’s registration in their  state based upon the company’s licenses in another state.

These fractured set of laws are generally referred to as Tied House law,  representing a loose collection of federal, state and local regulations rather than  a cohesive body of law.

STATE DIFFERENCES IN SALES: CONTROL VERSUS OPEN STATES

States have the capacity to regulate the transport, sale, taxation and marketing  of alcohol beverages within their boundaries. This has resulted in a fractured  distribution system across the U.S.

Primarily, states are classified as either Open States or Control States based  upon the distributor- and the retail-sales channels.

    • Open States have privatized retail sale of alcohol.
      • Control States have state government owned and operated distribution  and retail systems within their boundaries. Control States are subdivided into bailment and non-bailment, based upon whether payment for  product occurs at the time of invoice or at the time of sale to an end  consumer.

As with most regulations in the U.S. alcohol beverage industry, there are  exceptions that include: a) states being both open and control, distinguished  at the local level; and b) a state having an open retail system for some types  of alcohol beverages (e.g. beer) but a controlled retail system for others (e.g.  wines versus spirits, or wines of a certain alcohol percentage).

A FRACTURED WHOLESALE NETWORK

Wholesalers are limited by state boundaries or municipality boundaries within  a state. Consequently, every time a supplier seeks to expand its product’s  distribution into additional states, the brand needs to be registered with the  state, an appropriate wholesaler needs to accept the product into their sales  “book” and a wholesaler contract needs to be negotiated.

As a result, a national expansion plan requires re-inventing distribution in each  state. There is no such thing as a national wholesaler in the United States. A  few of the large distribution companies have multi-state footprints, but these  are really state-level, separate companies under a common name. Each state level company makes its own decisions. Although you will hear of national  contracts with the largest distributors, the fine print acknowledges that each  state-level wholesaler has some degree of autonomy.

Consequently, power has consolidated at the wholesaler level within the U.S.  Obtaining distribution is the single greatest challenge faced by an emerging  brand; obtaining attention by your wholesaler once you are signed is the  second greatest challenge. Put simply, wholesalers have thousands of SKUs in  their book and the titan brands pay the bills (and therefore get a lion’s share of  attention).

WHO REGULATES THE U.S. ALCOHOL BEVERAGE INDUSTRY

There is a formal and informal regulatory system in the United States. Formally,  four federal bodies regulate various aspects of the alcohol beverage industry:

  • FDA. The FDA defines what is considered safe and acceptable standards  for products offered for sale in the U.S., including the production facilities.
  • TTB. The TTB sanctions alcohol beverage products for sale ensuring that  they are generally regarded as safe and properly labeled according to strict  guidelines defined by the federal government.
  • ATF. The ATF is the enforcement arm of the government for federal  alcohol law violations.
  • FTC. The FTC oversees and regulates the marketing and advertising  materials of alcohol beverage companies, according to strict federal  guidelines.

As discussed above, states typically have liquor control boards or authorities  who work on alcohol beverage specific issues, frequently in conjunction with  their state department of revenue.

Finally, the industry is strongly self-regulated. DISCUS is an oversight body  made up of industry participants which serves as an intra-industry watchdog  group, principally concerned with the sale and marketing of alcohol beverages.  Similarly, Wine Institute publishes advertising standards for wine.

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