Why Uber Will Not Be Challenging How Alcohol is Sold and Distributed

Since the Uber purchase of local alcohol sales platform Drizly for $1.1 billion earlier this month, there has been talk and speculation that the food and people delivery service will be in a position to disrupt the three-tier system of alcohol distribution. While this would be a nice and welcome development, there is virtually no chance of this kind of disruption occurring as a result of this merger. Here’s why.

First, it’s essential to appreciate the “three-tier system” for what it is. While often the term “three-tier system” is used as a euphemism for the totality of a state’s alcohol regulations and laws, in reality, the most important elements of a three-tier system is how it 1) separates ownership among the three tiers (producer, wholesaler, and retailer/restaurant) and 2) how it mandates by law that producers sell to wholesalers and that retailers only purchase their inventory from wholesalers.

The three-tier system describes how alcohol is legally and physically routed to retail outlets, not how consumers purchase it.

Drizly’s business model (taking orders via its app then forwarding those orders to liquor stores that then deliver the contents of the order to nearby customers) doesn’t care how alcohol retailers buy and receive their inventory. Drizly’s model doesn’t care if retailers are mandated by law to only purchase inventory from local, state-based wholesalers. It only cares what products retailers have in stock.

The integration of Drizly into the Uber Eats platform will serve to expose Drizly users to the food delivery options offered via Uber Eats, while Uber Eats gets to expose its users to the inventory of local liquor stores. It’s a matter of local delivery consolidation.

What does seem likely is that Uber will, where it needs to, work to change laws to allow non-employees of liquor stores (Uber drivers) to deliver wine, beer, and spirits from liquor stores to consumers. In nearly every marketplace where Drizly operates it is an employee of the liquor store that delivers the alcohol to customers who placed orders via Drizly. However, this kind of legislative and regulatory changes in no way impacts how retailers obtain inventory or from whom they obtain inventory.

But the larger point here is that Uber’s purchase of Drizly does nothing to widen the diversity of product choices for a consumer whether they use Uber/Drizly or not. The merger does not bring more, diverse, craft or hard-to-find products into a marketplace. The only way this happens is if wholesalers begin to represent more small producers (this is not happening and has not been happening for years), if state laws are changed that allow consumers to receive shipments from out-of-state retailers who have access to products not available locally, or if state laws are changed to allow retailers to purchase inventory directly from producers and importers located both inside and outside their state.

Nothing about Uber’s purchase of Drizly will lead to these changes.

It’s worth noting here that early on in Drizly’s existence it took an investment from the Wine & Spirit Wholesalers of America (WSWA), a national trade association for the country’s dwindling number of, but powerful, middleman wholesalers. WSWA has and continues to be a primary opponent of consumer access to alcohol products that are not first sold through wholesalers and to the interstate shipment of alcohol to consumers.

Moreover, upon its investment in Drizly and ever since, WSWA has touted Drizly’s facilitation of local sales and retailer delivery of alcohol as the future of alcohol e-commerce. This is a head fake of an argument. Real e-commerce occurs when consumers can access products via the internet that may or may not be located and shipped from a location in the consumer’s state. Drizly is a delivery facilitation business, not so much an e-commerce facilitator. From its earliest days, Drizly never threatened the state-mandated use of a wholesaler or aspired to open alcohol shipping laws and this was glaringly apparent by WSWA’s investment in the company. Uber has no incentive, business or ideological, to pursue changes to the three-tier system.

What’s almost certainly true about the Uber purchase of Drizly is that the original ride-sharing company overpaid for the privilege of acquiring Drizly’s delivery facilitation service that up to now has yet to make a profit. Drizly was purchased by Uber after a gigantic increase in Drizly’s business due almost entirely to the COVID-19 pandemic and consumers’ need and desire to not venture out in public. That desire to avoid crowds is going to wane eventually and Drizly/Uber will not be able to sustain the kind of growth it saw in 2020. In fact, its transactions are going to contract over the next 12 months.

So, no. The Uber purchase of Drizly will do nothing to help reform the “three-tier system”. On the other hand, it will work to expose more people to the fact that they can remain firmly ensconced in their pajamas and still get more Bud Light delivered to their door. That’s something.

 


11 Responses

  1. acv - February 15, 2021

    Spot on commentary.

    Yes, the price was substantial but in acquisitions like this, there is a principle referred to as Goodwill.

    “What Is Goodwill? Goodwill is an intangible asset that is associated with the purchase of one company by another. Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represents some reasons why goodwill exists.” (Investopedia)

    Think of Facebook’s outrageous price for WhatsApp back in 2014.

    We will see if Uber can monetize Drizly either through the business end – ads??…or the data collection of the customer base to bring Uber its ROI.

    I’m as skeptical as you are…I keep a well-stocked cellar….so, I don’t need wine on the fly ha, ha.

  2. Robert Gregory - February 15, 2021

    I remember reading somewhere that the average amount of time most wines or cellared is 18 hours

  3. Joe Jensen - February 16, 2021

    Tom,

    You can’t really believe this statement and if you do you are ignorant of what is going on in any given market!

    “The only way this happens is if wholesalers begin to represent more small producers (this is not happening and has not been happening for years)”

    In your last post you mentioned how many TTB label approvals there are and that not all labels are available in most markets.

    There is a bit of a problem with this argument and I am not sure if you have ever submitted labels for TTB approval but 1 wine from 1 brand can have upwards of 50 label approvals of the same wine on imported wines who search out individual importers in multiple markets.

    In the Illinois market where any winery can get a license and sell or direct ship there are upwards of 80,000 wines available in the market with 45,000 results showing up on Sevenfifty.com and SGWS does not post there along with a few hundred small importers/distributors that don’t spend the money for the service.

    You tout Uber but they want nothing but the lowest common denominator which pushes the consumers into the hands of the big boys instead of them walking into their neighborhood bodega, fine wine shop or liquor store where they can get help finding something fun and interesting!

    Binny’s in Illinois has 12,000 wines listed and 6,000 spirits in their system right now and I can guarantee you that probably 25% of those wines are sold to them by dozens of small distributors.

    My significant other manages a store and the vast majority of people using curbside pick up are buying White Claw, KJ, Meiomi, Penfolds Kim Crawford etc. which are the same skews Uber would be moving for convenience buys.

    There is no shortage of distributors looking for brands, one of the biggest problems is the total amount of brands created with no experience or reality behind them! Who needs another $30.00 to $100.00 Pinot Noir or Cabernet when the average consumer is spending $10.00 to $20.00 on a bottle of wine if they are lucky.

    So many of the start up wineries are created by people who made money doing something else and then come here to whine about not getting distribution will willfully ignore a small distributor because their Tech Bro, Lawyer, Doctor, Hedge Fund ego tells them that since they got lucky doing something else only a big successful company should represent them.

    My company currently has about 1,000 items in our system between wine and spirits labels that represents most parts of the wine world with a combination of values $7.99 wines up to top line wines like Clos des Papes, G.B. Burlotto, Smith-Madrone & Joseph Roty.

    Most buyers consumers would take 2 or 3 years just to drink their way through our portfolio and there are another 20 companies larger and smaller than us and a few hundred selling 50 to 400 wines in the market!

    Forget SGWS, BreakThru and the other big boys and look at the thousands of small distributors around the country who have dedicated teams of professionals with relationships across the market with store and restaurant buyers and realize that the cost that goes to the 2nd tier is for the most part a marketing, delivery and collections cost!

    Eliminate the 3 tier system and you still need distributors!

    Cheers,

    Joe

  4. Blake Gray - February 16, 2021

    People who think Uber will expand market access for producers aren’t paying attention to what Uber did in its trial run of alcohol delivery in New Jersey, or to Uber Eats.

    In NJ, Uber limited retailers to 100 items. Some of these retailers sold more than 1000 items through Drizly and Minibar.

    Uber Eats offers more limited menus than DoorDash.

    It’s Uber’s business model. Uber believes fewer choices = more efficient service.

  5. Tom Wark - February 16, 2021

    Joe,

    It’s what I tell everyone who objects to the idea that getting rid of the wholesaler mandate will kill distributors. If a producer isn’t required to use a wholesaler, many will still use a wholesaler. You are correct.

    That said, I have a hard time sympathizing with small, nimble wholesales like you who do go out of their way to represent the smaller brands. The reason is whenever legislatures are considering bills that might allow winery shipping or retailer shipping the small wholesalers are nowhere to be found. They don’t support these bills. Instead, they let the local wholesaler association and local retailer associations come in and plead with lawmakers that they will go out of business and I can’t get small wholesalers like yours to take a stand on behalf of a free market or consumers.

  6. VVP - February 16, 2021

    Hey Joe, you will not forget SGWS and BreakThru when one day they take away Doubleday or something else that will become popular in your company’s portfolio.

    We agree with you that Tom is ignorant and often cries wolf. It is axiom that Drizly which mainly operated under 27 CFR § 31.189 in the States where otherwise not specified did not do anything to their regulatory systems. So, the Uber purchase of Drizly will do nothing either. However, for example in Illinois, liquor broker license is now required, and third-party local alcohol delivery license is now required too.

  7. VVP - February 16, 2021

    The small wholesalers are to be found. They are found in the retailer shipping as long, as retailer doesn’t bypass them. This is actually why you can’t get them to take a stand for your anarchist model. They want to have their piece of bread with butter too.

  8. acv - February 17, 2021

    I take it VVP is not your biggest fan Tom? Anarchist? Were you by chance at the Capital last month? Looking for that $75,000 reward.

    All distributors have to focus on maximizing company profits, and company rewards, and focus the company’s attention on the top brands that make them relevant.

    Joe Jensen didn’t mention any four brands he mentioned 4 brands Clos des Papes, G.B. Burlotto, Smith-Madrone & Joseph Roty that if he has a bad year of sales promoting would move on to a new wholesaler and these brands would no longer be the gatekeepers to getting his larger portfolio of wines into establishments throughout the city or state. Hell, G.B. Burlotto is part of the LIVEX top Italian brands…try 6 months of poor sales with these guys and let me know how that works out.

    Yes, the TTB label approval was a bit misleading.

    Yes, there are lots of small brands with poor leadership.

    No, there are not lots of distributors looking for new brands.

    Yes, there are lots of distributors looking to steal brands away from other distributors. Nothing like built-in placements to make you excited about taking on a brand.

    I worked for 14 years in the 1st and 2nd tier by far my favorite tiers. Three years in the 3rd tier – educational. I worked for Total Wine and More. Let us put aside their business model of winery direct for a second. The immediate issue is they will only work with a select bunch of vendors. And that is the same issue with a Costco or with national restaurant chains’ wine lists. Who you are in the pecking order is an obstacle in itself and that is where the system begins to break down?

    You can say you not addressing the three-tier model as much as you are speaking about private companies’ policies. Ok, but the exclusionary result is circular. A distributor only wants a brand they feel confident they can make placements for like a Smith & Madrone. This focus makes the tried and true brands desirable and the untested brands a gamble. New brands can’t get into the market because they have to go through this antiquated 3-tier framework – add big data IRI data and the 3 tier system is throttling to anyone without $100 K behind the marketing and promotion of a new independent brand.

    Why not jettison the least useful tier – the 2nd tier

    Say you bought a wine farm in Washington State and you make a new wine brand and it just so happens your friend back in Chicago who owns 3 restaurants says sure I’ll sell your Syrah….good luck making that happen.

    If your response is “built-in distribution, I would take the brand on today.’ Okay, let us put aside the paperwork…how much would you order? 7 cases? 14 cases? A pallet?
    When would you order? Next time you order from Washington State (WS) along with your other brands from WS. What happens if you don’t represent any brands from Washington State? How and when would you put the time and energy in to get that wine to Chicago? …to help two guys you have no relation to….with added shipping costs that just skyrocketed.

    If you’re the wine brand owner. How are you going to price the wine if the distributor only buys 7 cases? Or 14 cases. Are you going to offer a sampling budget and try to expand beyond your friend’s restaurant in Chicago? How do you build market share on a 7-case drop? Are you going to fly into the market for a 14-case drop…28 case drop?

    If you are on the Fermentation blog, you should know better than to throw up such weak arguments with minimum syllable words. There are too many obstacles to the full expression of commerce clause as it relates to wine and liquor sales not to see the 3-tier system as a glaring failure in 2021.

    You scored a point on the TTB label approval process…trying to avoid the minutia of a deeper discussion about the next step getting that label registered and approved often state by state…the stinking heap of red tape restrictive mumbo-jumbo/ bureaucratic nonsense that goes into shipping wine is only equaled by this run-on sentence.

    (see Price Posting regulations in Ohio).

    I’ve argued that tearing down the 2nd tier certainly should begin but that a broader focus on revising the system of wine and liquor distribution should encompass a whole lot more (Like my pet peeve striking down state Franchise laws). We need to scrap much more than a tier in liquor distribution.

    … but at the end of the day, Tom hit it out of the park with his commentary. Now, if we could just get him to stop wearing the Viking hat, we can all sleep well at night.

  9. Jeremiah S. - February 17, 2021

    Mon Dieu! eCommerce – commercial transactions conducted electronically on the internet. The Drizly app is not eCommerce sounds incompetent and silly. Are you confusing eCommerce with Interstate Commerce?

    What state laws do not allow consumers to receive shipments from out-of-state retailers?

  10. Joe Jensen - February 20, 2021

    Tom,

    Unfortunately the chance of any small distributor getting any attention at the top levels is a bit challenging. I tried to bring up some issues with WISDI our local trade group but their board is all SWGS and BT employees and not a single midsized member, not even from Winebow who is a multi billion dollar player in the country.

    I have been in business for 10 years now and have grown numerous brand from Zero to thousands of cases and it is still impossible to get plenty of small producers to search you out since too many believe that their brand belongs at the big boys.

    LibDib will never be very effective simply because of the logistics involved in moving small orders around the country in a timely way.

    Uber/Drizly will work out great for the founders of Drizly but will do nothing for brands!

    The second tier still needs to get those brands into the stores that Drizly plans to use for fulfillment!

    Instead of tearing down the small distributor network that has developed in most major markets of this country you could be promoting working with them as a strong alternative to your producer base!

    Joe

  11. Joe Jensen - February 20, 2021

    ACV,

    Please grow a pair and identify yourself, it would possibly give you some credibility with your arguments.

    Insulting me with this comment ‘you should know better than to throw up such weak arguments with minimum syllable words.’ tells me that maybe you are a better wordsmith than I will ever be but when your boots are on the ground and you are actually doing what I am and many thousands of other small and growing distributors are doing for the small brands you seem to be championing!

    Riddle me this ACV, which of these major multi billion dollar companies have created their own distribution companies which the could easily do and could get around most of the laws out there!

    Diageo
    Gallo
    Pernod Ricard
    Remy
    Bronco
    Beam
    The Wine Group
    Brown Forman
    Quintessential
    Campari
    Treasury
    Moet Hennessy
    Kendall Jackson

    Again I am certainly no wordsmith, have no legal skills, no accounting skills, etc.

    But while you sit around and bitch and cherry pick arguments, I am actually running a company that is growing and representing many small brands in the marketplace.

    We sold 60,000 cases in our market last year and in a few more years it will be 100,000 which is 60,000 or 100,000 more than your solutions will ever sell. Well I will give you 5,000 to 10,000 cases that could possibly be sold direct to the trade if 100 to 200 small players actually execute well!

    Meanwhile while we are waiting for that to happen we will be selling multiple thousands of cases along with all of our small competitors across the country.

    Hint, in my list above there is one player that is attempting to execute their own distribution network, in the beginning they are hiring some talented people but we will see how it plays out and what the accountants think!

    I’ll also we waiting for all of the people who post with initials to come and show yourselves!

    Cheers,

    Joe


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