Starting An Alcohol Brand
This is part of a miniseries on my experiences starting a ready-to-drink espresso martini company called Lyvely Drinks. For other topics such as real estate and crypto, visit the Hitting Send publication.
We drank pretty much every day in business school, so it was natural — since we were looking for startup ideas — to start an alcohol brand.
The alcohol market is big, well-loved, and people drink in good times and bad. More importantly, I drank alcohol, and so did all my friends. It was an easy pool of target users to survey and test product with.
In 2020, the alcohol market was being transformed through COVID. People couldn’t go to bars, but they still wanted to drink! Off-premise consumption shot through the roof, and with it, sales of every type of alcohol sold to drinkers in a take-home format. Beers, wine and spirits were already on shelves, but now drinkers needed a new type of product — mixed drinks.
It started with hard seltzers, which were both a low-calorie substitute to beer, and a low-ABV version of standard cocktail drinks like vodka sodas. More people started grabbing canned mixed drinks off the shelves, and soon the ready-to-drink cocktail format exploded. The excitement of riding that explosive new category was the chief reason we started Lyvely Drinks, Inc.
As we built the business, the excitement of the idea wore off, and the realities set in. Firstly, we had to confront strict regulatory hurdles, the toughest of which was the three-tiered system. In the U.S., you weren’t allowed to sell alcoholic products directly to consumers or retailers. You had to go through distributors. These were large, old, private companies who had enjoyed a monopoly middle-man position for decades, and they took a direct 30% cut of your top-line sales. That meant for every dollar sold, you lost up to 60% to both the distributor and the retailer. These distributors also acted as gatekeepers, barring access to retailers until you could prove your drink had fans.
We also had to confront the realities of manufacturing, which were that (a) nothing is affordable until you’re producing lots of it, and (b) the big guys win the contracts. Many contract manufacturers (also known as co-packers) could only do minimums of 30,000 cans or above, and their lines were booked up as far as 2 years out by big brands. COVID supply chain shocks further worsened our manufacturing. Aluminum shortages meant that all the available aluminum globally was being bought up by the big beer and soft drink brands, and a coffee bean shortage doubled the cost of our raw ingredients (we were making espresso martinis).
We also found out just how non-scalable sales and marketing was. Alcohol is a saturated product category where everyone has different preferences, and loyalty is incredibly low. People love trying new stuff, but rarely do they start buying it week-in, week-out. And virtually no one buys alcohol online; 95% of sales remain in liquor stores, grocery stores and convenience chains. Scaling was a linear, manual process, involving in-store tastings to get “liquids to lips” and constant pitches store-by-store to get store owners to buy cases.
In other words, the alcohol business is non-tech-enabled, non-scalable and low margins with high capital and inventory expenditures. It’s a tough business and generally a non-VC-backable one, even if you have robust demand for your product. Sure, you get economies of scale when you start selling a ton across the country, but until you get there, you take a loss on every single production run. We were looking at straight losses for 3 years before we broke even, and that was with minimal marketing spend.
It’s not all doom and gloom. There are certainly some VCs who invest in this space. And with the right connections, you could nail down a co-packer and break into the distribution game. Successful brands usually have founding teams with a combination of either deep connections into the industry, clout / personal fame, and deeper financial pockets. That gets you to scale quicker, minimizing your time to raise and maximizing your run sizes.
Perhaps the one most consistent positive is that you would love your product! It’s something you can enjoy and share with friends and family. That gives it a motivation that’s in a class of its own.
So should you start an alcohol brand? If you have an unfair edge and a passion for the product, you might be the right fit — otherwise, you might find the buzz wearing off quick.
Thanks to Emily, Tony, Andrew, and Yuhan for reading through my drafts.
