Note from the Publisher: In the NovDec 2022 issue of Beverage Dynamics, we ran the first in a series of articles about direct-to-consumer alcohol shipping titled “Consumer Convenience, but at What Cost?” It included interviews with Attorneys General from...

Note from the Publisher: In the NovDec 2022 issue of Beverage Dynamics, we ran the first in a series of articles about direct-to-consumer alcohol shipping titled “Consumer Convenience, but at What Cost?” It included interviews with Attorneys General from multiple states, beverage alcohol industry regulators and representatives from the distributor tier. Many of those sources highlighted illegal shipping’s negative effects on the industry and society at large.

Part two of our series focuses mostly on legal alcohol shipping, which is allowed in dozens of states under varying rules and regulations. In almost all cases, these purchases flow through the existing three tier-system (although not everyone interviewed believes that should be the case).

We do not take a position on whether DTC sales should or should not be allowed, only that everyone should follow the letter and spirit of the law. Editor Kyle Swartz conducted dozens of on- and off-the-record conversations in reporting this series, which will continue in 2024 as new developments come to light.

Jeremy Nedelka, Beverage Group VP, jnedelka@epgacceleration.com

Among many trends in the alcohol industry supercharged by the Covid-19 pandemic was direct-to-consumer (DTC) shipping.

Sheltering in place during the health crisis, consumers learned at a rapid rate that they could order alcohol online and have it sent to their door. What was a growing DTC movement before 2020 burst into an enormous number of orders zinging across the country, arriving at home addresses. 

This occurs both legally and illegally. In part 1 of our alcohol DTC series, we looked into the latter. Illegal shipping takes many forms: wineries mailing more than their legally allotted amount into states that limit these orders, retailers shipping rare whiskeys and even entire single barrels to wherever paying customers may live, overseas websites illegally importing bottles by switching labels in transit, and bad actors who operate shipping warehouses out of unmarked, unregulated locations.

Now, in part 2, we explore alcohol shipped to consumers compliantly within the constraints of state and federal laws. These are the faces of the fast-expanding DTC industry, which shows no signs of slowing down as consumers today expect online shopping with convenient delivery.

Modern Tech Enables DTC

Launched in 2013, ReserveBar has grown into the primary ecommerce platform for premium spirits and buying products directly from brand websites. Currently, the platform displays around 150,000 SKUs.

“We started around the same time as Drizly, but they’re more of an online liquor store, whereas we’re more about being the extension of what brands wanted,” explains ResereveBar CEO Derek Correia. “We are built to be the optimal brand environment, and to manage that last mile to consumers. Like any business, you need to be differentiable. You need to stand for something and to create specific value for consumers and businesses.”

Like other alcohol ecommerce services, ReserveBar does not have an alcohol license.

“We’re a tech company that connects consumers with licensed retailers for compliant purchases,” says Correia. “We don’t ship or deliver. We’re a platform for consumers to be exposed to products, learn about them and buy them. Buyers are matched with retailers who have that product in stock.”

“ReserveBar doesn’t ship anything,” he adds. “We don’t put bottles in boxes or ship anything. Brands pay us to have their products merchandised and to create content.”

What about concerns that the retailer who carries the purchased product might ship the alcohol illegally? Perhaps across state lines?

“We have commercial agreements with 3,500 retailers which explicitly states that the retailer must operate reputably,” Correia says. “We only work with reputable retailers. They know all the licenses and laws in their area. They know if they can ship.”

“We are not in the position of being — nor do we want to be — a regulator, or have the duty to enforce regulations” he adds. “There may be bad actors in our network. But we’re pro-enforcement. I’m talking to regulators all the time. We embrace and support the three-tier system. Retailers are operating on their licenses. Special licenses are required for retailers in some cases. It’s important that laws are maintained with maximum enforcement. If you’re a retailer, you must understand this.”

Elsewhere in the industry, Sovos ShipCompliant has emerged as the leader in automated alcohol beverage compliance tools for alcohol producers looking to sell and ship directly to consumers. The company launched in 2005.

“DTC in alcohol reflects broader market trends of the consumer increasingly expecting DTC options with whatever they buy,” says Alex Koral, Sovos ShipCompliant Senior Regulatory Counsel. “This was even more true during the pandemic. There’s been a tremendous surge in DTC wine. No surprise that this is also true in other alcohol product types.”

“We provide end-to-end framework solutions that can track orders and recognize the individual rules of the different markets,” he adds. “We send orders to partners holding the products, who then pack and ship. We automatically pay the proper sales tax and excise tax.”

As with alcohol laws in general, DTC rules vary greatly from state to state. Sovos ShipCompliant offers services that efficiently comply with these differing laws and taxes when shipping.

For instance, some states limit how much alcohol an individual or household can order via DTC. Other laws limit how much alcohol a producer can ship into a state during a given length of time. Sovos ShipCompliant is programmed to get out and ahead of potential violations.

“We’re tracking these things all the time to see when they’re coming up,” Koral says. “We send a notice ahead of time when it’s getting close. And we block an illegal order automatically. We’ll send a message like, ‘It’s great that you want to buy that wine, but you have to wait a couple of weeks’.”

“These are very real laws that states are increasingly tracking,” he adds. “It’s a central part of our business.”

DTC Issues Overblown?

Koral is correct that state alcohol agencies and their legal/law enforcement divisions have focused more on DTC in recent years. Beyond bad actors shipping alcohol illicitly, states nationwide face legal challenges from out-of-state producers and retailers who claim discrimination that they cannot sell products across state lines.

“These people want to get rid of the three-tier system altogether,” says Renee C. Metz, Assistant General Counsel North Carolina Alcoholic Beverage Control Commission, during a recent panel at the 2023 National Alcohol Beverage Control Association Administrators Conference. “But we have to discriminate in some way, because we only have jurisdiction [that extends] so far. The 21st Amendment Enforcement Act is not an either/or. It gives leeway in alcohol-related issues to rule in favor of public safety measures.”

Metz points to the large number of lawsuits claiming discrimination against out-of-state producers. For states that have not yet been sued in this area, Metz suggests, “Take a look at your statures for anything potentially discriminatory, and get your data sets ready about what’s coming in and out of your states.

“Have a cease-and-desist letter ready to go,” she adds. “And when you get no response from that, know who in your Attorney General’s Office will take this on.”

For all the concerns expressed about the spread of alcohol DTC, the question remains: are these fears legitimate, or overexaggerated?

“While we recognize that states need to maintain laws, it does seem that states have been overbearing at times focusing on DTC,” says Koral of Sovos ShipCompliant. “We’re in contact with state regulators, talking with them all the time. We absolutely want to support regulators and abide by the laws. But many of the fears with DTC are unfair and unjustified.”

“There’s a lot of fearmongering out there that doesn’t reflect the actual compliance in shipments,” he adds.

One commonly cited criticism of DTC is that alcohol could potential end up in the possession of underage consumers. Koral believes this concern is overblown.

“Our website has age verification services,” he says. “And more carrier services are getting signatures with IDs now, as well.”

Moreover, underage consumers — like college students who obtain alcohol illegally — want the product immediately, Koral points out. These individuals do not want to order an alcoholic product and have it show up days later.

“And these people are looking at the lower end, not a $40 bottle of wine” shipped across the country, Koral adds. “I don’t downplay the potential for risks, but the risk of underage purchase through DTC seems less than the risk of it happening at a corner store or something like that.”

Agreeing with him is Tom Wark, Founder of Wark Communications, a marketing communications firm specializing in solutions for the wine industry’s needs — including assistance with legal shipping.

“Minors can walk into liquor stores and buy alcohol,” he says. “Are minors ordering alcohol over the internet? The fact that they could doesn’t mean that they are. It’s simply not happening. DTC is the safest way to sell alcohol without minors getting their hands on it. And the local delivery services have way more issues underage consumers buying alcohol than DTC.”

Like Koral and Correia, Wark sees the rise of DTC as having less to do with underage consumers purchasing lower-end items, and correlating more with legal-age consumers wanting greater access to premium products.

“Why is illegal shipping happening?” Wark asks. “Because consumers clearly can’t get what they want in the states where they reside. Consumers want access to a greater number of products, as opposed to the small selection wholesalers provide in the marketplace.”

Wark pushes back at criticisms leveled against DTC by the middle tier (as covered in part 1 of this series).

“No one likes to deal with competition,” Wark says. “That’s what WSWA and the middle tier is complaining about: anything that puts a crack in their monopoly.”

“The consumer knows what products they want better than the wholesaler, and the consumer should have access to those products,” he adds. “There is always going to be more illegal shipping when the states protect the wholesaler.”

While not as critical of the middle tier, Koral also believes that wholesalers should reconsider their DTC protest.

“I don’t think DTC is going to hurt the middle tier’s bottom line,” he says. “In fact, I think it can help increase three-tier sales. When alcohol brands can get into more states, they can get a foothold there, and then start getting into retail stores. It’s about creating more options by raising the water for everyone.”

“I think we need to partner with the wholesaler to create a compliant marketplace,” Koral adds. “We want to meet the consumer demand that’s out there and make sure we do so in a safe, regulated marketplace — rather than a free for all.”

Concerns Remain

While highly sophisticated services like ReserveBar and Sovos ShipCompliant strive for compliant shipping, concerns remain about the many parties operating below these industry leaders.

For instance: Liquor store owners will notice products in their markets that are not carried by local wholesalers.

“Today’s consumer thinks all alcohol shipping is on the table and completely legal,” says Josh Hammond, President of Buster’s Wines & Liquors in Memphis, TN. “We all need to take a step back and look at the big picture and say, ‘What’s going on?’”

What Hammond sees that’s particularly alarming is “websites that say they ship alcohol to all states.” In fact, 16 states do not allow alcohol shipments to a consumer’s home: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas and Louisiana.

“You wouldn’t know that when a website says they ship all over the country,” Hammond says. “It becomes a big jurisdiction issue. How do state regulators enforce penalties in other states? I know there are thousands of cases shipped illegally, purchased in the face of the law because there’s little to no enforcement.”

As alcohol producers sue state governments and claim discrimination, Hammond asks why the same isn’t true for out-of-state retailers. Which is not to say that Hammond is completely against DTC. Rather, he’s for a fair, balanced and safe marketplace.

“The litmus test must be upholding public safety,” he says. “Lack of enforcement leads to safety issues like counterfeit products, people avoiding paying taxes, scammers, underage people being delivered products and products getting stolen.”

“Illegal alcohol shipping is still the elephant in the room in the alcohol industry,” he adds. “Or, it’s the elephant in the mail.”

In the meantime, alcohol ecommerce will assuredly only grow as consumers today expect all shopping to take place online, followed by fast delivery.

“We’re looking to bring buying alcohol to every logical moment on a website,” says Correia of ReserveBar. “On brand sites, in whiskey articles; we’re expanding the shelf. If someone wants to buy alcohol, we’ll make sure they have the link. We bring the shopping cart and checkout right to the moment.”

“What if we put a QR code on the side of your Yeti cooler so you can use that QR code to buy more alcohol instantly?” he adds. “Now we’ve created more opportunity for that cooler to create a lifetime value for all those transactions put into it. We’re empowering the ecommerce of alcohol in all these different ways.”

Kyle Swartz is editor of Beverage Dynamics. Reach him at kswartz@epgmediallc.com. Read his recent piece, Beer Trends in 2023: A Time of Transition.

The post Consumer Demand Drives Alcohol Shipping Growth appeared first on Beverage Dynamics.

---

View Entire Post