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How screwed up is three-tier? Plenty, as Missouri can attest

Missouri three-tier system

The three-tier system is about money, and not the consumer. Right, Missouri?

Alcohol is distributed through the three-tier system in the U.S., and is constitutionally protected, thanks to several Supreme Court decisions, just like freedom of speech and religion. But that doesn’t mean it deserves that protection.

This was amply demonstrated in Missouri this spring. The state legislature debated a bill that would have restored a law that a federal judge had thrown out, suffered through a filibuster in the state Senate, and almost scuttled much needed legislation to decriminalize home brewing.

None of this effort was intended to benefit consumers, and none of it did. Instead, it was a fight between one distributor, its biggest competitor, and the world’s largest booze companies to redistribute their constitutionally-protected share of the nine-figure Missouri wine, beer and spirits market.

Or, as one eyewitness told me: “It’s chaos.” More, after the jump:

Don’t worry if none of this makes sense. Even the experts are confused (almost all of whom asked not to be identified, since so much money and so many egos are at stake – and several didn’t want to talk about it at all). As Lou Bright, the former general counsel for the Texas ABC and now in private practice told me: “I’m sure glad we get to be spectators on this.”

And it’s not like there’s anyone to feel sorry for. Major Brands, Missouri’s biggest distributor, has $550 million of sales, and rival Glazer’s Midwest is part of the $3.8 billion Texas-based Glazer’s Distributors. The producers include the $11 billion Pernod Ricard and the $2.8 billion Constellation Brands.

So what do you need to know to make some sense of this?

• Three-tier in Missouri means that every wine, beer, and spirits producer has to sell its products through a distributor, which then sells them to retailers and restaurants. The distributor, by law, can’t be squeezed out of the sale and always gets its cut, often as much as 20 percent.

Missouri is a franchise state, which means that once a producer signs an agreement with a distributor, it’s almost impossible for the producer to get out of the deal. It’s stuck with the distributor forever.

A 2011 federal court ruling (and later affirmed by an appeals court) overturned the franchise law. Soon after, Pernod Ricard, Constellation, Diageo Americas, and Bacardi USA sued their distributors to get out of their contracts.

Pernod, in fact, sued both Major and Glazer’s Midwest, and may still be suing someone. In the meantime, it decided to give its Missouri business to Major, while leaving Glazer's with its distribution in Arkansas and Kansas. Which seems a lot like like suing Ford and then buying two more Fords.

• Glazer’s Midwest, meanwhile, switched sides in the middle of the debate. It originally supported the new franchise legislation, but then joined a group of producers opposing it.

And none of this takes into account the spellbinding sight of democracy at work in the Missouri Legislature. The state House passed a version of the new franchise bill, despite the federal court rulings and Gov. Jay Nixon’s veto of a previous attempt to revive it – and made the law retroactive to the federal court ruling. That anyone thought retroactivity would survive a lawsuit is beyond amazing. Hyper, super, stupidly amazing, perhaps?

Somehow, that bill died in the state Senate, but was resurrected in the House by attaching it to a bill to allow homebrewers to pour their beer at festivals, competitions and charity events as long as they didn’t sell it. Apparently, and we have three-tier to thank for this too, every time a Missouri home brewer wanted to give away his or her product at a charity event in years past, they were breaking the law.

That brought on the filibuster in the state Senate, and the franchise bill finally died (though, thankfully, the homebrewing part became its own bill again and passed).

The finally tally? The lawyers and lobbyists got theirs; Elizabeth Crisp of the Post-Dispatch in St. Louis reports that three dozen of the latter were involved on either side. The legislators wasted time and money that could have been put to better use debating criminal code and tax reform to argue about a bill that wouldn’t affect what consumers pay for wine, beer or spirits or how they drink it – just who will make more money by selling it. That’s not how government is supposed to work.

I long ago made my peace with three-tier; it’s too powerfully entrenched to go away, and especially in the campaign-contribution, pay-to-play system that passes for democracy these days. But that doesn’t mean it has any new clothes, and I’ll call that emperor naked every time he goes riding down the street.

4 Responses to How screwed up is three-tier? Plenty, as Missouri can attest

  1. Noblewines says:

    This is a controversial topic and a well written and balanced post. I am very surprised to the lack of commentary. The system is showing “wear & tear” but I too don’t believe it’s demise is coming very soon. But there are adjustments being made and the system will become more fluid as more wine biz people figure out different ways to use & abuse the system currently in place.

  2. steve@winethropology.com' Steve says:

    Call me a nerd, but that’s fascinating. Stupid, frustrating, and fascinating. Not only have litigation and lobbying become cornerstones in business practice, but apparently acting like an asshole doesn’t devalue the players’ sense of ego.
    Long, long gone is the naïve notion that wine is a hallmark of a civilized society and, as such, the business trading it ought to be conducted in a gentlemanly manner. Pity.

  3. Jeff Siegel says:

    One thing worth noting about all of this is that what happened in Missouri, and about three-tier in general, is that the behavior of those involved is no different than in too many other areas in modern business. The idea is to protect turf and not innovate or deliver value. You can see that in all of the patent trolling and lawsuits in high tech,
    And Noblewines, I hope you are right about adjustments being made. Frankly, I think there were so few comments here because it’s embarrassing to the industry.

  4. mcookson@abbeywinery.com' Matt Cookson says:

    And everybody wonders where the Mafia went after prohibition, well I will give you a
    hint, SW&S. Money for nothing and chicks for
    free. The whole bunch are still criminals with no remorse for holding the industry and
    its consumers hostage. They only care about themselves. How does a Chicago distributor end up owning wineries? Very fishy.
    Matt

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