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Industry Updates

Leveling the Playing Field

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Craft distilleries pride themselves on the cocktails, experience, story and the life of their product. The farm-to-glass experience is achieved by these independent distillers perfecting the process by handmaking their products with locally sourced ingredients. The result is a better, healthier alternative to mass-produced products. 

These artfully crafted spirits often go unnoticed outside of their own backyards because limited resources mean limited expansion. BigFish founder and CEO Michael Weiss set out to share uncommon craft spirits with consumers who demand a higher standard. 

“In 2015, I started to notice trends about how the industry for microbreweries has shifted and taking shape to become what it is today, and I saw the same thing happening in the craft spirits world because people like to drink and shop local,” Weiss remembers. “How do you share a piece of that place with a customer? That’s what people try to do. They want to find that little spot they can call their own and all small batch distilleries are that.”

Weiss founded BigFish to create a solution to that problem. His goal was to aggregate all craft distilleries from around the world into one platform where the product is available to consumers throughout the United States, and do so cost-effectively. The craft spirits industry has been trending upwards since 2014, growing year after year.

“In 2016, we lobbied in the state of Illinois to receive the first-ever legally compliant retail liquor license that would allow for shipments of liquor direct to consumers exclusively within Illinois,” he says. “We received our license Jan. 2, 2017, and are the only ones in the state to ship liquor, but not sell on-premise.”

BigFish is the United States’ only legally compliant, online craft spirits retailer lawfully authorized to deliver straight to consumers. It provides Illinois customers with unprecedented access to a carefully curated collection from more than 200 independent distilleries from around the world, delivered straight to their doorstep. “We believe that digital is the future and only sell in Illinois within the three-tier distribution system,” Weiss notes. 

The company is looking to expand to new markets, such as Florida, Michigan and Massachusetts, but will do so within the structure of the law. One of the biggest problems with non-compliance and selling over state lines is not paying local sales tax.

The Dangers of Operating Outside the Law

The three-tier distribution system in the alcohol beverage arena is the process by which a manufacturer sells the product to a distributor who in turn sells it to the retailer. 

“The three-tier system ensures consumer protection in terms of safe products being available in the marketplace,” says Margaret Barchine, director of communications for the National Alcohol Beverage Control Association (NABCA). “Should there be any issues with a product, the system is designed to keep track of where the product goes such that should there be a recall, all product can be removed from the shelves to protect the public.”

Without the three-tier distribution system, the recent issues with tainted alcohol in foreign countries, for example, could become more prevalent. “Purchasing any regulated product from an unlicensed vendor can be dangerous,” Barchine advises. “This is especially true when it comes to alcohol, as the product itself can be lethal if it is not manufactured properly.”

In addition to safety concerns of operating outside the three-tier distribution system, the model also levels the playing field. Prior to prohibition where the saloons were owned and operated by the manufacturer, the three-tier distribution system creates an orderly method of distribution and control to prevent the occurrence of tied house, where a person must buy product from a particular manufacturer. The system prevents vertical integration where the producer is also the large volume seller of the product. The 21st Amendment gave states the responsibility to regulate alcohol as their citizens and legislators see fit. The NABCA supports all states in their right to perform this role in regulating alcohol as it is a product that can cause harm, if misused, Barchine explains. 

In terms of enforcement, Barchine says it is often analogized to an hourglass with the state serving as the construction point. “By ‘touching’ every product in the supply chain, the state simultaneously ensures tax payment and product integrity while affording itself the opportunity to remove illegal or tainted product. On the rare occasion bad product makes it to the shelf, the state can locate every bad bottle and assist the responsible parties in its removal.”

Increased Enforcement

Most states allow some form of direct shipment as long as the companies shipping the product have been properly licensed and agree to comply with the relevant state laws. Reporting requirements vary, but every state requires reporting from the shipper. 

“Unfortunately, because these reports serve as the lone tracking mechanism, it is exceptionally difficult for states to verify everything from tax payment to product integrity on sales that go unreported by out-of-state companies,” Barchine explains. 

In states with larger enforcement budgets, investigations have begun, citations have been issued and charges have been filed against e-commerce platforms operating outside the three-tier distribution system. 

In states with limited resources, enforcement often consists of cease-and-desist letters.

The NABCA does not have statistics on the number of illegal operators. “Given the nature of the problem, it is increasingly difficult to get a firm count as these ‘companies’ may change their corporate form after receiving a cease-and-desist letter from a state,” Barchine says. “Similarly, some of these ‘companies’ use contractors or third-party facilitators to affect their sales – further making it unclear who was the original source.”

Today, states are developing methods to better track this information. Common carriers are also assisting by implementing internal operating procedures that respect state laws and regulations, requiring proof of compliance from shippers. BigFish has made it part of its 2020 mission to help the liquor commission by bringing attention to companies it feels are operating outside the three-tier distribution system.

 “We do believe a crackdown on illegal e-commerce business is coming,” Weiss says. “I also believe that the industry as a whole is going to create more transparency and will bring this to light. The customer is very educated and does not want to buy from an illegal company operating in way that puts them in harm’s way.”   

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