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Prohibition and the Resulting Beer Distribution System in the United States

By Blake Potolicchio | March 1, 2009 | 1 Comments

For anyone who has ever sat and pondered the steps between a beer’s conception and the moment it reaches your lips (and for those who haven’t wondered but are reading anyway), here is a look at the alcohol distribution system in the United States which has been in effect since the Twenty First Amendment was passed in 1933.

To put things in perspective, we should first cover the period before the current system was established. In 1919, the Eighteenth Amendment received its final ratification, and in conjunction with the Volstead Act effectively made alcohol illegal (sort of), marking the beginning of Prohibition in the United States – a 13 year period when the manufacture, sale, and transportation of liquor was made illegal; a most depressing time I’d say. While Prohibition was enacted as a final and overly strict attempt to curb excessive drinking and rising crime rates, it wasn’t very successful in doing so. The increased level of demand resulted in the rise of a profitable business for gangsters, who could illegally import and traffic alcohol they would sell to speakeasies and other individuals who needed a taste. Additional loopholes were found that made the new law even harder to enforce. Furthermore, Government Agents responsible for conducting raids of suspected properties often became the recipients of bribes that outweighed their government salary and inhibited their ability to see any wrongdoing.

In 1933, after years of this failed policy, President Roosevelt pushed Congress to repeal Prohibition, an act that earned him one of the very first post-Prohibition bottles of Budweiser, delivered to the White House by the Clydesdales themselves. However, the process by which Prohibition was repealed marked a new distinction between beer and spirituous liquors. In the early days of Roosevelt’s Presidency, prior to the ratification of the 21st Amendment legalizing all alcohol, Congress passed the Cullen-Harrison Act, which legalized beer that was 3.2% alcohol by weight or 4% by volume. To this day the beer vs. liquor distinction still holds weight, as many states still distribute beer and liquor differently, requiring liquor to be purchased at a special “package” or “state store” instead of a grocery or convenience store.

Okay, on to distribution. After the repeal of Prohibition, the three-tier system of alcohol distribution was established and is still in effect today. The three tiers of the system include producers (brewers or importers), distributors, and retailers. While the three-tier system may seem inefficient, from a beer drinker’s perspective it was fashioned to allow for greater choice and variety and also ensure competition, which keeps prices down and leads to higher quality products. It also created to allow for better government regulation to ensure safe consumption. The debate still remains. Some argue that without this system, it would be even more difficult for smaller craft breweries to bring their beer to market, while others view this system the sole reason craft beers have trouble getting to the shelves.

Before you interrupt, there are exceptions to the three-tier rule, such as with your local brewpub, which is able to brew its own beer and then sell it directly to a customer without the intermediate steps. However, with the small volumes sold on-site and the potential of quickly destroying their reputation by selling unsafe products the above-mentioned concerns aren’t really valid.

So what really does the beer distributor do? From the time a case of beer (or keg) leaves the brewer until it is placed on the shelves or arrives at your local watering hole, distributors provide transportation, refrigerated storage and maintenance. Distributors maintain the relationships with retailers and ensure proper inventories so that excess supply in one store doesn’t lead to bitter beer. Distributors are also responsible for most on-premise advertising, often sharing the costs with the brewery. Anti-trust issues regarding bigger breweries out-muscling smaller brewers, as most know the three-tier system has obvious issues.

Throughout time, regulators have worked hard to keep the three tiers separate so that fair and competitive practices weren’t compromised. For example, In 1935, the Federal Alcohol Administration Act, which relinquished oversight of the beer industry to the states, prohibited brewers and distributors from owning any interest in a retailer. However, varying types of relationships between these layers do exist but vary from state to state. One example, a beer distributor might either be responsible for, or prohibited from setting up and maintaining draft lines in a restaurant, depending on the state.

However, the line for mixed ownership of breweries and distributors is a bit blurrier, but for the most part, breweries are not allowed to own distributors either. “But,” you might say, “I’ve seen a distributor with the Anheuser-Busch logo on the building.” Well, more than 12 years ago, Anheuser-Busch started a campaign called “100 percent Share of Mind” through which they reached a financial agreement with distributors requiring them to drop non-Anheuser-Busch products, ensuring their competitors wouldn’t receive any preferential treatment. While this agreement was very appealing when AB dominated the beer market, in recent years the benefits have dwindled as craft beers have taken off and have been picked up by the independent distributors. While this is unfortunate for the exclusive Anheuser-Busch guys, it is a testament to the system and the need for independence at all steps of the distribution system.

As it stands today, the three-tier system is effective and successful in bringing us beer lovers high quality products at fair prices. What more could you ask for? Lobbying and particular legislature may blur the perceived fairness within the industry, specifically in distributors carrying lessor known and funded brewers.