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Ab Ovo #26: The Direct-to-Consumer Edition
The U.S. Treasury Department takes a serious look at the outdated regulations governing the sale of beverage alcohol.
Devoted readers of Ab Ovo will recall that back in September we published a hot take on the Biden administration’s increasing scrutiny of anticompetitive practices across the U.S. economy and how that might impact the way Americans buy beer, wine, and spirits. Specifically, we predicted that regulatory changes could ease current restrictions on direct-to-consumer (DTC) spirits sales, allowing more Americans to order spirits online directly from distilleries. More broadly, we noted that any overhaul of the America’s convoluted web of federal and state regulations governing the alcohol trade could weaken, however slightly, the oft-maligned “three-tier system.”
Last week, we got some movement on this front in the form of a 64-page U.S. Treasury Department report expressing concerns over consolidation in the $250 billion U.S. beverage alcohol industry. The report outlines various regulatory reforms that could both boost competition in the drinks space and save consumers a whole lot of money at the cash register. Among those suggestions: enhanced scrutiny of mergers and acquisitions within the space; a review of (often uneven) taxation regimes; a potential overhaul of so-called “post-and-hold” pricing laws that essentially allow wholesalers to engage in legal price fixing; and, yes, a lifting of various regulatory burdens to new market entrants, including restrictions on DTC spirits sales.
In fact, Section 2.5 of the report — titled Direct Shipment: An Alternative to the Three-Tier Distribution System — goes on for nearly three pages, noting the various pros and cons of DTC spirits sales. The pros coalesce around the notion that the vast majority of states have permitted DTC wine sales for decades with little or no detrimental effect, providing consumers with greater choice and lower costs while making it easier for small producers to do business. The availability of a DTC option also places free market pricing pressures on wholesalers, keeping them a bit more honest.
The downsides to DTC, as determined by Treasury, center on concerns that DTC spirits sales (in particular shipping spirits through the mail) could make it easier for underage consumers to obtain alcohol. That’s a perfectly valid concern, if not one supported by data (and we do have heaps of data from a few decades of DTC wine sales). Are minors more likely to try to order a bottle of vodka through the mail than a bottle of wine? Possibly. Maybe even probably. But once again there’s no real body of data suggesting that’s the case (while there is ample data indicating that teens are less and less interested in drinking, FWIW).
Restrictions on DTC alcohol are directly tied up in debates over the merits of the three-tier system (the regulatory framework that in most states requires spirits producers to sell into retail markets through a “middle tier” of wholesalers/distributors). Advocates for the three-tier system generally like to point out that the middle tier provides jobs and plays an important role in ensuring alcohol-related taxes are collected. Removing it — or letting producers sell around it — would make the industry more difficult to regulate (and tax).
Removing the middle tier would also make beer, wine and spirits less expensive to consumers, as wholesalers/distributors make their money as all middlemen do: by marking up the price of whatever passes through their hands. Supporters of the three-tier system cite pricier booze as a virtuous economic disincentive to alcohol abuse. Pretty much everyone else cites it as a key reason to abolish the three-tier system.
It’s probably clear at this point that I have a position on this issue, and I won’t spend time here rehashing all the ways that prohibiting DTC spirits sales is (in my view) patently unfair, or how it harms the more than 2,000 craft distillers in the U.S. every year, or the myriad ways in which the three-tier system is a non-sensical framework in which the state supports the often-monopolistic practices of a handful of distributors at the expense of small brewers, vintners, and distillers, not to mention consumers. We got into all that in our aforementioned September post, and if you missed it or need a refresher — or if you simply miss that warm feeling you get any time a white man takes to the internet to rant passionately on some esoteric topic — give it a read.
Instead, I’ll just quote directly from the report, because the language in here is pretty interesting. Over the many years that industry advocates have pushed for greater fairness in the way different categories of alcohol are treated under the law, the federal government (outside of some spicy judicial rulings) has largely backed the status quo. But here, Treasury explicitly describes DTC alcohol sales as “an alternative to the three-tier distribution system” before going on to question why federal and state regulations treat wine one way and beer and spirits another. It seems to question — and even care about — whether the current system is fair, or competitive, or a net good for consumers or small businesses.
In the alcohol industry, while some of the restrictions on direct shipment to consumers may have had legitimate consumer protection or public health rationales, they also had the effect of making it challenging for niche producers to reach consumers and also insulating local retailers and distributors from out-of-state competitors.
Hurts small business? Hinders free market competition? This doesn’t sound like the America Americans love!
The report goes on to cite a 2003 study commissioned by the Federal Trade Commission to study e-commerce and its impacts on the price of wine in the local market of McLean, Va. What did it find?
The McLean study suggested that, if consumers used the least expensive shipping method, they could save an average of 8 to 13 percent on wines costing more than $20 per bottle and an average of 20 to 21 percent on wines costing more than $40 per bottle. The report concluded that “[s]tate bans on interstate direct shipping represent the single largest regulatory barrier to expanded e-commerce in wine.”
This isn’t me, or a lobbyist, or some industry insider saying this on behalf of independent distillers or spirts e-commerce companies. This is the U.S. Treasury Department citing the U.S. government’s own data that suggest, pretty unequivocally, that barring wineries (and likewise distilleries) from DTC sales hurts both small producers and consumers while doing little else that’s in the public interest.
For many consumers, this may not feel important and that’s understandable. If you can already get the brands that you like from a retailer that’s convenient to access at a price you’re willing to pay, then why should you care?
But just to tie this all together: If you read our last edition about how various products (like Jameson) have grown scarce in certain regions where demand is high (like New Orleans during Mardi Gras) and you found yourself wondering why bars in New Orleans don’t just order a few cases from a vendor in some part of the country that’s awash in Jameson, this is why. Under the current system, consumers often can’t buy from the retailer of their choice, and retailers can’t buy from the producers of their choice, beholden as they are to whatever their state’s distributors have in stock (there’s often only two or three distributors to choose from, and in many cases only one that carries a specific product).
E-commerce has proved transformative for pretty much every retail market it’s touched, and it’s heartening to see the federal government take note of the places it’s thus far been unable to make an impact (due to federal and state rules). And for whatever anecdotal evidence is worth, I’ve spent a whole lot of time talking to boutique winemakers and small American distillers over the past several years and have yet to meet a single one who feels the three-tier system benefits them, or makes it easier to get their products into the hands of consumers, or helps facilitate the process of bringing new and better products to market. The legally mandated obstacles placed between small producers and potential consumers actively deter entrepreneurialism. And more broadly, a lot of these outdated regulations significantly hinder the market’s ability to connect supply with demand (whether for a single bottle or a dozen cases).
Does this Treasury report spell an imminent easing of DTC restrictions or the beginning of the end of the three-tier system? Is your trip to the bottle shop about to get significantly less expensive? Probably not, at least not in the near term. But this report’s very existence indicates that someone in the federal government is finally giving some of our more outmoded — some might say “anticompetitive” — regulations a much-needed review.
Ab Ovo is a (somewhat) weekly newsletter produced by Clay Dillow (CD) and friends. If you enjoy our work, we’d love to have you as a subscriber (it’s free!). If you already subscribe, we appreciate the support — and don’t forget to forward this to a friend. Thanks for reading.
What We’re Drinking: Uncle Nearest Master Blend Edition No. 005
Nathan “Nearest” Green’s contributions to American whiskey haven’t always received the attention they should, but those close to the Tennessee whiskey tradition know his name well. Not only does the historical record show that Green was making whiskey there as far back as the 1850s, but he was doing so alongside a young Jack Daniel, teaching the entrepreneurial youth the ins and outs of distillation. You know Daniel’s name and not Green’s because Nearest Green was enslaved. The first Black master distiller (that we know of) in American history was more or less omitted from this origin story despite his central role in the founding of one of America’s most recognized global brands.
Uncle Nearest is correcting the record. Entrepreneur Fawn Weaver launched the brand in 2016, tapping fifth-generation master blender Victoria Eady Butler, herself a distant descendant of Nearest Green, to anchor the production side of the operation. Uncle Nearest now has its own distillery in Shelbyville, Tenn., and while waiting for the whiskey produced there to reach maturity — maturing good whiskey typically takes 3-6 years in that part of the world — the brand has blended and bottled a handful of whiskies produced and aged by two other (undisclosed) distilleries. Uncle Nearest Master Blend Edition No. 005 marks a significant turning point for the distillery, as it’s the first batch of whiskey contract-distilled and aged entirely to Uncle Nearest’s specifications (it was laid down in 2017). Distinct from the Uncle Nearest whiskeys that came before it, it’s a high-proof (59.2%) liquid that goes down surprisingly easy, with fresh orchard fruit, warm cinnamon, and a bit of creme brûlée on the nose plus a bit of orange zest, honey, warm brown sugar, and wood spice on the palate.
Available for sale only at the distillery, consider this less a buying recommendation (though it’s worth buying if you can find it) and more a “watch this space.” Uncle Nearest is a young distillery doing the things young distilleries do to build their stocks and bide their time while new product reaches maturity. But this first contract-distilled liquid shows a ton of potential upside for the brand as it moves to release a handful of other small bottlings (rumor has it a couple of rye whiskeys are in the offing) in the year ahead. Expect more — and even better — in the very near future.
The U.S. surpasses the U.K. to become the world’s largest global export market for Champagne • Related: Italy’s Franciacorta posts record sales in 2021 • Scotland’s Campbeltown region slated to open its first new distillery in 140 years • And also its second new distillery in 140 years • Prices for California’s top wines rise 32% in 2021 • It was always our fate to see a $95 boxed wine • Angel’s Envy launches a limited-edition rye (a rye!) finished in ice cider casks • American whiskey is so popular MGP is investing in a $12M warehouse expansion • CONTROVERSIAL: Asimov says it’s okay to drink these 12 natural wines • EATER’s new Oaxaca city guide is extremely comprehensive in a very good way.