Liquor Laws Outpaced by Technology
The liquor laws have always struggled to keep up with ever-changing technology.
As the number of delivery apps in the US grows, players are trying to sort out the rules.
Source: Wine-Searcher
By Liza B. Zimmerman
29-Jun-2017
The wine business has long lagged behind other sectors in terms of its ability to serve its customers online.
In the past three to four years a number of both local and national delivery services have come to market and some of the largest are operating in an impressive 30 states and 40 major markets.
State liquor laws, in most of the country, have not kept pace with the finer points of how some delivery apps make their profits, leaving many retailers in somewhat murky legal negotiations with current and previous delivery partners. These issues have recently come to a head most notably in dense and heavily regulated urban markets like New York City and San Francisco.
How the business should be allocated
Every store wants to increase their revenue, particularly in urban markets like New York, where retailers are not technically allowed to have more than one store. When wine delivery applications – from MiniBar Delivery and Instacart to Thirstie and Saucey – started to approach retailers years ago with the promise of increasing register rings, many were quick to partner up. These services promised to bring them not just more business but also new customers from other areas of the city.
While the business model sounded great, it didn’t work out so well for many retailers in the long run. According to a 2013 ruling by the Albany-based New York State Liquor Authority (SLA), retailers were only supposed to be charged monthly operating fees – not percentages of sales processed through delivery apps – and were supposed to have exclusivity to serve certain neighborhoods.
One of the largest players, Drizly – founded in 2012 and based in the mini-tech hub of Boston – has benefited from huge investments from companies such as New York-based VaynerMedia and a separate operating company of the Washington, DC-based Wine & Spirits Wholesalers of America (WSWA). Gary Vaynerchuk of VaynerMedia was the heir apparent of the iconic Wine Library store in New Jersey before making a successful segue into marketing, while the WSWA represents the bulk of the mid-level to large wholesalers in the country. VaynerMedia reps declined to comment for this story and a WSWA spokesperson noted that WSWA is a non-profit entity distinct from WSWA Services LLC, the second of which owns shares in Drizly.
Another declaratory ruling from the NY SLA in September of 2013 pertained specifically to Drizly. It noted that: “Drizly does not receive a portion of the licensed retailer’s profits. Accordingly, it cannot be argued that Drizly possess a financial interest or ownership interest in the licensed retailer’s business.” This would seem to prohibit Drizly from taking a percentage from their retail partners. However we enter gray teritory here as the ruling is a policy, not a law, notes John Hinman, a beverage alcohol specialist and a San Francisco-based partner in the law firm of Hinman & Carmichael LLP.
Monthly processing fees – which delivery apps such as MiniBar Delivery and Thirstie say that they use – have long been deemed the easier and politically “cleaner” way for deliver apps to profit from their work with retailers. The Seattle-based Amazon wouldn’t share details about its financials, according to spokesperson Amanda Ip, although both Amazon Prime and Prime Now sell wine in select states.
By paying delivery apps monthly fees, instead of percentages, the retailers also, per the 2013 NY SLA advisory opinion, are always accountable for the entire profit from the sale of the alcoholic beverages.
According to William Crowley, the director of public affairs at the NY SLA, the licensed retailer should select the product, deliver the product and “be the only one who has access to funds [paid for it]”. According to the January New York State SLA ruling on Instacart’s delivery services: “Payments for alcoholic beverages by customers go straight to the licensed retailer via a payment processing system. Licensed retailers receive 100 percent of the customer payment for alcoholic beverages.”
The laws tend to be fairly similar in California and a current proposed amendment to Senate Bill 254 – passed in California in May of this year to regulate the delivery of alcoholic beverages – notes that the “off-sale retail licensee must have exclusive and continuous control of the proceeds from the sale of alcoholic beverages”. According to Hinman, Drizly is behind a proposed amendment that cleverly excludes Drizly from the amendment by saying that “the person delivering the alcoholic beverage is not directly compensated and contracted by the retail licencee”. Since this is Drizly’s operational model, the proposed amendment could be seen as an attack on Instacart.
The more successful apps – like Drizly – have continued to change the way they operate. The company’s executives recently approached retailers who they previously worked with for free or for minor monthly fees to ask for a percentage on items sold. They have also started to allow multiple stores to compete for the same market, even including stores located at great distances from the client; i.e. if you shop for wines in San Francisco you may be given both local and Southern California store options.
Many retailers expressed – off the record – that they didn’t have any choice but to pay the percentage for fear that Drizly would divert shoppers to other stores. They also expressed concern how big players like WSWA and VaynerMedia would react to their not accepting the new sales terms. When one retailer decided to leave the fold it was a hard parting of ways.
Attorney John Hinman (L) and retailer Seth Weiser both believe there needs to be better rules governing new technology.© Wine-Searcher | Attorney John Hinman (L) and retailer Seth Weiser both believe there needs to be better rules governing new technology.
When things don’t go to plan
67 Wine & Spirits, a single-location store on the Upper West Side of New York, had agreed to work with Drizly several years ago and was paying nothing for the service, according to Seth Weiser, the store’s marketing consultant. In April of this year Drizly executives asked the store to pay a 10 percent commission on wines sold through their app and 67 declined in May. What proceeded was a really “bad breakup” for both parties.
Drizly CEO and co-founder Nick Rellas said that everything his company does is legally compliant and that business terms evolve on a regular basis. He noted that none of his partners get Drizly’s services for free and added that Drizly never had a contract with 67, so it was fair game to change the financial relationship with the store at any time. He went on to say the stores that are Drizly’s clients may or may not be charged fees based on how much the company might want to incentivize new clients in different markets.
The end-goal for Drizly, he added, is to create a richer marketplace and better consumer experience by allowing customers to comparison price shop and get product delivered within an hour. For instance, offering San Francisco consumers the opportunity to shop in Southern California might allow them to purchase products at lower prices, as San Francisco stores may be constrained by space but they have the advantage of being able to deliver product within an hour. The company offers intrastate delivery in 14 states.
Weiser says that the day after the “breakup” in May, multiple negative reviews were posted on 67’s mobile app and they were the first less-than-positive feedback the store had ever received.
“We had never had a bad review until that day,” said Weiser. Three negative reviews were received in a three-hour period and some of the user names’ contained words such as “Drizly Fan”. The building on the Upper West Side where 67 is located, was also immediately blanketed with $15-off flyers from Drizly, according to Weiser. When “the market dries up for this kind of business we are one of the few stores that can say no,” he noted about 67’s solid reputation on the Upper West Side.
While their collaboration increased top-line profits, it also added costs in terms of additional staff to take orders, print them and ship them out, according to Weiser. “Retailers have gotten addicted to top-line growth while they are losing money,” he noted.
New customers were brought into the 67 fold, but they could also be taken away at the click of a mouse. “When you can’t come to an agreement on a percentage with Drizly they will switch customers to other stores,” said Weiser. If you currently shop with Drizly on the Upper West Side none of the store options currently include 67.
Rellas said that negative reviews are a factor of everyday business life and Drizly has received fake negative feedback in the past as well. He added that the company regularly sends fliers out to all New York City residents, so 67’s building was just one of many who might have received them.
What’s more, both Weiser and Rellas confirmed that Drizly had bought Google ads reading “67 Delivers”, where the link led customers to other stores in the area. Rellas added that he has even purchased Google adds using the names of stores with which Drizly has never worked with as a way to promote the delivery app in new markets.
The problem with all this “he said, she said” is that the local, state liquor authorities have yet to firmly lay down the law. And deep-pocketed companies like Drizly remain active is shaping how the future of alcohol beverage delivery is and will be executed. “Life isn’t fair and the legislature is for sale,” added Hinman.
What is legal versus what is ethical
Hinman highlighted that Drizly’s approach is not necessarily illegal. While using a store’s name to sell products from another store may not be a problem for Google, it could be classed as fraud and misuse of intellectual property, according to Hinman. However, the fact remains that the 2013 NY SLA ruling is not the law. “You are not going to get a definitive resolution without a court case,” he said.
The online sales arena for alcoholic beverage continues to pose new, legal challenges as to what is both ethical and or legal. Sadly the bulk of rulings, and proposed amendments, thus far are just nothing more than business industry goals that aren’t going to hold up in a court of law. And any business entity with funds has the right to try to shape new laws to fit and better suit their business models.
There is no doubt going to be a big future shakeout between big business and the sometimes puritanical – but well-intentioned – laws that govern the sale of alcoholic beverages in the United States.