Prohibition’s Progeny: Understanding Minnesota’s Three-Tiered Alcohol Distribution System

As Minnesota continues its move to the forefront of the craft beer industry in the United States, a reminder of its not-so-friendly relationship with liquor interests reared its head this week.

The new Ken Burns series “Prohibition” aired this week on PBS, and among the stars is a gentleman named Andrew John Volstead.  Volstead, a Republican congressman from Granite Falls in the early 1900s, is best known as the namesake of the infamous “Volstead Act”, the law which ushered in the era of Prohibition in this country.  Prohibition, as we know, came to an end in 1933 with the passage of the 21st Amendment, but some remnants of the era remain embedded in our liquor laws to this day.  Key among these remnants is the system of alcohol distribution colloquially known as the “three tiered system.”  

In a 2008 article for Reason magazine, Radley Balko explains the genesis of the three-tiered system – which gets its name from the three “tiers” of manufacture, distribution and retail sale.  Quoting California State Northridge Professor Glen Whitman, author of Strange Brew:  Alcohol and Government Monopoly, Balko writes:

It was put in place largely to appease temperance activists, who still held sway in some parts of the country. Angsty prohibitionists feared what they called “tied houses,” bars that were owned by liquor producers. Before prohibition, tied houses, they said, had lured blue-collar workers in with free salted pork sandwiches on their lunch breaks. The salty meal would make the laborers thirsty, at which point they’d purchase alcohol from the bar—leading, the temperance activists said, to decreased production, drunkardness, and all-around moral decay.

Minnesota’s retailer license statute is found at Minnesota Statutes Section 340A.402, and it expressly forbids the issuance of a retailers license to “a person who has a direct or indirect interest in a manufacturer, brewer, or wholesaler.”  There are, of course, exceptions to this general prohibition.  For example, manufacturers who brew 3,500 barrels or less per year are permitted to sell “growlers” on site.  More recently, the new pint law permits breweries to obtain a license to sell pints of beer onsite.  These are, however, the exceptions. 

Minnesota’s neighbor to the east, Wisconsin, enacted legislation this past session that prohibited and distribution of beer directly from a brewery to a retailer, regardless of size.  Craft breweries in the state, taken by surprise on the law change, have cried foul since its passage, as they are affected by the change far more than the MillerCoors and AnheuserBusches of the world.  Some have termed the new Wisconsin law to be a “war on craft beer.” 

What’s my point in writing this?  It is to suggest that the rise of the craft beer industry should prompt a revisiting of regulatory burdens that have existed for over a century.  Craft breweries are in expansion mode – more so, these days, than big breweries, according to the statistics, and this expansion leads to job creation.  Why, then, are we placing artificial barriers on their growth?  The three-tiered system – in part due to the laws governing distribution agreements which are extremely one-sided in favor of the distributor — puts money in the pocket of the wholesalers at the expense of the consumer as well as the manufacturer (i.e., the job creator).  Mr. Balko’s article cites an 18%-25% markup on every glass of beer or wine thanks to the manner in which we distribute liquor.

Maybe it’s time for a change.