Why Craft Distillers Are Calling to Expand Direct-to-Consumer Shipping

Mark Willingham Uncategorized

Why Craft Distillers Are Calling to Expand Direct-to-Consumer Shipping

Source: https://vinepair.com/

TIM MCKIRDY

August 4, 2020

Buying spirits online has never been more convenient for consumers. In dozens of states, drinkers can purchase their favorite liquor brands through websites such as ReserveBar, and have them shipped to their door via common carriers like UPS or FedEx. Meanwhile, third-party service Drizly delivers bottles within a matter of hours in the 15 states it currently operates in.

Such convenience is clearly a boon for consumers, especially right now as many may wish to limit their trips to liquor stores because of the coronavirus pandemic. But some spirits producers (mainly smaller-production, craft brands) say the current landscape could be vastly improved both for distillers and consumers if the laws surrounding direct-to-consumer (DTC) sales were relaxed.

While more than 40 states let retailers sell alcohol online, the number of states that allow the same privilege to producers is significantly lower. Multiple craft distillery owners, including Jaime Windon of Maryland’s Lyon Distilling, say the ability to sell DTC would provide a significant boost to their businesses. “DTC is the Holy Grail for small producers, especially [for those] who make something that’s rare and sought after but not widely available,” Windon says.

Rather than harm the wholesalers and retailers this method of sales bypasses, distillers argue that the overall outcome would prove beneficial for every level of the three-tier system. Consumers, too, would gain from the vastly increased choice of smaller spirits brands they would otherwise not be able to purchase online.

This sounds like a win-win scenario for all involved, and craft spirits brands say it is. But calls for legislative change face notable opposition from powerful trade groups, which are opposed to DTC spirits sales and are keen to uphold the current system of alcohol distribution.

DTC VERSUS ONLINE RETAILERS

Before exploring the pros and cons of DTC spirits sales, it’s worth highlighting how this practice differs from buying liquor through online retailers. In many, but not all cases, the websites that appear to be “retailers” are actually third-party services. These companies place orders on the consumer’s behalf with a licensed retailer that is legally able to ship liquor to the buyer’s address. This generally relies on both parties (retailer and consumer) being located in the same state, though some retailers ship across state lines.

The legality of shipping spirits across state lines is another topic entirely, and one that VinePair was unable to receive a consistent answer on when we contacted three separate beverage lawyers. But because it occupies a seemingly legal gray area, cross-state shipping is something that larger, high-profile retailers typically avoid, while smaller retailers may be more willing to take the risk.

WHICH STATES ALLOW DTC SPIRITS SHIPPING?

The laws surrounding DTC spirits sales vary on a state-by-state basis, as they are not federally regulated. Some states allow in-state DTC spirits sales only, while others only allow their residents to purchase from producers based out of state. More than 30 states ban the practice entirely.

Eleven states currently allow consumers to buy directly from out-of-state producers. Each operates with their own complex guidelines, which are designed to ensure the state receives the appropriate duty on the inbound spirits.

By contrast, Washington and Pennsylvania allow consumers to buy only from in-state producers. Since the coronavirus pandemic began, a further eight states have granted this temporary permission to their distilleries.

WHY CRAFT DISTILLERS ARE CALLING FOR DTC PERMISSIONS

The loudest calls for states to relax DTC spirits regulations come from craft distillers. Their arguments focus on the difficulty of smaller brands to gain distribution in new markets through the three-tier system as it stands.

For most wholesalers, it doesn’t make sense to include craft distilleries in their portfolios because their production volumes are so small, explains Becky Harris, co-founder of Virginia’s Catoctin Creek Distilling Company. “Ninety percent of the craft distilleries out there make less than a thousand proof gallons per year,” says Harris, referencing a recent data report published by the American Craft Spirits Association (ACSA), of which she is president of the board of directors.

Even if wholesalers are willing to accept the small-scale production size of craft brands, they may also be wary of whether there is actual consumer demand in their markets, Harris says. For many producers, this is a frustrating reality: How can you prove demand in a market where you have no means of selling your products? “To me, and to a lot [craft distillers], the obvious answer here is DTC,” Harris says.

Harris’s assertion here is more than a hypothesis.

In 2017, when the ACSA polled its members on whether they would benefit from DTC shipping, 95 percent said they would. “DTC has been nothing but good for us,” says Tim Russell, founder and head distiller at Pennsylvania’s Maggie’s Farm Rum. When the state first allowed DTC spirits sales, his brand’s footprint was mostly focused around Pittsburgh, where the distillery is based. The ability to sell DTC not only allowed him to reach customers in markets like Philadelphia and Harrisburg, but when he was able to present sales figures to the state officials who run Pennsylvania’s Liquor Control Board, it resulted in greater distribution for his brand. (As a control state, Pennsylvania manages both the distribution and retail of spirits through government agencies.)

While the main arguments supporting DTC spirits sales focus on distribution, the topic has taken on heightened importance with the ongoing coronavirus pandemic. Once again, there is strong evidence to suggest that DTC sales have provided a much-needed lifeline for producers. But the situation hasn’t always played out exactly as the states or producers might have hoped where temporary permissions have been granted.

Catoctin Creek’s Harris has been able to ship to in-state consumers since Virginia relaxed its laws in April. During the first month, the distillery received “20 to 40” orders per day, Harris says, which is significantly more than it would normally sell in its tasting room. While the volume of orders has since dropped, they continue to outpace what the distillery would normally sell during a normal pre-Covid week to distillery visitors.

But in Maryland, which has also relaxed its DTC shipping laws, it’s a different story. In March, Gov. Larry Hogan signed an executive order allowing distilleries to fulfill home delivery of their products. At the end of May, that order was updated, allowing producers to also ship to consumers using common carriers. So far, most have not been able to take advantage of this provision.

What’s holding them back? Shipping companies like UPS and FedEx are worried about the liability of shipping spirits door to door, explains Lyon Distilling’s Windon. During conversations with UPS, Windon and many other craft distillers were told if they want to ship spirits they have to sign up with a third-party company called Spirits360. For its services (which we will explore in further detail later) Spirits360 takes a 10 percent cut off all sales.

“While it’s a nice option, it defeats the object of direct-to-consumer if I have to pay a percentage fee to a third party,” Windon says.

THE OPPOSITION TO DTC SPIRITS SALES

In the states where temporary DTC permissions have been granted, distillers hope the new measures will become permanent. But standing between them and long-term change is the opposition of large-scale trade groups with significant lobbying power.

One such group is Wine and Spirits Wholesalers of America (WSWA). Headquartered in Washington, D.C., WSWA has spent more than $10 million in political donations over the past 10 years, according to OpenSecrets.org.

WSWA is directly opposed to interstate, and intrastate-only, DTC spirts sales. Instead, the group champions e-commerce solutions provided by local licensed retailers and third-party companies like Drizly. “The current system of alcohol distribution is the gold standard,” says Michael Bilello, WSWA’s senior vice president of communications and marketing.

WSWA’s opposition to DTC spirits sales arises from what it says are three potential dangers: underage drinking, unpaid taxes, and counterfeit alcohol. When alcohol is sold directly to consumers, and not through distributors and retailers, the risk of counterfeit or illicit alcohol entering the supply chain increases, Bilello says. And when spirits cross state lines, there’s a chance the producer shipping the spirit will avoid paying the appropriate local and state taxes in the destination state. On the topic of underage drinking (i.e., a delivered package falling into the hands of a minor), Bilello acknowledges this is also a possibility with wine, but he says the risk of harm is greater in the case of spirits.

Bilello says that when it comes to impairment, spirits are different from wine. “An eight-year-old comes across a case of vodka on their mom’s front doorstep; it’s clear and it’s odorless and maybe it doesn’t taste great, but they start drinking it,” he says. “This could really, really harm them. That risk isn’t worth even one child’s life.”

Others within the alcohol industry remain skeptical about the reasons given by the WSWA for its opposition.

“Common carriers like UPS and FedEx are beholden with the states and have to file detailed reports,” says Sean O’Leary, a Chicago-based beverage lawyer. The fact that these carriers require individuals receiving alcohol packages to sign and provide identification means that the “risk of abuse” is no more significant than a minor buying from a liquor store, O’Leary adds.

As for the claim that spirits are in some way more harmful than wine, Lyon Distilling’s Windon says that argument is “frustrating and borderline insulting.”

This just leaves the issue of unpaid taxes, and there already exists a tailor-made solution for this potential sticking point: Spirits360. Among the range of services the company provides, Spirits360 designs and integrates an e-commerce platform for the websites of its producer clients. When a producer receives an order through this platform, Spirits360’s “compliance engine” calculates the taxes to be paid and provides the appropriate documentation that the producer must fill out in order to ship orders. Spirits360 also generates the shipping label and tracks the package all the way to the customer via UPS, with a signature required upon receipt.

This system would appear to address the concerns raised by WSWA, and for many producers it is no doubt an attractive proposition. Whether or not a producer should be required to sign up for a service like Spirits360, especially when they can handle each matter here independently, is another topic. But as Windon pointed out, if a producer has no choice but to go through a third-party company, it’s not exactly “direct” to the consumer.

Numerous industry professionals contacted for this article believe there’s another reason wholesalers are opposed to DTC spirits sales – one that they’re not mentioning: the risk they pose to wholesale businesses and the three-tier system. (WSWA’s Bilello said he couldn’t comment on this and called it a purely “hypothetical” scenario.)

Producers say any perceived risk is inflated at best and that DTC spirits sales could actually benefit distributors. “My [New York] distributor would love for me to mail you a bottle of rum because you’re not going to pay shipping every time,” says Lyon Distilling’s Windon. “But after you’re hooked, you’ll go pick it up at the liquor store.”

There would also appear to be little threat of large distilleries pivoting to DTC en masse if, indeed, they were allowed. If a consumer wishes to buy a bottle of Jack Daniels, for example, they can pick it up from almost any liquor store. If that consumer wishes to have that bottle delivered instead, they can do so via Drizly or the already established online retailers. Given that large liquor brands already have distribution in most if not all states, there seems little incentive from a new-market perspective, either.

For now, however, the day-to-day reality for most craft distillers is probably strikingly similar to that of Maggie Campbell, president and head distiller at Massachusetts-based Privateer Rum. “Every day, I probably spend at least an hour answering emails and messages from individuals in places that want to get our rum and they can’t,” she says. “It’s hard as a business to know you’re not making that money.”