Is disruption coming to the alcohol beverage business?
For those not in the business of selling alcohol, we have a three-tier distribution system in the U.S., where a wholesaler, whose presence is mandated in 49 states, sits in the middle of the producer and the retailer.
Producers can’t sell, except in small-scale cases where they have exemptions to sell directly to consumers (think wineries and brewpubs). While I’m sure the wholesale layer adds value, it is beyond me why it needs to be mandated.
I’ve spoken with wine industry veterans who’ve told me that the three-tier system is here to stay, despite essentially being a sharp stick in the eye to free market economics.
As an interloper with 20 years of experience watching other seemingly entrenched industries (music, books, disposable razors, taxis, hotels, etc.) being disrupted by a combination of technology, entrepreneurship and venture capital, I’m going to take the broader view that no set of norms is sacred. I see three reasons why a disruptive e-commerce player could lead to the demise of the current system.
States ignore Washington, DC
Big states have become increasingly willing to use their power independently. California is the best example, mandating more fuel-efficient cars than federal standards and getting away with it because it has so much spending power. Ballot initiatives have legalized marijuana despite hostility from the federal government.
Entrepreneurs love to take risks
Today’s e-commerce startups aren’t like normal businesses in their capacity for risk. Let’s take Airbnb. Back in 2008, when the founders started renting their inflatable mattress out to strangers, I’m fairly confident it didn’t occur to them to check in with the landlord or the city to make sure it was okay. Each significant growth stage for Airbnb was fueled by a “beg for forgiveness, don’t ask for permission” ethos, I’m guessing. The support of passionate customers provided all the leverage needed when they ultimately had to negotiate with regulators, making reasonable concessions that never would’ve been approved if permission had been sought on day one.
States weed out the middle man
Finally, we’ve got legal marijuana in a growing number of states. And guess what? None have (yet) chosen a three-tier distribution system. States regulate growers and retailers and haven’t felt a need for the markups that wholesalers would bring. If this two-tier system holds up in marijuana, it could set a promising precedent for alcohol.
DISCUSSION QUESTIONS: Do you think the current state-mandated three-tier alcohol distribution system will likely collapse? Why or why not?