Costco’s Wine Guns Part 1: The History
As many of you may know, Costco is now the largest wine retailer in America and early last month, they won another step for the wine industry against the State of Washington. The lawsuit, in its simplest form, challenges the infamous Three-Tier System, which in eyes of this blogger, is yet another unconstitutional law surrounding America’s liquor industry. In this piece, I’d like to walk you through the history of the industry and in Part II, I’ll discuss the lawsuit and its benefits and ramifications.
It’s interesting to know that before the 18th Amendment (Prohibition), alcoholic beverages were sold in a free-market system. Then in 1919, morals and religion got the better of our government and deemed the consumption of alcohol illegal due to too much public drunkenness. Prohibition, the 18th Amendment, remained in effect for over a decade until The Depression started and in the early 1930’s, the government said, “Hmmm… We need money…. so let’s let these heathens drink themselves stupid and we’ll heavily tax it.”. Ok – that’s my interpretation of what was said on the Congressional floor, but I might not be far off. Hence, the 21st Amendment was ratified, which repealed Prohibition and made alcoholic beverages once again legal to drink, and most importantly tax.
One other piece of legislature was also created during this time. The Federal Alcohol Administration Act was created by the Bureau of Alcohol, Tobacco, and Firearms. This act prevented many practices that were deemed “undesirable” before Prohibition. For example, before Prohibition, alcoholic suppliers would provide discounts, equipment, and supplies to retail shops if they would only carry their brands. There might have even been kickbacks for high sales months, interest free loans, and other incentives to the retail shops. The Federal Alcohol Administration created insulation by putting a wholesaler in the middle and this gave birth to the Three-Tier System.
Though I agree these practices seems unfair, I feel they are slightly antiquated because of the internet and mass transportation. Not to mention this happens all the time in other less regulated industries. Is it a coincidence that a certain bank underwrites a multi-billion dollar IPO once you find out that the CEO’s of the companies play golf together? Nepotism never really happens, right? Your company’s World Series tickets are never given to a client… Every industry has a sales component and every sales organization has budgets for “client entertainment”. And do you know who is the number one culprit for excepting gifts is… Politicians! - ironic no?
I graduated from university with an Economic degree and one thing I we learned about was the free market combined with supply and demand. If Retail Shop A is not selling the wine I want to buy and Retail Shop B is, I’m going to go to Retail Shop B. If Retail Shop A is selling a wine for more than Retail Shop B, I’m going to buy from Retail Shop B. If Retail Shop A is only selling Franzia and Retail Shop B is only selling Far Niente, I’m only going to buy from Retail Shop B. Seems to me that Retail Shop A better change its supply, otherwise it might never get any business. Of course you have to worry about monopolies forming, but there’s an entire government agency to regulate that for all industries not just the liquor industry.
Seems to me, that the creators of the Three-Tier System weren’t protecting the interests the public, but instead were probably getting kickback themselves or working with the states to maximize their profits. As its commonly said, “Let the free market reign, and supply and demand will dictate price competition.”.