Professional Chefs Association - Continuing Education PCA – edu
Table of Content
Chapter 1 Basics
Distributing Alcoholic Beverages in U.S.
Before Prohibition
From the colonial times until 1919 when the 18th Amendment ushered in Prohibition, alcohol beverages were sold in a free-wheeling, free-market system. The system had only two tiers-suppliers and retailers. Producers of spirits and beer (wine was a minor market back then) frequently owned their own retail outlets. Suppliers usually were larger and had more capital than retailers and using loans, mortgages and threats to cut off supply, they sought to control retailers through intimidation and corruption. Besides pressuring retailers to carry only their brands, they pushed them to increase sales regardless of the social consequences.
Economic issues joined social issues to encourage Prohibition. During World War I, the diversion of grain from food into beer production, and the German heritage of many brewery owners, fueled an outcry against an otherwise minor use of grain. By playing on issues of food shortages and anti-German hysteria, abstinence advocates were able to achieve that which they were unable to achieve from their "evils of alcohol" argument-the 18th Amendment ushered in Prohibition in 1919. The Volstead Act, passed a year later, was designed to enforce Prohibition. When Prohibition was repealed by the 21st Amendent in 1923, the public was determined to avoid the marketing abuses that led to Prohibition in the first place. Hence, they created the three-tier system.
The Three-tier System Explained
Wine and spirits are distributed in the United States today through what is called the "three-tier system." The three tiers are producers, wholesalers and retailers. This system was formed by states following Prohibition to prevent the recurrence of marketing abuses that characterized supplier-retailer relationships before Prohibition. States established wine and spirits wholesalers as the middle tier separating producers from retailers.
The three-tier system was created by conscious decision of the federal and state legislatures to treat alcoholic beverages as a special category of products deserving regulatory treatment different from most other products. It serves a critical role--our societal control over the distribution and availability of beverage alcohol that deters underage access.
Alcohol Control in the U.S. is a State Matter
Except for general guidelines in the Federal Alcohol Administration Act, the control of alcoholic beverages is a state matter. Regulations and laws vary by state. In some, referred to as "control states," the state government serves as the wholesaler (and often the retailer as well) for wine and spirits (beer is sold through the private sector in all states). Although a menagerie of state laws and regulations control the alcohol beverage industry, all states have mandated the separation of the production tier from retailing.
The Role of Wholesalers
Wine and spirits wholesalers serve as "order consolidators," reducing the number of transactions required for all suppliers to reach all retailers. As a result, even smaller suppliers have potential access to the 300,000 wine and spirits retailers in the U.S. In addition, wholesalers serve as conduits to suppliers for local market information, extend credit, provide local merchandising support, and reduce the amount of inventory that suppliers and retailers need to carry. Consumers benefit from wider distribution of products and lower prices stemming from the distribution and marketing efficiencies built into the system.
Does the System Protect Wholesalers Over the Small Vintner?
No. This is a bogus argument advanced by direct shippers who want to operate outside the system. When wine and spirits wholesaling is tested for strength of competition, the industry was found to exhibit many characteristics of competitive industries. Returns on sales and net worth are at or below the average for overall wholesaling. Numerous wholesalers compete in virtually every market, and entry by new wholesalers is constant. Wholesalers deal with large numbers of suppliers and each sells to hundreds of retailers. Market shares or leading suppliers and brands shift rapidly, and new brand introductions abound, even from the smallest suppliers.
Twenty-Eight States Prohibit Any Direct Shipping
Alabama, Arizona, Arkansas, Delaware, Florida*, Georgia*, Hawaii, Kansas, Kentucky*, Maryland*, Maine, Massachusetts, Michigan, Mississippi, Montana, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee*, Texas, Utah, Vermont, Virginia and Wyoming.
* Violations are felonies for shippers
States Prohibiting Direct Shipping (except small quantities if a host of regulatory conditions are met)**
Alaska, Connecticut, District of Columbia, Louisiana, Nebraska, Nevada, New Hampshire, North Dakota and Rhode Island
** IMPORTANT NOTE: Most of the consumer-direct shipping that is occurring in these states is NOT in accordance with these regulatory conditions and, therefore, also is illegal in these states.
States With Reciprocal Arrangements Allowing Direct Shipment of Wine Only, and Only to States with Reciprocal Agreements
California, Colorado, Idaho, Illinois, Iowa, Minnesota, Missouri, New Mexico, Oregon, Washington, West Virginia, Wisconsin
Source: National Conference of State Legislators, October/November 1997
Direct Shipping Loots State Coffers
Consumer-direct shipment of alcohol directly threatens state treasuries because, in most cases, it evades state excise and sales taxes. In addition, direct shipping evades regulations against sales to minors and sidesteps laws in "dry" areas of the country that prohibit or severely restrict the availability of alcohol beverages.
The consumer-direct shipment of wine, beer, and liquor has grown from a cottage industry to a $1 billion a year enterprise that is expanding as fast as direct shippers can set up Internet home pages and toll-free phone numbers. Alcohol beverage offerings on the Internet and through mail order catalogs have created a virtual 24-hour open bar for anyone of any age to order wine, beer and liquor. The resulting loss in state revenues from excise and sales taxes now amount to as much as $100 million-and is growing. The hemorrhage of tax revenue will only increase if these illegal mail order, telephone and Internet sales are permitted to expand.
More than $8.7 Billion in State Revenues at Risk
At risk is more than $8.7 billion in state revenues generated by alcohol excise taxes. What's more, states are increasingly dependent on revenues generated by alcohol, with revenues having jumped nearly 40 percent in the last decade and nearly 20 percent since 1990. In addition, federal receipts from alcohol excise taxes totaled $7.8 billion while state and local governments took in $9.8 billion. Revenues lost to illegal direct shipping will need to be made up elsewhere, or governments will have to reduce services.
A state-by-state breakdown of state, federal and local revenue is attached.
Additionally, wine and spirits wholesalers have a meaningful impact on states' economies. They pay billions of dollars in state excise taxes. Directly and indirectly, they help create more than 177,700 jobs paying $4.3 billion in wages and adding more than $15 billion to our economy.
The Only Way to Protect Revenues is for Direct Shippers to Operate Within the System
Be wary of false fixes and so-called compromise solutions. The direct shipping lobby suggests that states license out-of-state persons to sell small quantities directly to consumers, relying on what amounts to an honor system for reporting. Local authorities cannot possibly police such a system. Under such systems, an adult resident can legally order 15 gallons of beer, wine or liquor each year from any one out-of-state shipper delivered to the home or office. But as a practical matter there is no limit on the number of out-of-state shippers who could each ship 15 gallons to that same customer...and there are no safeguards to prevent someone underage from ordering. In fact, any system that allows direct-to-the-doorstep shipping of alcoholic beverages, regardless of the quantity, cannot adequately deter underage access.
Further, the cost of attempting to effectively monitor such an honor system would be astronomical, dwarfing existing state resources. Licensing, auditing and inspecting thousands of out-of-state suppliers selling directly to consumers is plainly unrealistic…and catching state residents who exceed the 15-gallon limit would be a virtually impossible task for authorities.
Where are the Safeguards?
Direct shipper organizations, such as The Coalition for the Free Trade in Alcoholic Beverages, are lobbying for a "paper tiger" reform called the "Interstate Shipping Regulation Act." The proposal is notable for its abject disregard for responsible safeguards on alcohol distribution. The proposal contains no penalty provision and fails to provide for personal jurisdiction over violators in the courts of the offended state. The model law is really a ruse by the alcohol-on-demand lobby. These out-of-state interests want to bypass and destroy the licensed structure - a system that gives consumers more brand choices than any in the world, produces billions of dollars of tax revenue annually with minimal collection costs, and enables states and communities to effectively and efficiently control the conditions under which beverage alcohol is marketed and sold.
The bottom line is that the only sensible and responsible approach-and the one overwhelmingly supported by the American people-is to keep all alcohol beverage shipments within the licensed system where the merchandise can be controlled, revenues collected, and the age of the purchaser verified.
Direct Shippers Want a Tilted Playing Field
It's no secret why direct shipment profiteers are urging false reform in states-they don't want a level playing field. By definition, they seek unfair advantages over licensed wholesalers and retailers who play by the rules, importing, distributing, and selling beverage alcohol under highly taxed and regulated conditions. Out-of-state direct shippers are modern day bootleggers who want to increase their profits by exempting themselves from local laws, taxation and accountability for marketing practices.
True Reform Requires Cracking Down on Modern Day Bootleggers
Rather than agree to direct shippers' bogus "reforms," we should hold them accountable to strict enforcement and, if necessary, new legislation that toughens penalties for direct shipment to non-licensed addresses.
The Need for Direct Shipping is a Red Herring
Advocates of direct shipping argue that they are merely providing a service to wine connoisseurs and others who want products that are not available through the existing system. The fact is, consumers in most states can legally obtain brands not regularly available in their markets. Small producers have marketing and distribution vehicles available to get their brands directly to consumers through the existing licensed system. Wholesalers and retailers are willing to represent any of the brands of small producers that are being shipped illegally to consumers. But most direct-shippers are deliberately not cooperating because their goal is to undermine and dismantle the licensed system-their goal is the free trade in alcoholic beverages, a way of doing business that is not supported by the majority of the American people.
Fact Sheet: Underage Access Resulting From
DIRECT SHIPPING OF ALCOHOLIC BEVERAGES
A Pandora's Box to Underage Access
Most Americans agree that direct shipping is a Pandora's Box to underage access. It's no secret that today's teenagers are savvy when it comes to acquiring alcohol. And direct shipment of alcohol to customers is an open invitation for youngsters to log on to the Internet, download "cyberliquor" or order via toll-free calls that don't show up on their parents' phone bill. A recent poll confirmed that most Americans believe this is a bad idea-85 percent believe "the sale of alcohol over the Internet or through the mail should not be allowed because it would give minors easier access to alcohol and could result in more abuse."(1)
Alcohol-Related Teen Highway Fatalities On the Rise
At a time when alcohol-related teen highway fatalities are on the rise, we should not be making it easier for teens to buy alcohol. Ironically, direct shipping advocates say that concern about underage access to alcohol is a "red herring." Stings conducted by state officials from Colorado to New York prove that teens can readily obtain alcohol through the Internet and other direct shipping schemes. The facts point not to a "red herring," but should be a red flag for the public:
· Youth (ages 15-20) alcohol-related traffic fatalities increased by almost 5 percent in 1996. This is the first increase since 1990. (2)
· This increase bucks the alcohol trends: Alcohol-related traffic fatalities have been declining for many years among the general population and even among teens (down 50% over the past decade). There can be only one reason why alcohol-related teen traffic fatalities were up in 1996-more teens are getting access to alcohol and driving.
· Almost two out of five youth highway fatalities in 1996 involved alcohol. Young drivers were twice as likely as adult drivers to be involved in a fatal crash in 1996.
· In future years, demographics will place more teens at risk: By 2005, the youth population is expected to increase by 14 percent.
· More than half of high school seniors drank alcohol in 1996. Nearly a third were binge drinkers (five or more drinks in a row during the past two weeks) (3)
Direct Shipping Removes Safeguards to Underage Access
With direct shipping, teens don't have to worry about risks associated with purchasing from local outlets. No longer do they have to forge fake ID's and chance getting caught and arrested for buying alcohol at a store monitored by the police. All they have to do is dial a toll-free number or log on the Internet and mouse-click "Yes" to the question of whether they are of age. They can pay by credit card or even the new checking account debit cards which function much the same as a credit card. Indeed, most students go off to college these days with a credit card, yet most are not of legal drinking age until their junior year. Delivery truck drivers are not in the business of checking ID's - and in any case many direct shippers don't label their packages or intentionally list contents deceptively, such as "olive oil."
Direct Shipping Creates a Coast-to-Coast Blood Border for Underage Drinking
Every state has set age 21 as the legal drinking age. This unity was intended to save lives by eliminating the former situation in the U.S. in which states had differing legal drinking ages. This created "blood borders" across which underage drinkers would drive to get access to alcohol. Passage of "21" laws in all states effectively eliminated the "blood borders." But Internet and toll-free direct shipment creates a new, technological blood border that touches every state.
Why Make It Easier for Young People to Acquire Alcoholic Beverages?
The Internet was supposed to be an information superhighway…not a bootleggers bypass to easier alcohol access that detours around state and local regulations that encourage responsible control and usage of alcohol. Direct shippers say that kids cannot order alcohol on the Internet, but that's what was said about pornography. The truth is, you can get whatever you want on the Internet…without restriction. The Internet cannot verify age…and delivery truck drivers are not in the business of "carding" the recipients of packages they deliver.
America's View: Alcohol Is Different
Most Americans don't regard beer, wine, and liquor in the same manner as other consumer products and don't think it should be sold in the same way. But those lobbying to legalize direct alcohol shipment to customers argue that ordering wine, beer, and liquor should be no different than ordering a garment from a clothing catalogue. A recent Wirthlin survey confirmed that they're out of step with most of America: Four out of five respondents believe "the sale and shipment of beer, wine, or liquor over the Internet or through the mail directly to consumers should not be allowed." Large majorities support the current licensed distribution system because, while not perfect, it does a relatively effective job of responsibly regulating alcohol and discouraging access to minors.
Direct Shippers Deliberately Confuse the Issue With False Arguments
Supporters of direct shipping to consumers argue that kids aren't going to be ordering $60 bottles of Chardonnay. That's true, but it's a false argument. Obviously, teenagers aren't going to order fine wine. Nor do they have to-virtually anything is available. Instead, they order lower-priced beer, wine, and liquor which also are available by direct shipment. Whether a $60 bottle or $4 bottle it's all ordered the same way and delivered the same way--right to the doorstep, often during after-school hours when parents are working. No wonder 85 percent of the American people oppose direct shipment because they know it makes it easier for underage access and abuse.
Wine Aficionados or Adolescents? "Reforms" Can't Tell the Difference
"Reform" and "compromise" proposals pushed by the direct shipping lobby are fundamentally flawed because they rely on an honor system which cannot prevent shipments to minors and "dry" counties around the country. State agencies have neither the resources nor the authority to ensure that all shipped packages that might contain alcoholic beverages are not delivered to minors. The bottom line is that there is no way to devise a system of direct shipment to customer homes that effectively differentiates between connoisseurs and kids.
There is No Need for Direct Shipping
Consumers in most states already are able to legally obtain brands not regularly available at their local outlets. Small producers have marketing and distribution vehicles such as Cellar Masters to get their brands to consumers through the existing licensed system. Also, wholesalers and retailers are willing to represent any of the brands of small producers that are being shipped illegally to consumers. But many direct-shippers are deliberately not cooperating because their goal is to dismantle the licensed alcohol control system.