Welcome to the second installation of Erstwhile Mezcal’s blog series, in which I share my firsthand experiences and takeaways on Why Is Mezcal So Dam$ Expensive in the United States.
In a previous post, I observed that for Erstwhile’s first shipment of mezcals from Oaxaca to the United States, our production costs account for only about 20-25% of the shelf prices paid by US consumers.
By “production costs”, I am referring to the costs of:
- Compensating our partner producers fairly – we pay our producers their asking prices, and do not ask them for exclusivity or discounts;
- Bottling and packaging, including the costs of bottles, labels, corks, cork seals, etc.;
- Transportation from Oaxaca, Mexico to our warehouse in the United States, and related expenses such as customs and insurance.
So what accounts for the other 75-80% of shelf prices that consumers pay in the United States? What happens after our mezcals leave our producers’ facilities in Oaxaca, touch US soil in a shipping container, and eventually arrive in our warehouse in the United States?
The Real Culprit: Three-Tier System
The three-tier system is the primary reason of why mezcal is so dam$ expensive in the United States. By way of quick background, the three-tier system is the legal system governing the distribution and sales of not just mezcal, but all alcoholic beverages, in the United States. It has been in place for close to a hundred years, ever since the repeal of Prohibition in 1933.
I plan to dive deeper into the three-tier system’s history in a future post, so our readers who are interested in this topic have a better understanding of how the three-tier system came to be in the first place.
For purposes of this post, it suffices to say the three-tier system exists. Moreoever, it is a system that is – in its current state – profoundly inefficient, ripe for reform, and drains the wallets of US consumers everyday.
Under the three-tier system, it is illegal for consumers to buy any kind of alcoholic beverage directly from the producer, or from the most convenient source of their choosing (e.g., an importer like Erstwhile).
Instead, consumers must go through not just one but several middlemen. There are at least three mandatory steps:
Producers must become, or go through, importers. An importer must first find and then sell to a licensed distributor (or become a licensed distributor itself) in every state where it would like to have sales. Distributors, in turn, sell to retailers (e.g., bars, restaurants, stores) that are licensed in the same state. Finally, retailers sell the product to individual consumers.
To reach individual consumers in the United States, we have no choice but to navigate our way through all the layers of the three-tier system. All alcoholic beverages, not just mezcal, snowball in price as they clear each tier. Individual consumers, myself included, ultimately foot the bill.
At each tier, each intermediary takes its cut — often varying between 25-50% of its purchasing price in my experience. At each tier, federal, state, and/or local taxes are added. These expenses are ultimately passed onto individual consumers like you and me.
Don’t Forget the Control States
In some states, commonly referred to as control states, the state government exerts some form of monopoly power over the distribution and sales of alcoholic beverages. Consumers in control states are essentially subject to a four-tier system, in the sense that the state government inserts itself as another mandatory tier and takes its cut in an already convoluted, inefficient system.
In Pennsylvania, for example, the only stores where mezcal and other spirits can be sold are state-run stores known as “Fine Wine & Good Spirits” stores. For Pennsylvanians, that means the selection of mezcals and all spirits available in their neighborhood liquor store is not determined by free market forces like product supply and consumer demand, but instead by a handful of state government employee(s) working for the Pennsylvania Liquor Control Board (PLCB).
At mezcal events like tastings and seminars, I often meet folks who live in Pennsylvania and other control states. It is no surprise that they vote and shop with their feet, routinely driving across the border to non-control states (New Jersey, for example) when shopping for booze.
For Pennsylvania retailers like bars and restaurants, that means when they order Erstwhile’s mezcals, they are not ordering directly from our Pennsylvania distributor. Rather, they are technically ordering from the PLCB, who in turn takes a substantial cut and orders from the distributor.
As a result, Pennsylvania retailers have to pay substantially more for our mezcals compared to their counterparts in non-control states like New York and New Jersey – about $ 8-26 more per bottle in fact, depending on the expression of mezcal. And that’s not counting the sales tax that retailers have to pay in Pennsylvania.
To be clear, I use Pennsylvania as an example here, not because I harbor any negativity against the state or the Pennsylvania Liquor Control Board. I use Pennsylvania as an example, primarily because it happens to be the first control state in which Erstwhile Mezcal gained distribution and sales, and the control state where, to date, I have had the most firsthand experiences in the context of running Erstwhile Mezcal.
Why Is the Three-Tier System Bad for US Consumers?
In my next post for this blog series, I plan to do a deeper dive into why the three-tier system in its current state is so terrible for US consumers’ bottom line and overall economic welfare.
Are you intrigued? Want to know more?
Sign up for our newsletter so we can keep you posted on future blog posts on the economics of mezcal. You can do so by emailing us at email@example.com, or scrolling to the bottom of our website.
Yuan Ji, founder of Erstwhile Mezcal
P.S. In case you missed it, here is the first installation of Erstwhile’s blog series on Why Is Mezcal So Dam$ Expensive in the United States.
P.P.S. As always, I do not presume to speak for everyone in the mezcal industry, and welcome others’ perspectives that may differ from my own. My opinions stated above are based on, and limited to, my own firsthand experiences of creating and running Erstwhile Mezcal. Erstwhile’s business model, and as a result my opinions stated above, are not necessarily the same as that of other mezcal importers and brands.