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Oakes Weekly - April 27, 2006

The Fall of the Three Tier System...Does the Sky Come With It?
Oakes Weekly April 27, 2006      
Written by Oakes

Vancouver, CANADA -

At this point, the three tier system looks to be on life support. In Washington State, Costco has been waging war on the system for a couple of years now and it looks like they’ve finally won. Last week, a judge handed victory to the company, rendering several judgments that together could spell big changes for the retailing and distribution landscape in the US. There is always the possibility of appeal, and other states would have to use the Washington case as a precedent, but big retail has the hammer now and I suspect they will use it.

So what happens when the three-tier system is dismantled? There is a lot of speculation at this point. Nobody is entirely sure what to make of it. I talked to a couple of retailers in Washington State and neither were particularly worried. As Matt Bonney of Bottleworks put it, “This mainly affects the people who buy their beer at the end of the supermarket aisle.”

Simply put, the majority of the changes will only have an impact at the bulk-buying end of the market. Costco doesn’t deal with small microbrewers and that won’t change. They may deal with large micros, though. The one thing about Washington State is that if you’re not selling any microbrew, you’re missing out on a big portion of the market. So I can see that a few big micros will benefit. When you combine changes like out-of-state micros no longer needing a distributor and removing the ban on central warehousing by retailers, you now have a situation where out-of-state micros big enough to deal with the Costcos of the world (Sierra Nevada and New Belgium, for example) can send their beer by the truckload to one location and have Costco take care of the rest.

Will this result in greater selection? Well, the players big enough to do this are already in the market, presumably, but there may be the odd brewer who sees this as an opportunity to launch in Washington without much investment. Such a scenario would initially force a consumer to seek out such beer at said large retailer, but if the brewery is serious about establishing a presence, they’ll need to get to other retailers and ultimately this will probably require a distributor.

A small micro may decide to haul a small shipment of beer to one or two specialty retailers, which would increase selection for the hardcore beer geeks. (This might have the biggest impact in Vancouver, Washington, which would then have much easier access to Portland’s many tiny brewers). The middle of the road consumer won’t see this theoretical increase in selection, though.

While specialist stores don’t seem too worried, that’s because they compete on an entirely different set of features than the likes of Costco. The biggest losers will be stores that aren’t specialized but are also not large enough to get the volume discount. That actually doesn’t sound like a store that’s got a good business model anyway.

Consumers who purchase based on price win. Consumers who don’t probably won’t notice. “Most small producers are still going to need a distributor anyway,” says Bonney. So it really doesn’t look like much will change at the micro end of the scale, save for the possibility of a few new products for the hardcore beer hunters to find.

So the feeling, and I pretty much agree, is that the sky isn’t falling. Opening up the market merely forces producers and retailers to choose between playing the volume game and being a specialist. You know what? That’s how it is in every industry. There’s room for big and room for small but getting caught in between is the worst place to be.


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