Scotch Whisky in the Land of the Three

'Three cheers for three tiers' cry US wholesalers, about America's sacred distribution system through which Scotch whisky flows. But it could now be at risk, as Tom Bruce-Gardyne reports for WhiskyInvestDirect…

VIRTUALLY every bottle of Scotch whisky sold in America has to pass through the country's unique supply chain that keeps suppliers, wholesalers, and retailers as separate entities controlled and taxed by the individual States.

This three-tier system evolved from the 21st amendment that ended Prohibition in 1933. Given the passage of time and all that has happened to other seemingly entrenched industries disrupted by the forces of Amazon, Spotify, Airbnb and Uber, the system has proved remarkably resilient.

But the mid-tier of wholesale - represented by the Wine & Spirit Wholesalers of America (WSWA), one of the most powerful lobbies in the country - is under threat right now.

President Biden issued an executive order to the US Treasury Secretary, Attorney General and Federal Trade Commission in July to investigate threats to competition and barriers to entry across a range of industries including beers, wines and spirits. Their findings were due to be submitted last week, and could ring alarm bells at the WSWA.

"Protection of the consumer and variety of choice via prevention of monopolies are some of the main accomplishments of the Three Tier System," trumpets the WSWA on its website, yet plenty would argue that wholesalers have become virtual monopolies themselves.

The mid-tier has seen a wave of mergers and acquisitions that has left Southern Glazer's with a staggering projected turnover of US$21 billion this year. Next comes Republic (RNDC) on US$12.3bn and Breakthru Beverage on US$6.1bn.

That gives the top three distributors about two thirds of the entire US wholesale market for wines and spirits. Diageo, by way of comparison, posted a £12.73bn (US$17.2bn) turnover in its latest annual results (FY21).

David King, who was president of US importers/producers Anchor Distilling (now Hotaling & Co) before his current role as Gordon & MacPhail's sales director, believes the system is underpinned by "huge vested interest" and "breeds inefficiency."

"The market in the US is actually pretty simple," King continues. "Everybody takes 30%, the importer, wholesaler, and retailer, but it's the bit in the middle that has everyone over a barrel, and I think there are probably a lot of people who would like to see the three-tier system ended."

However, it would be wrong to assume it is necessarily the smaller distillers who feel squeezed out by the system. It may be clunky and expensive, but it does offer unparalleled market access.

"It certainly hasn't held Macallan back in the US, which continues to be one of our strongest markets," says the brand's marketing director, Glen Gribbon, who doesn't expect the mid-tier to disappear anytime soon.

"For twenty years there's been talk of change, rather like the Indian market liberalising tariffs. It's not something we're planning for, but if you look back at the past 18 months and the amount of change we've seen, who knows?"

Paul Hletko, founder of FEW Spirits and a former president of the American Craft Spirits Association, is among the fans of the present system. "I think it's wonderful because it allows us to focus on what we do and it allows distributors to focus on what they do," he told me a few years back. He also appreciates having their endorsement, saying: "They're voting with their dollars whether or not they feel they're going to build a product."

David King at Gordon & MacPhail disputes this point. "It's your job to build your brand, but a distributor will make sure it's available if there's demand for it," he says. "America's the land of opportunity, but it isn't the land of entitlement."  

The pressure for change seems to be coming from digital platforms keen to bypass the middleman, and from the big brand-owners who resent having to share the value chain with a third party. As one industry insider told me: "the big guys want to take distribution in-house as they did in Europe in the 1980s, and they now want to get close to the consumer without having a wholesaler in the way."

Of course, these pressures are nothing new, and if a fight ever did break out into the open between say the owners of Johnnie Walker and Southern Glazer's, the smart money might not be on Diageo. The WSWA has enormous political clout at a Federal and State level, and a bulging war chest of campaign dollars to lavish on its supporters.

Unlike the corporate giants of the drinks industry, American wholesalers are almost invariably family-owned and run by trusts which is where their vulnerability may lie. Under Biden's 'Build Back Better' rhetoric, they risk being hit with a new surtax that according to the WSWA equates to 45% on income over US$200,000. With their corporate rivals on 21%, no wonder they are up in arms.

The sacred three tier system is not about to crumble, not without an almighty tussle in the courts if it comes to that. Quite what it will mean for Scotch whisky, from niche single malts to mainstream blends, is hard to say right now. But if it does change, there will certainly be winners and losers.