Is the US ready for a liquor delivery app that does for beer, wine, and spirits what GrubHub has done for food and Uber has done for transportation? The answer depends on the definition of ‘ready’; several of the dozen or so apps currently available across the US have made inroads with customers and investors. But the obstacles to success are so high, mostly because of the infamous three-tier alcohol distribution system, which means the apps must deal with not just one set of liquor laws, but with 50 laws for 50 different states.
“The regulatory barriers, combined with the difficulty providing convenience in a lot of urban areas, will make it difficult,” says Paul Mabray, the CEO for Internet drinks consultancy VinTank. “It's going to be difficult for them to deliver enough value to be as successful as they need to be.”
Making the attempt
The apps, which have names like Drizly, Klink, Saucey, DrinkFly, and Minibar, take online orders from consumers who access the app through mobile devices or computers. The apps then funnel the orders to liquor retailers who have joined their networks in each city where they operate. The order usually goes to the retailer nearest to the customer, so apps with bigger networks should be able to offer better service.
The apps take their cut of the order as a percentage of sales, or as fees for using the app’s technology or service. Some apps require minimum orders and charge delivery fees, depending on the city where the retailer is located. Drizly's minimum ranges from $20.00 to $30.00, and some of its cities charge a $5.00 delivery fee (which is given to the retailer).
The key to success so far? That the retailer delivers the order and accepts payment, satisfying the myriad laws that govern liquor sales in the US. In this, the apps are marketing platforms that deliver customers to the retailer and don’t actually sell anything, so that they aren't much different from other forms of advertising, says attorney Kyle V. Hill with Martin Frost & Hill in Austin, Texas.
So far, the growth of these apps seems to be mostly on the edges of the US – New York, Los Angeles – with some larger cities in the middle. The number of retailers who belong to each network are closer to three figures than four, and there is growing realisation among the apps that they need to have more large retailers in their networks. Larger retailers carry more inventory and hence variety, and offer better prices. In Dallas, for example, one Minibar retailer charged as much as one-third more than the two biggest chains in town, and the retailer’s selection wasn't much better than a convenience store.
In addition, the legal obstacles are formidable, despite the decision to operate as marketing platforms and not as e-commerce companies. For one thing, state and local regulations often limit the hours retailers can be open, which means the apps can’t take orders when stores are closed. In Texas, that means no orders on Sunday or after 9:00 pm Monday through Saturday – two times that would seem natural for online ordering. And the apps may not be able to enter ‘control’ states like Pennsylvania (which includes the big cities of Pittsburgh and Philadelphia), where the state owns the wine, beer, and spirits shops, or some combination thereof.
The question
Mabray asks if the apps will be able to gain customers outside of urban areas where consumers are used to driving to the liquor store. The idea of ordering a couple of bottles of wine and waiting 45 minutes for it to arrive may not work in cities where it’s easier and quicker to drive to the store to buy the wine, particularly in California and the rapidly growing US southwest. That might limit the apps to cities like New York, where people don't necessarily drive to go shopping and there is already a delivery culture.
Those limitations have not deterred developers, and the number of apps has grown consistently since the middle of last year. Many continue to attract big-time investor money, and Drizly said in May that the Wine & Spirits Wholesalers of America trade group had bought a minority stake in the company. The wholesalers group said it liked Drizly’s approach to three-tier, and wanted to help it expand its retail partnerships in the US by working within the three-tier system.
Still, there is a long way to go. Drizly told the Wall Street Journal it expected to participate in some $100m in sales in 2015. By comparison, GrubHub – which has 35,000 restaurants in its worldwide network – recorded $88.2m in revenue in the first quarter of 2015, but just $10.6m in income, based on $589.9m in sales from its restaurant members. Almost two-thirds of that revenue was used to pay marketing and operations expenses, and GrubHub doesn't face the same harsh regulatory environment as the liquor delivery apps.
