Welcome to the third 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 Part I of this blog series, I observed that for Erstwhile’s first shipment of mezcals from Oaxaca to the United States, our production costs account for only about 25-35% of the shelf prices paid by US consumers. In Part II, I explained why the three-tier system, the legal system governing alcoholic beverage sales in the United States, is the primary driver of the other 65-75% of shelf prices that US consumers pay for our mezcals.
In this post, let us dig deeper into how the three-tier system came to be, and why it is terrible for US consumers’ welfare and bottom line.
To be clear, the point of this blog series is not to criticize any particular tier. Nor is it about any company or individual working within the three-tier system. Erstwhile Mezcal is an importer and very much part of this three-tier system. So are our distribution and retail partners all over the country. Each tier, Erstwhile Mezcal included, serves unique roles and brings something valuable to the consumer. Each tier also takes a cut to remain profitable. All tiers, Erstwhile Mezcal included, collectively account for the 65-75% of shelf prices I estimate above.
My ultimate goal with this blog series (and really with everything we do as a company) is to empower our readers and fellow mezcal consumers with knowledge. In this post, I dig deeper into the origin of the three-tier system because, in my experience, it rarely comes up in discussions of mezcal prices in the United States, yet makes a dramatic difference to US consumers’ bottom line.
The Three-Tier System Hurts Mezcal Consumers and Small Producers
Mezcal consumers will enjoy better selections and significant lower prices, only if direct shipment from producers and importers to consumers were to be allowed.
With the exception of alcoholic beverages, small producers can sell directly to US consumers in almost every category of craft product.. Chocolate, stationery, hot sauce, jewelry …. Whatever I am shopping for, there are often plenty of options to choose from, thanks to the Internet. I can, and prefer to, buy directly from the source – at farmer’s markets, street stands, the maker’s website, or e-commerce platforms (e.g., eBay, Etsy). Placing an order online usually takes no more than a few minutes and easy clicks on my keyboard.
My money goes directly to the maker, as it should, after deducting incidentals such as tax, shipping charges, and commissions charged by platforms like eBay.
But when it comes to mezcal, most of what US consumers pay out of pocket does not go to the producer or importer. Imagine that you, after having tried our mezcals at a tasting event, want to buy a bottle directly from us. Or your favorite bar / restaurant / wine & spirits shop is interested in stocking our mezcals, and contacts us to place an order. Our hands are tied, as much as we would love to sell our mezcals to you right there and then.
Under the three-tier system, it is illegal for Erstwhile – and any producers / importers of wines & spirits for that matter – to sell directly to individual consumers who want our mezcals. Instead, we are required to go through more than one middleman, by law. Each tier — including Erstwhile Mezcal the importer — marks up the price to remain profitable, and consumers ultimately foot the bill.
You Could Save A Lot, If Not for the Three-Tier System
You, the consumer, could potentially be buying quality mezcal for only half the price in an alternative universe without the three-tier system.
Erstwhile Mezcal the importing company and our partner producers, combined, receive 50% or less of the retail shelf prices paid by US consumers. In other words, half (and often more) of the retail shelf prices you pay for our mezcals are spent on clearing the three-tier system, after the bottles leave our warehouse and control in the United States.
The savings are significant and add up over time. Just do the math. Erstwhile’s flagship line, for example, consists of seven different mezcal expressions. They often appear on retail store shelves around $50-$60 / bottle for Espadin (our least expensive expression at the moment), $100-$120 for our wild agave expressions, and $130-$150 / bottle for Henequén (our most expensive expression at the moment).
Why Does the Three-Tier System Exist?
The US alcohol beverage industry has not always had tiers. Before Prohibition, the industry essentially consisted of suppliers (e.g., Erstwhile Mezcal) and retailers (e.g., your local bar or store). In 1933, the 21st Amendment repealed Prohibition and gave each state the power to regulate and control alcohol sales within its own territory.
The three-tier system was born when, under the new authority granted by the 21st Amendment, most states enacted laws requiring suppliers to go through a state-licensed distributor before reaching retailers.
The three-tier system was intended to curb reckless alcohol consumption by restraining suppliers that had grown too powerful. By cutting off direct interaction between suppliers and retailers, the three-tier system was meant to keep suppliers from engaging in pre-Prohibition practices known as “tied houses”.
Before Prohibition, suppliers often controlled retailers – either directly through ownership, or indirectly through contractual agreements by which retailers (primary taverns) sold only the controlling supplier’s products in exchange for financial incentives like interest-free loans and free equipment. Such a retailer was a “tied house” in the sense that they were tied to the controlling producer.
The popular perception was that suppliers and retailers, who were often one and the same entity, pushed sales by encouraging reckless alcohol consumption, which in turn caused social evils like domestic violence and financial ruin.
“The Drunkard’s Progress: From the First Glass to the Grave”: a lithograph by Nathaniel Currier (circa 1846) supporting the temperance movement.
Prohibition (1920-1933) was a failed national experiment. Intending to put a stop to social disorders, it had the opposite effect. Outlawing alcohol production and sales did not curb consumer demand, but created a lucrative black market. Organized crime syndicates flourished as they supplied speakeasies, smuggled alcohol across state lines, and fed bootlegging profits into other criminal enterprises. Assaults, homicides and burglaries increased significantly during Prohibition, as a result of territorial disputes between different organized crime syndicates.
Why Did the States Embrace the Three-Tier System?
State governments, post-Prohibition, could have regulated alcohol sales and consumption however they wanted under the authority granted them by the 21st Amendment. The states had the option to not impose a three-tier system, but all did. Why?
In 1933, John D. Rockefeller, Jr. – a teetotaler concerned about the impending re-legalization of alcohol consumption in the United States – commissioned Raymond B. Fosdick and Albert L. Scott to develop a plan for liquor control.
Fosdick and Scott, in their work titled Toward Liquor Control, proposed two alternative methods of liquor control at the state level: state government could either (1) act as a public monopoly, or (2) license private enterprises if the state was unwilling to become a liquor monopoly.
The Fosdick and Scott study turned out be extremely influential in shaping the states’ liquor control trajectories post-Prohibition. It was a blueprint for how state governments have continued to regulate liquor sales to this day. Most states opted for Fosdick and Scott’s “three-tier system” per option (2), using licensing as the mechanism to control alcohol sales and police consumers. Other states – the control states I wrote about in Part II of this blog series – opted for option (1), by exerting some form of monopoly power over the distribution and sales of alcoholic beverages, thus adding a fourth tier.
Three-Tier System Is Ripe for Reform
The three-tier system was meant to rein in unscrupulous, too-powerful suppliers with “tied house” retailers in their pockets. Small producers and importers like Erstwhile Mezcal (and so many of our peers in the craft wine & spirits industry) are not the problem that the three-tier system tried to solve almost a hundred years ago.
Therein lies the irony. In my experience as a consumer and as a supplier, I see strangleholds on US consumers’ access to craft wine & spirits, and players in other tiers that have acquired power disproportionate to the value they bring to consumers. Small producers and importers are not the problem here.
All of this is not to say that any tier in the system is unimportant or a villain. Each tier serves a purpose. Producers make the mezcal. Importers deal with, for example, the complex regulations in more than one country and the logistics of bringing the mezcal to market. Distributors provide a host of services including consolidation of multiple brands, warehousing, delivery, and curation. Retailers like your neighborhood store, bar and restaurant serve you, the end user consumer.
Here is my question for you: while each tier serves a purpose and has a role to play, should it be mandated by law?
I will save that discussion for another day. Are you intrigued? Want to know more?
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Yuan Ji, founder of Erstwhile Mezcal
P.S. 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 here, are not necessarily the same as that of other mezcal importers and brands.
Great article and thanks for writing it and bringing attention to this matter.
The wine industry was able to lobby for reform in 2005. Why haven’t the spirits and beer industry been able to do the same? What is needed to change the 3 tier system or what immediate steps can be taken to correct this inefficient system? Is is highly unlikely that such a structure can be reversed?
Dalton – Thank you for taking the time to share your feedback.
We have been asking the same questions ourselves for a long time.
I think spirits as a category faces more obstacles, as far as improving the current system goes. Hard liquor was perceived as more dangerous and “sinful” even before Prohibition. Higher alcohol content was considered to be more conducive to reckless alcohol consumption, which in turned caused social evils – or so the logic went.
Case in point: in the 1933 Fosdick & Scott study, the idea behind their state control model (where the state government acts as a monopoly) was that the state government would be responsible for limiting access to hard liquor by becoming a monopoly, while leaving beer and sometimes wine to private enterprise.
I am still hopeful that the three-tier system can be made more efficient and better for consumers. I think change will need to start with legislation and deregulation at the local level (e.g., city, county, state), one community at a time.
In the meantime, we can all do our small parts in effecting systematic change. I know you are. Keep up the great work!
Yuan
This post doesn’t come close to addressing the reason THAT MEZCAL COSTS SO MUCH MORE THAN OTHER HARD ALCOHOL. If the three tier system is so bad for consumers, then why is so much hard alcohol so cheap at retail? The real answer is that Mezcal is the adopted spirit of the Brooklyn Hipster crowd. Young, urban and has to drink something unique with that long back-story for every single small batch producer. Appeals to a certain demographic because it doesn’t’ appeal to many others. Gotta stay hip.
David – Thank you for taking the time to share your feedback.
There is certainly a perception among some US consumers that (1) Mezcal costs so much more than other spirits, and (2) Mezcal pricing is driven up by – as you put it — “the Brooklyn Hipster” demographic’s demand for “something unique with that long back-story”. I think these are excellent topics for discussions, and I’m happy to dig deeper into them in future blog posts.
But this blog post is not intended to address either point. The point of this particular post is to shed light on how the three-tier system developed and why it is bad for consumer welfare – something that applies to not just mezcal but all wine & spirits sales in the United States, affects many US consumers’ bottom line (my own included), but rarely comes up in discussions re mezcal prices.
If there is anything that you disagree with on the substance of my post, please let me know and I will try my best to clarify. And of course, feel free to defend the three-tier system as it currently stands. I always welcome different points of view that may differ from my own.
As for your point (1), I think you might be assuming that Mezcal is a “widget” — no different from any other mass-produced, industrially made spirit in terms of production and labor costs, and therefore should be “cheap” at retail. If so, this is where we disagree. At least, that is NOT the kind of Mezcal and producers that we at Erstwhile love, import, and promote.
Perhaps I will save that discussion for a future blog post. What do you think?
Cheers,
Yuan, founder of Erstwhile Mezcal
Perhaps change the title to “3-tier System increases the prices you pay” and let’s save the “Why is mezcal so expensive” title to highlight other factors such as the long growing periods for the maguey, intensive labor to produce, small batches, limited production, transportation, etc. Thanks for sharing your thoughts on the 3-tier system! Indeed it is ripe for reform. What if 100 small-batch brands signed a petition? Say 100K cases or less per year type producers. Would that move the needle?
Andy – Thanks for your input. The title is fine as it is written. No need for change. This is a multi-part blog series, intended to explain the different factors that determine retail prices for mezcal paid by US consumers, with each post focusing on a different component.
The factors you mentioned (e.g., long growing periods for maguey, limited production, etc.) are definitely important parts of this discussion. We plan to focus on those factors in a future post.
That said, the three-tier system needs to be part of this conversation as well. It rarely comes up in discussions of retail Mezcal prices in my experience, yet accounts for a significant chunk of shelf prices of Mezcal in the US as I explained in this post.
Interesting idea re small-batch brands signing a petition. Are you going to start one?
Yuan