Navigating the Legal Maze of the Three-Tier System for Alcohol E-Commerce Success

Alcoholic beverage suppliers, whether they are distillers, wineries, or breweries all hold licenses issued by the federal government and the state government. With limited exceptions such as DTC sales for wineries or sales from tap rooms, the license held by most suppliers only allows them to sell their products to wholesalers and in-state retailers. Simply put, the vast majority of distillers and brewers are not legally able to sell to consumers. So, can brand suppliers websites be a place for consumers to purchase their products? The answer is YES, and let’s get into the history that led us here and how these types of sales are made online.

Evolution and Legal Milestones of the Three-Tier System

Under the three-tier system established after Prohibition, alcohol suppliers may only sell their products to wholesalers. These wholesalers then sell the products to retailers, who finally sell them to consumers. The primary goal of this system is to prevent distant suppliers from dominating local alcohol markets, thereby fostering community-based oversight and sensitivity to local alcohol consumption norms.

These post-Prohibition laws are still in place today and are credited with creating the vast ecosystems of craft, spirits, wine, and beer sold in America. Supporters of the three-tier system argue that this allows consumers to choose from thousands of different alcoholic beverages in each state.

It was the Supreme Court case of Granholm v. Heald in 2005 that later allowed the majority of states to offer direct shipper permits to wineries—changing the landscape but only in the wine category. Accordingly, in most instances, wineries who also hold state specific direct shipper permits, are the only suppliers who can legally sell to consumers via e-commerce. However, it is illegal for all other suppliers to sell in this manner.

Legal Restrictions and E-Commerce Strategies

In traditional CPG it’s common to see things like brands paying a retailer for shelf space (slotting fees), fancy displays, end caps at the end of an aisle, and more, all to make their brand stand out. In alcohol none of that is legal; suppliers can’t directly or indirectly pay retailers or offer anything of value to induce them to purchase their product or display their products. These are called “tied-house” laws since they prevent a retailer from being tied to a supplier. These laws aimed to create independent local retailers who know the most appropriate products for their community and the most appropriate means of displaying and marketing them in their stores. Tied laws extend to the alcohol e-commerce. Specifically, tied-house laws prohibit suppliers from directing consumers to one retailer versus another. The direction to specific retailers and the ensuing sales to be made by the retailers would be deemed “a thing of value” and a violation of tied-house house laws.

So what CAN a supplier legally do in the e-commerce space to enable sales? The best way for a supplier to enable e-commerce sales legally is to engage a third party who can compliantly work with many retailers and focus on the needed technology to seamlessly enable local retail sales.  Third-party platforms can legally connect consumers with local retailers. As entities outside the three-tier system, third-party platforms can engage with suppliers for marketing and advertising while also legally engaging with retailers connecting them to consumers. When operating with a third-party platform, retailers retain control of sales, selecting their inventory, pricing, and delivery means.  Retailer e-commerce sales mirror their brick-and-mortar sales with one large exception. Third-party platforms enable retailers to reach a larger number of consumers, and the third party’s engagement with suppliers yields high-intent customers, customers who are seeking alcoholic beverages and are most likely to make a purchase. By engaging with a large number of retailers, the third-party ensures that suppliers are not directing consumers to one retailer over another or passing a thing of value to a retailer.  Supplier engagement drives consumers to the platform not the retailer in compliance with Tied-House laws.

Accelpay: A Model for 3-Tier E-Commerce

AccelPay offers a streamlined online shopping solution that allows suppliers to feature a branded page with a "buy now" or "shop here" button for consumers. Utilizing its extensive network of retailers, AccelPay determines the customer's location and connects them to a nearby retailer where they can purchase the brand's products. Furthermore, AccelPay facilitates the process for consumer payments to be compliantly transmitted to retailers, enabling them to prepare the order for pickup.

When brands work with us:

• Accelpay enables a “buy now” or “shop now” button on a supplier-branded webpage.
• Accelpay operates customer services for all sales made by its retail network.
• Brands pay a monthly fee for access to customer data, marketing insights, and customer support management.

When retailers work with us:

• Retailers pay a percentage based or flat fee commission to AccelPay on gross sale for service of order referrals. Commission fees differ based on the retailer's jurisdiction.
• Retailers are the merchants of record, responsible for compliance checks and fulfillment.
• Participate through an opt-in system where referral eligibility depends on product availability, pricing, and quality scores related to fulfillment efficiency.

What AccelPay does:

• Mechanizes order referrals to retailers using a probabilistic method.
• Assigns financial transactions, ensuring funds transfer upon order acceptance.
• Provides data services and customer support to brand suppliers.

Compliance and Order Mechanism

Compliance adherence:

AccelPay ensures adherence to three-tier compliance regulations by guaranteeing that retailers maintain control over all sales, a critical aspect for meeting these standards. Retailers are responsible for managing all compliance-related requirements, including age verification and adhering to legal shipping protocols, thereby upholding the integrity of the three-tier system.

Order process:

AccelPay's order process is designed to connect consumers with retailers based on criteria such as proximity, pricing, and fulfillment quality scores. Retailers can tailor their participation by selecting delivery methods, including opting out of shipping to specific states. The connection process employs a weighted random selection mechanism to ensure fairness and quality, giving retailers with higher scores more opportunities to be connected with consumers. In situations where multiple retailers, for instance, 15, in a single location offer the same brand, have comparable quality scores, and are equally close to the consumer, the system probabilistically selects one retailer to connect with the consumer, minimizing AccelPay's control over this process.

See It in Action

If you are a brand or retailer looking to partner with AccelPay to power your e-commerce efforts compliantly, don't hesitate to schedule a demo with us.