There has been a lot of hype about Amazon’s entry into the beverage alcohol space. Some of which has, admittedly, come from us with articles like “Did Amazon Just Kill Liquor Retail as We Know It?” and “Amazon is the largest liquors store you didn’t know about”… And for good reason! There is no question that Amazon will create real and different competition for independent retailers and change consumer expectations around buying alcohol in a big way.
However, it is not the “doom and gloom” situation you might conclude. Amazon will make an impact, but it is not going to change the beverage alcohol industry as we know it. It will not put every independent retailer out of business, and here’s why….
First, let’s start with the 3-tier system.
The beverage alcohol industry has a love-hate relationship with it. On the one hand, it safeguards against any one of the three tiers — producers, wholesalers, and retailers — from having too much power. On the other hand, it can limit sales and marketing efforts across all three tiers while adding cost and complexity.
Right now, as the largest e-commerce company enters the beverage alcohol space, the industry as a whole should be thankful for the 3-tier system… and quite frankly, it should also be thankful for a whole bunch of arguably archaic regulations that vary state-by-state and make selling alcohol in the United States a complicated matter.
Because of the 3-tier system, wholesalers ultimately control pricing, distribution and product allocations. Laws are in place so that wholesalers can’t overtly favor one account over another; and hard-to-get items are distributed among several outlets.
Obviously, there are loopholes. However, in general, the 3-tier system serves to keep the playing field somewhat level. This becomes particularly relevant when a powerful buyer enters the market. Giant retailers have to play by the same rules and their advantages are limited as a result.
Let’s also acknowledge that none of the three tiers want a single retail account to dominate. Suppliers and wholesalers rely on getting diverse portfolios into the market and a range of accounts is necessary to support this.
If a single account has too much power in a market, they not only control pricing (something brands would particularly despise), but they also begin to dictate what will, or will not, be available to consumers (something wholesalers would really hate). The result would be fewer choices for consumers and a preference to high-volume (read: commodity) and high-margin (read: private label) items.
At every tier, there are very powerful organizations (DISCUS, WSWA, ABL, NABCA and NAWR, to name a few) that will do everything in their power to avoid a scenario in which a single player dominates the market. (Unless, of course, that player is the state, which is the case in 17 states and further complicates any attempts at national domination for beverage alcohol retail.)
Given that the beverage alcohol industry contributes over $65B in taxes to state and federal governments annually, you can bet these organizations have a voice. So, while a retailer the size of Amazon may have the means to challenge laws that stand in their way, they will be met with a lot of resistance from the tiers that supply them with product and any change will be a long, arduous and costly process.
Logistics and Marketing
According to TTB.gov, 178,000 beverage alcohol SKUs were added or renewed in U.S. in 2017. These are perishable goods that need to be stored at specific temperatures. They are heavy and costly to distribute. There are laws that limit their availability state-by-state. They are also increasing at a rate of approximately 20k new SKUs per year. Logistics aside, finding market demand for all of these products takes many hands — and many, many retail accounts.
Because of the “Tied House Laws” in the 3-tier system, Amazon will not be able to take advertising money from alcohol brands. This means, Amazon will have to market wines, beers and spirits itself. This is hard to do. It takes product knowledge and a lot of time and effort — difficult for a public company to justify given the slim margins in beverage alcohol (more on this later). It is much more efficient for Amazon to pick a small set of popular products that are available country-wide and their focus marketing efforts on those.
Not only is beverage alcohol highly regulated, the regulations change state-by-state and, in many cases, town-by-town.
In some states, a liquor retailer can only have one liquor license. In several states, delivery is illegal. Shipping across state borders is not allowed in most states. There are heavy penalties for selling to underage consumers, or intoxicated individuals. There are strict regulations around promotions and incentives.
For example, in Massachusetts and several other states it is illegal for a liquor product to get sold below the published wholesale price. This means that any discounts applied to a consumer sale, including the use of loyalty “points,” can not make the effective cost of a product to the consumer lower than the book value.
Keeping track of (and properly interpreting) the multitude of laws around beverage alcohol sales is not only daunting — it makes scaling a model like Amazon’s in this industry very, very difficult.
The margins in the beverage alcohol industry are razor thin, with unit economics averaging at about 15% across all products. Items that have market demand tend to have the lowest margins.
This puts large volume players, like Amazon, in a tough spot. The lemon isn’t worth the squeeze on the items that are guaranteed to sell. Alternatively, finding a home for higher margin items takes a lot of effort… and the margins are still small. Diverting resources to sell low-margin items is difficult to justify for a public company, like Amazon. It makes a lot more sense to focus on electronics.
There’s No Fire Without Friction
Amazon’s value proposition hinges upon offering frictionless commerce for anything that is remotely annoying to buy (i.e. requires going to a shopping plaza). Running low on socks? Save yourself the trip. Looking for that new cool gadget? Compare online and get it delivered. Need a gift for little Johnny’s birthday? Avoid the toy store and save your sanity.
The reality is: there isn’t much friction for Amazon to solve when it comes to buying alcohol. Most neighborhoods have a local liquor store; and, most of the time that store has what you need, when you need it. Swinging by your local liquor store or wine shop isn’t very labor intensive and many stores deliver, if that is what you want.
There is a reason why retailers and wineries have been selling wine online (for shipping and local delivery) for over 20 years and it STILL only represents about 1% of beverage alcohol retail sales. 99% of the time, it’s easier and more enjoyable to buy locally.
For wine, spirits and beer, the consumer pain point is not that it is difficult to buy, it is that it is difficult to know what to buy. THIS is where the local retailers can dominate. — Retailers with product expertise, understanding of local consumers and 1:1 connection with customers are able to provide expert guidance and inspire consumer confidence.
That said, consumer behavior around buying alcohol has and will continue to change. Customers will demand increasingly higher levels of convenience and personalization, and Amazon plays a huge part in this movement.
Amazon is poised to take advantage of it’s 300+ Whole Foods liquor licenses across the country and this is a big deal — particularly for the retailers near them. Inevitably, there will be fallout.
Smaller stores that service commodity buyers and lack the resources to advance will suffer, but independent retailers who go the extra mile to understand and connect with their customers are in a position to win.
It’s Your Time to Be “En Fuego”
If you are a retailer, now is the time to go the extra mile.
I’ll take a quick moment to indulge in a recent personal experience of mine at Lower Falls Wine Company — a retailer in Newton Mass that has mastered in-store customer service. It’s a beautiful store, organized and elegant with a wide variety of wines, beers and spirits that you don’t see everyday.
I used to stop by weekly, but it no longer fell along my commute — until Waze re-routed me one day. It was the end of the day. I was tired, crabby and feeling rushed to get home. But when I walked in, all of that took a pause, because they took the extra effort to connect with me.
“How are your chickens?” said Steve, one of their wine buyers — who not only recognized me (from a year ago), but remembered I had backyard chickens! Other folks from the store, including the owners Chris and Phil (who are always there), engaged with witty banter and smiles. They offered me a taste of some Ruinart Blanc de Blancs champagne they were sampling. — It felt more like visiting friends (and a much needed mini-cocktail hour) than going to “the liquor store.”
In a world that is becoming increasingly digital, better understanding your customers and developing a personal connection with them is essential for businesses to thrive. We are humans and, whether we admit to it or not, we crave interaction with people.
While such a high level of customer service is not easy for businesses to attain — it needs to be the goal. If you need to start somewhere with your team, “Hello” and a smile goes a long way. A knowledgeable staff goes even further.
Independent retailers also need to leverage their deep trade knowledge and relationships — stores need to carry differentiated offerings and train their staff to help people discover new products.
The store environment needs to be welcoming. A space that is clean and easy to navigate is essential and product displays be compelling, helpful and (if possible) fit the store’s look and feel.
Finally, to compete, retailers need to embrace the technology that is available to them. Today, there are affordable turn key solutions (like Drync) for independent retailers to have their OWN mobile commerce apps and collect valuable and practical information about their customers and sales trends.
Like never before, retailers can have access to detailed reports of their own, real-time-data through platforms like Drync’s. There are also advanced marketing tools available that allow you to optimize your efforts — Getting the right message to the right audience in a way that’s immediately actionable and requires less work from your team.
Not only does technology offer a convenience consumers have come to expect, it makes it easier for you to run your business more efficiently, and your team to better service your customers.
In addition to knowing your customers better, these tools provide insights to help you stock products that move quickly off the shelves and delight your customers — so they continue to depend on you for an experience Amazon and “Big Box” stores will be hard pressed to compete with.