Since the repeal of Prohibition in 1933 federal and state governments have held a tight rein over the US liquor market. Only in limited circumstances has a consumer been able to purchase a bottle of liquor from the person who made it. In most cases, they must buy it from a retailer (a licensed liquor store or a bar), who bought it from a distributor, who bought it from the producer.
In an economy that reveres a free market and consumer choice, this seems unnecessarily complicated. And it restricts the range of products the consumer can buy.
“It’s about choice,” says Dan Farber, owner and distiller at Osocalis Distillery, a maker of brandy in Soquel, CA. Farber has been agitating for expanding direct-to-consumer sales of spirits for more than a decade, and currently heads up a committee at the American Craft Spirits Association pushing for legislation to make it easier for consumers to buy liquor directly from the distillers. “Just because the consumer wants something doesn’t necessarily mean it’s going to happen,” Farber says. “They still have to convince people along the line to facilitate that sale for them.”
The reasoning for these restrictions is rooted in Repeal. By adding a complicating layer between spirits makers and spirits drinkers, regulators sought to create a system that was intentionally inefficient, adding roadblocks and increasing costs. The idea was to permit drinking, but not actually encourage it. The fear was that our society would return to the era of cheep booze and overconsumption that led to the banning of alcohol in the first place.
Over time, the three-tier system grew into essentially a formidable dam, with distributors controlling the sluice gates that allowed liquor to flow to market. But as the pool of adult beverages began to overflow the lake behind the dam, it did what liquid does: it found small cracks and made them larger, and created flows around the impediment.
These small rivulets started widening into notable torrents in the past decade or two. They increased when state legislators learned that distilleries could be a boon to local economies — especially remote regions struggling with the decline in manufacturing jobs. Distilleries hired skilled workers, supported local farms, and served as an engine for tourism.
As a result, many states have eased up on the more restrictive laws of the past. They’ve passed legislation that allows direct sales to consumers at the distillery itself, although often with caps on the number of bottles that can be sold. They’ve allowed distilleries to set up bars and restaurants, such that they could sell their own products by the glass at full retail prices, while boosting their profit margins without going through a middleman.
Over the past two decades, the number of distillers has boomed — from a few dozen two decades ago, to more than 2,000 today. With each distiller producing multiple products, the pressure to get those products through the three tiers and on the shelves or backbars is immense. The three-tier system was well designed, but for an era in which a limited number of distillers sold a narrow range of products.
As distillers pushed for better access to the market, the market pushed for a better and easier access to liquor. A new generation is increasingly comfortable ordering everything from diapers to cars online, and many are aggravated and confused that they can’t just go to a distiller’s website and order a bottle or two by express mail.
That’s being addressed in part by what are essentially “Potemkin websites” — a consumer can click an “Order Online” button and be seamlessly linked to a fulfillment house that’s offer legal sales in that customer’s state. And apps behind delivery services like Drizly also give the appearance of direct sales, although these are all operate within the three-tier system. (One of Drizly’s lead investors was the Wine and Spirits Wholesalers Association before the company was recently purchased by Uber.) Many now refer to these delivery services as the “fourth tier” — another level that connects the consumer with the retailer.
But this still operates with the three-tier system, and so consumers are frequently denied their choice. If a traveler from South Carolina visits a distillery in Oregon, is impressed, and seeks to purchase a bottle when they return home, it’s either impossible or will require research to find an online workaround. In an era of instant convenience and easy clicks, this is a relic of a restricted past. As consumers complain, the foundation around the dam gradually erodes.
Then came the global pandemic of 2020. It cut off those smaller sales channels the craft spirits industry had carved out for itself. Tours were cancelled and tasting rooms shuttered; distillery restaurants were closed. Craft cocktail bars, where bartenders had served as an informal sales force for craft spirits, shuttered from coast to coast. And distributors became less interested in taking chances on lesser known craft labels, and scrambled to stock shelves with handles of Jack, Gordon and Tito’s as consumers clamored for “comfort brands.”
Some state legislatures tossed distillers a lifeline by allowing direct shipments to consumers within their state, helping make up some lost sales. At the time of this writing, 16 states (plus the District of Columbia) allowed direct shipment of liquor within their borders, according to the Distilled Spirits Council of the United States. Most of those involved laws that predated the pandemic, but six states passed laws in response to the virus. (Some were temporary measures, and efforts are underway to make these permanent.)
“When COVID first hit, people in different states were asking if they could get some shipping abilities now that their tasting rooms were closed,” says Jeff Kanof, a member of ACSA’s Direct-to-Consumer committee and vice-president at Copperworks Distilling Co. in Seattle. “I think we’re hoping for a snowball effect — you see other states doing it, and helping their small business, then you can point to them, say, what about us?”
Being able to ship to customers within state borders has helped some distillers keep the lights on. But the interstate shipping of spirits — opening an exponentially larger market for direct sales — remains the holy grail.
“There are definitely some cross-state transactions starting,” says Kanof. “And that’s going to be important.”
Interstate shipping is in some ways breaking new ground, and in others treading an old path broken by American vineyards, which pushed for direct sales for several decades. This culminated in a 2005 US Supreme Court ruling (Granholm vs. Heald), which decreed that states that allowed in-state shipping of wine couldn’t ban shipments from out-of-state. Some states, such as Michigan, responded by initially banning all shipping of wine. But in the years since, a growing number of states have liberalized laws and have allowed wineries to ship directly. Currently 39 states allow cross-border shipping, with seven permitting it with restrictions; four still ban it.
As is often the case with Supreme Court decisions, Granholm was written narrowly to apply to wine, but no spirits.
In one of the more notable changes, last April state laws went into effect in Kentucky that allowed the direct shipment of beer, wine and spirits in to and out of the state, although with restrictions. This included a cap of 10 liters per month per consumer, and a requirement that the spirits shipped be “produced by the manufacturer; produced for or by the manufacturer under a written contract with another manufacturer; or produced and bottled for the manufacturer” — in other words, distillers couldn’t morph into retailers selling the products of others.
Consumers get more choice. Distillers increase profit margins. Who could object?
Turns out — perhaps not surprisingly — the distributors. They’re the middle tier of the three, and every bottle a distiller sells directly to a consumer is one bottle that’s not going through the wholesale turnstile between still and store.
“We definitely respect the 21st amendment and the right for each state to regulate the distribution and sale of alcohol within their borders,” says Michael Bilello, senior vice president of communications and marketing the Wine & Spirits Wholesalers of America. And that includes states that opt to allow direct shipping to consumers within the state.
But respect for in-state shipping laws doesn’t translate to outright support. Bilello says that the organization is in favor of “licensed local delivery” with a “clear chain of custody” — that is, the “fourth tier” delivery services working within the existing system — but are more silent when it comes to in-state shipping direct from distillery to consumer. “We respect the rights of states to do what they’re doing,” he repeats.
As for direct-to-consumer sales across state lines, WSWA is more vocally opposed. “WSWA is opposed to direct-to-consumer shipping from producers,” the organization says in its official statement. “Shipping from producers creates an enforcement nightmare for regulators…”
WSWA also joined with other beverage industry groups, including the National Beer Wholesalers Association, in February to oppose legislation that would allow the US Postal Service to deliver beer, wine and spirits. (It’s currently forbidden.) “Proposed legislation to allow the US Postal Service to handle beverage alcohol is simply not a safe or responsible solution to answer the current significant needs of the USPS,” said WSWA CEO and President Michelle Korsmo in a written statement.
The wholesalers’ arguments against direct sales focus on public benefit — of keeping a clear chain of control of the product from distiller to store. WSWA cites three chief benefits of maintain the three tiers: forestalling underage drinking, ensuring proper tax collection, and preventing adulterated or counterfeit booze from entering the market.
On the Internet, no one knows you’re a dog. And no one knows if you’re of legal age to purchase spirits. Liquor stores and bars have a system in place to verify age — and states have in place systems to check on retailer compliance — and allowing an alternative to this invites mischief.
Bilello cautions that allowing delivery services, including USPS, FedEx, UPS and others, will make verifying age more difficult to enact and to enforce. And it raises a liability question. “Where does the liability lie,” if a bottle of ends up with someone underage, he asks. “Is it with the producer/supplier, or the shipper?”
As far as collecting state taxes, direct shipping presents something of a gray area, he says. “There’s no way to enforce what’s coming into the state, or to even know what’s coming into the state.”
And that lack of oversight may harm quality as well, and open the door for the delivery of substandard alcohol. He cites other countries where direct shipping is allowed. “I feel like it’s every week now we get a different story about counterfeit alcohol winding up in retail” in the United Kingdom, he says.
As distributors see it, these flaws put the whole system at risk. “The moment one bad actor takes advantage of these of this potential new direct-to-consumer environment, you’re going to sacrifice consumer confidence in the alcohol marketplace,” Bilello says. “Furthermore, you’re going to get a knee jerk reaction with government oversight, and that could cost the industry a lot of money and a lot of goodwill.”
Distillers tend to be skeptical of these claims.
“Opposition comes in three flavors, and three flavors only,” says Dan Farber: Underage drinking. Health and safety. And taxes. “And somehow, the wholesale sector prevents all these things? Well, that’s not a true statement.”
Farber notes that the wholesale industry’s opposition to direct-to-consumer sales has remained by and large unchanged for decades. But technology and delivery practices have continued to change, which can provides safeguards today that weren’t available earlier. “I can tell you that in 2021, the difference between what we can do today and in 1999 is like night and day,” he says.
Modern delivery services are more sophisticated than ever, allowing virtually anyone to track a package to ensure that it hasn’t left the chain of control. “Today, UPS and FedEx has tracking on packages, and we have an actual documented delivery time, date and signature,” Farber says, which makes it far harder for underage drinkers to end-run the system. “Let’s talk about the world we live in today,” he says.
Much the same applies to tax collection. The boom in interstate e-commerce has led states and shippers to pay far more attention to cross-border sales. And Farber says the collection system for alcohol leaves little room for shenanigans. “Let’s take Illinois,” he says. “I have to file two pieces of paper — one with California, letting it know that the liquor went outside the state so I’m not responsible for paying state excise taxes. Then I have to file documentation with Illinois, telling them the exact amount and who the taxpayer will be.”
And Farber says the counterfeit booze argument failed to hold up to close scrutiny. “If we had full-on Internet sales, where we had a Craigslist of bucket booze, we would have problems,” he says. ”But we’re not talking about that. Every distiller is registered with their state government, they’re registered with the federal government, and they’re registered with the FDA,” all of whom are charged with ensuring a safe product gets to market.
Farber is frustrated that the push for direct-to-consumer sales has been cast as a war between distributors and distillers — a zero-sum game in which one side loses and the other wins. Expanding interstate direct-to-consumer sales in a common sense way to benefit distillers and distributors alike — and ultimately the consumer.
“There’s just no way for the wholesale sector to build, bottle by bottle, 20,000 different brands from distilleries that no one has heard of before,” Farber says. And direct-to-consumer sales can effectively serves as a test market for distillers to understand where they should focus their attention.
Distillers have long faced a Catch-22 with distributors. Wholesalers aren’t interested in carrying a new brand that hasn’t built a market. But distillers can’t build a market if they don’t have distributors. Direct-to-consumer allows smaller distillers to begin testing markets. In places where they find traction, they can then start working with distributors.
“Think of cars on the freeway going at 70 miles an hour,” Farber says. That’s the current wholesale system, and smaller producers have difficulties getting up to speed to join in. “We just need a kind of on-ramp. That’s really the most effective and efficient way to really grow to a different level.”
Once distillers start to get traction, Farber says, they’ll be happy to work with distributors who can take them to the next level, expanding business for both of them. “Let’s face it, packing up and shipping a bottle, one at a time to an individual, is the most expensive way to receive these goods.”
Monique Huston, vice president of wholesale spirits at Winebow in Chicago, agrees that direct-to-consumer could benefit everyone, especially given the surge in available products. “The increase in the number of samples I am receiving is ridiculous,” she says.
Being able to sell direct could be “a really helpful incubator,” she notes, and could help her decide whose products to pick up. “Distillers will come to me and say, I have people who come to my distillery and when they go home to Illinois, they say I want your product. And I say, okay, how many people? And it’s like five people. That’s not helpful.
“But if you could come back to me and say, I’ve got facts and figures for 37 states, these are my top five, and I’m doing 20 cases a month in Illinois, you know what? We should have a conversation.” And as those sales increase, distillers will likely grow weary of being their own logistics and packaging managers, and are ready to team up with a distributors to grow to the next level.
“A lot of people want to want to frame this as a war, and it’s its not at all,” Farber says. “It really is just a matter of sort of common sense.”