September 11-15, 2017

6 Lessons 8 Decades After the 21st Amendment

Few can deny that “Boardwalk Empire” is one of the better series on TV right now. It just got renewed for its fifth season on HBO, so it must be doing something right. There’s great audience appeal for a show set in the Roaring ’20s when the only folks getting rich off of beverage alcohol were hardened gangsters.

And who doesn’t like the retro charm of those speakeasy-throwback bars hidden behind restaurants or down alley ways, many requiring passwords before an evening of imbibing Sidecars and Old Fashioneds can commence? There’s great entertainment value in “The Noble Experiment.” Just ask the team at Crescent Crown Distributing’s new Mesa, Ariz. facility. When workers finish a shift or the sales team wants to entertain accounts, they can kick back in the very architecturally dynamic on-site pub. And while they hoist a pint or two, they can watch the Ken Burns/Lynn Novick PBS documentary “Prohibition,” which is on a continuous loop on the pub’s TV screens.

But it’s more than just an engaging happy hour history lesson. It’s a constant reminder and cautionary tale: No matter how much we romanticize the era of flappers, bathtub gin and tommy guns, it’s a place that no one who responsibly enjoys alcohol or makes an honest living producing, selling or distributing it ever wants to return.

Dec. 5, 2013 marks the 80th anniversary of the ratification of the 21st Amendment, which ended Prohibition—though beer got a bit of a jump on wine and spirits in April of 1933. And in the eight decades that have followed those 14 long, dry years, those in the beverage alcohol business have been doing their best to ensure that the lessons of Prohibition are never forgotten.

Lesson 1: The public wants alcohol.
The reason that period between 1920 and 1933 holds such a mythical place in popular culture is because it not only was the heyday for modern organized crime—always a ticket-seller at the multiplex—but it spawned many cocktails that are still popular today.  At the time they were concocted mostly to mask the taste of some pretty questionable spirits.

The clandestine nature of drinking in those days also birthed the concept of the cocktail party—folks entertained at home more because drinking in public just wasn’t happening. And when it was happening, it was in the speakeasy, an establishment that is enjoying a sort of legal renaissance today, further romanticizing the era.

The key take-away from all this is that people want to drink and they’ll find a way to do it. It’s better that it’s done legally, in a regulated market.

“The key lesson is you can’t keep people from getting something they want; if they want it badly enough, they will find a way to get it,” says Daniel Okrent, author of the book “Last Call: The Rise and Fall of Prohibition” and a prominent participant in the Burns and Novick documentary. “And a super structure of manufacture, distribution and delivery will be built up to satisfy the need. And the very prohibition of the substance will only guarantee that those satisfying the need will be making great, untaxable fortunes. Legislation that prohibits does not stop people from doing what they want to do.”

Lesson 2: People want choice.
It goes without saying that companies involved in the alcohol business owe their very existence to the 21st Amendment, which created the state-by-state regulatory system that many have come to take for granted. But those who owe a particular debt of gratitude to it are in the craft segments. Many would argue that the fact that there are nearly 2,500 craft brewers in the U.S. is a direct—albeit gradual—result of Repeal. Sure, obviously the fact that there are any breweries at all is thanks to Repeal, but it is unlikely that the breadth of choice in craft beer, as well as craft spirits and cider, would be a reality if it hadn’t been for the three-tier system. The old tied-house system that put too much power into the hands of the largest players of the top tier is one of the abuses that contributed to Prohibition and one of the practices that the 21st Amendment forbids, for the most part. “By putting wholesalers in place, you blunt that power and create a more level playing field for all players involved,” Craig Wolf, president and CEO of the distributor trade association, Wine & Spirits Wholesalers of America (WSWA) asserts. “With wholesalers being put in the middle, it created that bulwark, that kind of wall that prevented suppliers from monopolizing the retail trade.”

The range of options that American consumers take for granted when they go to bars and restaurants is not commonplace in many other countries. Only recently, with the craft beer boom going global and European consumers starting to demand more variety, have a handful of independent pubs with wide craft selections started to pop up in places like the United Kingdom—such as the selection-heavy Euston Tap—where the tied-house system still exists.

“[One thing] we’ve seen as a result of the three-tier system in its evolution and its change and growth, is that it’s provided an anti-trust buffer for manufacturers and retailers—which is a very important function because, of course, retailers cannot be owned or unduly influenced by manufacturers, the whole notion of a tied house,” says Craig Purser, president and CEO of the National Beer Wholesalers Association (NBWA). “An additional benefit of the three-tier system is that it provides access to market for thousands and thousands of new and emerging brands, which is really part of what we’re celebrating today. Regardless of who’s counting, we have over 2,400 breweries in the U.S. and I really believe that that growth was facilitated because of an independent three-tiered system.”

That brewery count is about 500 percent greater than what it was just 30 years ago.

The number of craft distilleries is increasing rapidly as well, with a 71 percent jump in new entries between 2010 and 2012, according to the Distilled Spirits Council (DISCUS). The total number of craft spirits producers is still significantly smaller than that of craft brewers, at around 300, but if it continues on its growth trajectory, that tally should reach 1,000 well before the end of the current decade. The consensus among those in the audience for Beverage World’s recent webcast, “Crafting a Modern Beverage Market,” was that craft distilleries would hit that number by 2017.

“It’s a hugely innovative market,” says Wolf. “You really have to think about why that’s occurring. Not only is America the best market in the world, there’s opportunity here.”

Wolf contends that one of the key reasons so many are getting into the craft distilling business is because of the work of wholesalers, a creation of the 21st Amendment. And despite some distributor-directed criticism from some members in the tiers both above and below them, wholesalers’ role, Wolf argues, is what makes the market work. “Wholesalers are always looked at as anachronistic,” Wolf observes. “They’re always viewed prohibiting commerce—and [the reality] is completely the opposite.”

Wolf points to the trend toward large distributors setting up separate craft-specific divisions. “We want to be at the front of that wave; we want to make sure we are satisfying that consumer need,” he says. “If we’re not doing that, we’re not doing our job and frankly we want to make sure that if there’s a consumer demand, we’re filling it. We don’t want to be behind on this one. You never know which one of these brands is going to be the next Grey Goose.”  

LESSON 3: When any one tier has too much power, it’s at the expense of that choice.
When Repeal set up the three-tier and barred tied houses, it did so because the top tier, the producers/suppliers, were exerting too much control over retailers, forcing them to carry only the brands of the suppliers to which they were tied. But eight decades later, the power dynamic in many cases has flipped, as mega-retailers—those of the big box variety in particular—seem to be the ones calling the shots.

“The system was put in place initially to prevent control from the top, monopolization and tied-house problems where the supplier controlled the retail outlets,” says Wolf. “And that was very anti-consumer because they would want to create exclusive outlets for their products to the detriment of all other products…Nowadays what you’re seeing is the rise of the large retailers, the big-box retailers. The problem with that is they’re trying to break down the system to, of course, benefit themselves most of all.  

But when one tier gets bigger, the other tiers get better, suggests Dr. Peter Cressy, president and CEO of DISCUS, whose member companies are on the supplier tier.  

“There’s always a tug-and-pull between all three tiers, that’s part of competition and how we all get better,” says Cressy. “As the wholesalers have consolidated, they’ve gotten extraordinarily professional and good at what they do. They have the advantages of scale and I think they’re going to be able to compete very well. Will everyone keep an eye on that? Sure. It’s just a matter of everybody working hard and making themselves relevant in terms of the services they provide and the value they add so the consumer gets the best possible deal.”

When Washington State voters approved spirits sales privatization two years ago—a move Costco supported by funding pro-privatization ads—many feared it ultimately would subvert the three-tier system as the big box retailer makes no secret of its desire to buy direct. But Cressy says that since private sales started in 2012, the three-tier system has been “alive and well.” “In Washington State,” Cressy notes, “the ballot initiative allowed, arguably even encouraged, suppliers to sell direct to large retailers. They didn’t choose to do it. They chose to use the wholesale system. The wholesale tier in my judgment is healthy and will continue to be because it is commercially relevant.”  

Lesson 4: The market demands an orderly, transparent supply chain.
The development of the three-tier system was not only about which entities had too much power and how to level the playing field. It was largely about creating order from disorder. Let’s face it, a lot of the practices that ultimately led to the dreaded 18th Amendment had a lot to do with the fact that the pre-Prohibition alcohol market was like the Wild West (quite literally in the Western U.S.) The 21st Amendment brought the modern structure that the pre-Volstead business environment was sorely lacking. Taxes are collected in an orderly, mostly efficient manner, product quality is controlled and beverages get from point A to point B and into consumers hands’ in a very organized, responsible manner.

“What it means is that in every state only reputable suppliers—which had to be licensed of course—could deliver only to licensed-in-the-state wholesalers and then retailers could only buy from those wholesalers,” Wolf explains. “It created an accountable logistics chain all the way from the top to the bottom, so the product couldn’t enter the market in an unregulated fashion.”

Some might even argue, half-seriously, that it actually works too well. “Of course the oddest thing that came out of regulation after Prohibition is that it became much harder for someone to get a drink once it was legal than when it was illegal,” Okrent observes.

When it operates at its fullest, perfect-scenario capacity, the system minimizes shenanigans that allow questionable beverage alcohol into the marketplace. “We have a system that prevents bad product from the market, counterfeit product, adulterated product,” Wolf says. “Even if a product were to get through, you could trace it back to its source and immediately remove it from the system to prevent further injury.”

In some countries where oversight is weak and in many cases, virtually non-existent, it’s not uncommon to find cheaply made spirits filling the bottles of known higher-end brands. It’s not that counterfeiting doesn’t happen in the U.S. But when it does, the public hears about it and the perpetrators are swiftly punished. Take the incident earlier this year in New Jersey, when the operator of a string of restaurants was accused of selling cheap alcohol when patrons ordered high-end and super-premium spirits. The discovery was part of a sting operation dubbed “Operation Swill.” The accused ultimately paid a $500,000 fine.

In a weakly regulated, poorly managed supply chain, it is not likely such a situation would have even been brought to light, let alone dealt with swiftly and severely.

Incidents like that in the U.S. are rare; that’s why they attract national attention. More common are the day-to-day applications of the orderly, transparent supply chain aspect of the 21st Amendment. Especially in today’s market when, thanks to the craft explosion, the number of choices is so vast, it’s not hard to imagine a less-organized market collapsing under the weight of so many new SKUs.

Lesson 5: Prohibition may have ended in 1933, but there are still aspects of it that exist today.
It’s often quite easy to take the beverage alcohol marketplace for granted when you consider that few in the industry are old enough to recall a time when alcohol was illegal. But what’s equally easy to take for granted is the fact that there are elements of everyday life that are remnants of Prohibition.

“There are all kinds of interesting aspects from the lingering effects of Prohibition,” observes Cressy.

One of those is alcohol advertising, particularly spirits advertising. In the mid-’90s, when spirits ads started going back on TV, their previous absence made many opponents cry foul, thinking it was downright illegal. But, as Cressy points out, that was a false assumption. “Back in 1948 spirits decided they weren’t going to advertise on television and beer very smartly went ahead and advertised and that became the norm,” he explains. “When we started to go back in 1996, because we’d been historically absent, there were many public officials who thought it was illegal for spirits to advertise on TV. That was not the case. There was nothing illegal about it; it was a self-imposed moratorium.”

Spirits ads initially started popping up on basic cable and today they’re on the major networks, thanks largely to the work of industry organizations.

Another echo of Prohibition is the fact that there are still some 220 or so dry counties across the United States, those that, for all intents and purposes, are still in the pre-21st Amendment era. However, that number is shrinking. Cressy notes that just in the past nine years there have been around 600 wet-dry elections in states like Texas, of which about 500 have tilted in favor of wet.

And then, of course, there’s taxation. The ability to generate a new stream of tax revenue was, of course, one of the key drivers of Repeal. And beverage alcohol today is not only one of the most, if not the most, rigidly regulated commercial categories in the U.S., it’s also the highest taxed.

While most in the industry agree that such taxation is necessary to ensure the orderly supply chain alcohol has enjoyed, it doesn’t mean they want to be taxed any more.

“We certainly pay more than our fair share,” says WSWA’s Wolf. However, perhaps due partly to some lingering negative attitudes about alcohol left over from the Prohibition and pre-Prohibition era, beverage alcohol is always an easy target when governments need to raise more revenue.

Up until about the past decade, a term that was thrown around quite a bit among those in support of upping excise-derived revenue was “sin tax,” which was an obviously stigma-laden (and biblically self-righteous) epithet to begin with.

“[Terms like that] have been around since before Prohibition, during the fight to Prohibition,” Cressy says. “We only refer to these taxes as hospitality taxes because that’s what they are. If you’re taxing the products, you’re taxing small businesses, you’re taxing consumers and you’re reducing the margins of taverns or bars.”

None of the alcohol categories are immune to such scapegoating. As NBWA’s Purser points out, many governments, especially at the state level, are revenue hungry as they’re still dealing with fallout from the Great Recession. “Right now government is in a quest for revenue,” Purser offers. “They’re looking to find anything they can.”

“Last Call” author Okrent calls that “exploitation of desire.” “In fact,” Okrent says, “as much as anything, the reason Prohibition came to an end was the need for tax revenue. The Depression had brought tax revenue so low, ‘Well, gee if we could put a tax on something that people really, really want, then it will raise a lot of money.’ I’d call that opportunism.”

Lesson 6: There will always be those who wish Repeal never happened.
The IRS, and state and local tax agencies might be more interested in money grabs than passing judgment on adult beverages, but there always will exist individuals and groups that will constantly have alcohol in their crosshairs. The industry, DISCUS’ Cressy advises, should remain vigilant about those. “I don’t want to impugn their motivation,” he says, “but it’s very hard to tell what’s driving them. Many of them are sort of pseudo-scientific and they deal with surveys and research that is not held to the highest standards to create headlines. They end up arguing for all sorts of population-based controls.”

The three most common population-based controls are restrictions on advertising, excessively raising taxes and excessively restricting access. “The problem with these population-based controls is that they simply don’t work,” continues Cressy. “It’s misguided of certain public health types who think you can solve the problems of the harmful use of alcohol by inoculation in the same way you’d be able to solve the problem of a communicable disease. These aren’t communicable diseases. These are individual problems and the focus needs to be on the individual.”

Industry organizations like DISCUS, WSWA and NBWA, tend to put their support behind organizations that run comprehensive education programs to battle misuse of beverage alcohol, such as binge drinking, drunk driving and underage drinking.

The industry, after all, is run by parents and grandparents, and they have a personal interest in social responsibility. “We have grave concerns about the misuse of beverage alcohol,” Cressy notes. Also, promoting moderation just makes good business sense. “It’s the essence of being sustainable over the long term,” he adds.

A decade ago, NBWA had singled out a number of organizations that it had labeled as “neo-Prohibitionist,” but has used that term less and less as it increasingly found common ground with organizations it previously had identified as adversaries. “I think when you’re in the alcohol industry, there’s a tremendous amount of obligation to recognize the fact that the products that our members sell are socially sensitive,” Purser asserts. “The products that can be a great source of enjoyment and bring people together are also products that, when misused, can tear families apart. There are a number of victims’ organizations like Mothers Against Drunk Driving that are well known because these are folks who’ve had their lives uprooted and adversely affected by misuse of our product. The reason we haven’t just stopped opposing their initiatives, we’ve actually begun dialogues [with them] is because we believe there are more things we agree on than disagree on…. When it comes to some of these issues where we can put our shoulders to the wheel together, or we can have a dialogue or we can even have a better disagreement, we’re going to do our best to do that.” NBWA continues to oppose, however, organizations that lobby for advertising restrictions and higher excise taxes.'

Despite the efforts of such groups with anti-alcohol agendas, Okrent believes another Prohibition is extremely unlikely. For better or worse, the crippling inertia brought on by today’s dysfunctional legislative climate is partially to thank for that. “For one thing,” Okrent notes, “I don’t think a constitutional amendment that says Tuesday should come after Monday could pass in the current political environment.”

If by some twist of political fate it did happen again, it’s unlikely that Prohibition 2.0 would last that long. “Even if we did fall into a period of intense blue-nosed moral police that by some miracle established prohibition on a state-wide or nationwide basis,” Okrent adds, “[lawmakers] would be voted out of office in the next election and that would be changed. You can’t legislate against human desire. You just can’t.”

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