Amazon’s One-Hour Alcohol Delivery May Be a Headache for Startups (blog)

Wall Street Journal

By Lizette Chapman

September 1, 2015

For on-demand alcohol startups, Amazon.com Inc.’s recent move into the one-hour booze-delivery business may be sobering.

As Amazon experiments in Washington–the only state in which it now holds a liquor license–and evaluates the complex patchwork of state and county regulations governing alcohol sales nationwide, more than a half-dozen alcohol delivery startups are working to differentiate themselves from one another and Amazon while wooing more physical retail stores to use their technology.

“We’re sitting up and taking note. Amazon is the biggest e-commerce company in the world and they have an almost infinite investment horizon and much more money than we do,” Drizly founder and Chief Executive Nick Rellas said.

Having raised $17.8 million from private investors, Boston-based Drizly is the most well funded of the more than half-dozen startups enabling consumers to purchase alcohol and get it immediately delivered with just a few taps on their smartphone.

Like Minibar Delivery, DrinkFly, Thirstie, BrewDrop, Saucey, Swill and others that have emerged during the past few years, Drizly doesn’t sell alcohol and therefore doesn’t need a liquor license. Rather, these startups sell their technology to physical alcohol retailers as a monthly subscription service that promises to increase revenue by selling online and through an app while gathering and analyzing data about their customers and the products they buy.

Although some of these startups work with existing delivery services provided by retailers, others enable retailers to launch such a service by equipping drivers with a smartphone app they use to confirm the person accepting delivery is the same who legally purchased the items.

While each company is slightly different–Drizly also sells an API that customers can embed in tweets so followers can purchase directly–all are seeking to be viewed as delivering higher-end, specialty liquor that differs from Amazon.

Online giant Amazon entered the market last week by offering alcohol deliveries in as soon as one-hour in Seattle, but it remains to be seen whether the e-commerce company plans to expand. While Amazon’s sheer size and threat of wide-reaching instant gratification loom large on rivals, startups are moving to specialize.

“Amazon is the Wal-Mart of online. I don’t see us competing,” said Will Cullen, who co-founded Chicago-based DrinkFly with his brother last year and has since expanded to seven additional markets. “The types of stores we talk to wouldn’t be interested. We don’t sell $6 wine or Busch Light.”

Amazon sells a range of alcohol products, from a $4.99 bottle of 2012 Sauvignon Blanc to a $2,679.50 bottle of 1996 Burgundy, according to a search of its website.

An Amazon spokeswoman declined to comment.

For Amazon, selling and delivering alcohol within one hour both compliments its food-delivery services and is an experiment in what could be a lucrative new vertical.

National alcohol sales figures aren’t available. Each state, and sometimes county, makes their own laws governing the sale of spirits, wine and beer. Based on sales figures of spirits from the 17 states and one county which the National Alcohol Beverage Control Association oversees, the total market for spirits nationwide is a $35 billion business, according to NABCA Vice President of Operations Jerry Janicki.

“It’s not unthinkable that it (national alcohol sales) could be a $100 billion a year business,” said Mr. Janicki, noting that is a loose industry estimate and includes beer and wine.

Private investors backing the booze delivery startups remain bullish on the sector despite Amazon’s entry and similar activity by delivery services such as Postmates and Instacart . The ability to bring offline transactions online and mine the data coupled with consumer enthusiasm for summoning items from smartphones as evidenced in food, rides, laundry and other services have made the sector a compelling one for tech investors.

“Amazon’s model will be driven by regulation. Ours is not,” said Pat Kinsel , a partner with Drizly investor Polaris Partners . “Alcohol is a $100 billion a year industry that knows nothing about its customer.”

Except for Drizly, most startups are still in the seed stage, having attracted small amounts of capital primarily from individual investors.

Thirstie Chief Executive and co-founder Devaraj Southworth said he got “15 calls asking whether it was time to worry” from his existing investors just following Amazon’s announcement. Despite initial concern, Mr. Southworth said those same investors, who have invested a total of $2 million in his startup, pledged continued support as he prepares to raise a Series A and enter Seattle in coming months.

Thirstie aims to differentiate itself from Amazon by offering high-end specialty products and stand apart from competing startups with its heavy focus on original lifestyle content and community. It is in 18 markets now.

Chair of the Alliance of Alcohol Industry Attorneys and Consultants R.J. O’Hara said he has seen an uptick in both private equity investors and alcohol retailers seeking his counsel in recent months. Mr. O’Hara, an attorney at Flaherty & O’Hara in Pittsburgh, said Amazon’s entry will likely generate more interest in the sector from new players who enable sales but don’t do it themselves. He expects Amazon’s impact to remain limited, at least for now.

“It will be a chore for them to expand state by state. It’s a patchwork” of laws and regulations, Mr. O’Hara said. “Regulators will be very resistant for them to expand. They will find it difficult.”

Although Amazon may help educating consumers about the service, ultimately each startup’s success will be based on the willingness of physical retailers to try sometime new.

“I haven’t even thought about it,” said Shawghn O’Keefe, the manager of Bottewworks in Seattle, where he stocks 1,000 different varieties of craft beer. Mr. O’Keefe said his store experimented with delivery about 10 years ago, but it discontinued it after a warning from regulators. “We are open to change and might explore (working with a startup) if we see a loss of sales. The laws are always changing.”