The pandemic created a boom in online alcohol sales. Jeff Carroll, general manager of beverage alcohol at Avalara, looks at the legislative and legal battles being waged between producers, wholesalers, distributors, and the new players-the e-commerce companies that are disrupting the old three-tier system.
2020 changed everything for beverage alcohol e-commerce. As restaurants, bars, tasting rooms, and brewpubs either closed or were severely restricted, governments rushed in to create temporary measures, such as "cocktails to go," to ease the pain that these on-premises businesses were experiencing. Consumers, stuck at home, quickly came to realize that options existed for buying alcohol online, and beverage alcohol e-commerce boomed as a result. We'll look back on 2020 as an inflection point for consumer behavior around online purchases of alcohol.
Drizly and Vivino are two of the many companies that benefited from the e-commerce trend. Recognizing the rapid change in the industry as well as growth potential for e-commerce from a very low base (e-commerce represented just 1% of off-trade retail alcohol volume in the U.S. in 2019 but will grow to 7% by 2024, according to IWSR), Uber announced they would acquire Drizly for $1.1 billion, and Vivino announced a record investment round of $155 million. More mergers and acquisitions will likely follow as the race to capitalize on alcohol e-commerce accelerates.
The three-tier system of beverage alcohol regulation established a traditional sales model where suppliers (wineries, breweries, distilleries, and importers) sell to wholesalers, wholesalers sell to retailers, and retailers sell to consumers. Delivery apps and marketplaces like Drizly and Vivino, often referred to as the "fourth tier" of the industry, are a relatively new phenomenon. Delivery apps typically facilitate sales from retailers after products have traveled fully through the three- tier system, whereas marketplaces typically facilitate sales from manufacturers or retailers that ship across state lines direct-to-consumers (DTC) using common carriers like FedEx and UPS. The rapid growth of sales originating from this fourth tier will force regulators and legislators to establish new frameworks and policies for regulating these unlicensed entities that solicit on behalf of different types of licensees.
This swiftly changing landscape will result in continued battles and challenges in the courts and legislatures as interest groups look to both capitalize on the trends, and defend existing statutes. Wholesalers, who would love nothing more than to have all sales flow through the three-tier system, are celebrating the Uber deal as a victory for the traditional three-tier system and will oppose any new out-of-state DTC legislation. Breweries and distilleries, having recognized the increasing importance of DTC sales during the pandemic, will look to expand the roster beyond the fewer than 12 states to which they can currently ship. Wine retailers, fresh off of a 2019 victory in the Supreme Court, are pursuing litigation and legislation to allow out-of-state retailers the same opportunity to ship to consumers that in-state retailers enjoy. Wineries, who already have access to 46 states, will mostly look to preserve the status quo because they have fought for decades to get access to 97% of U.S. adults via DTC shipments.
One such battle is playing out in Tennessee as of this writing. In-state wholesalers and retailers are pushing legislation to ban wine shipments from fulfillment houses-entities that evolved because wineries generally lack capacity to store larger quantities of inventory on premises. Fulfillment houses, licensed in their own state to store and ship alcohol on behalf of licensees, are an important piece of the supply chain for licensed direct shippers and ship upwards of 60% of DTC wine shipments delivered to Tennessee residents. Instead of creating a more level playing field or better enforcement capabilities, this bill will severely restrict e-commerce and DTC sales and will result in substantial losses in product selection and tax revenue.
2021 will certainly be a dynamic year in both the regulatory arena and the marketplace. Tennessee is one of many states where the battles will intensify as businesses in all four tiers attempt to take the lead in the race for dominance in the beverage alcohol industry. Uber and Vivino are off to fast starts in 2021, but Amazon, Instacart, and myriad others in all four tiers will surely be in the mix, chasing changing consumer preference for how alcohol is purchased, and demand for new options across beverage alcohol categories.
