Instacart stops selling alcohol for compliance reasons

By Richard Nieva , written on December 11, 2012

From The News Desk

Selling alcohol on the Internet is an attractive but tricky prospect, governed by state regulations that hardly bear in mind the expediency of the Web. So when the grocery shopping startup Instacart began delivering alcohol alongside groceries to users via a simple mobile app tied through its Web service, it seemed almost too good to be true. Apparently, it was.

It appears that Instacart's happy hour of online booze selling has ended. A search on the site for alcoholic beverages either returns “no results” or lists products with, at best, a tangential connection to alcoholic beverages. For example, a search for vodka brought up frozen dinners for chicken Alla Vodka and Rigatoni in a Vodka Cream Sauce but no Stoli. There's no Cuervo for tequila; instead you get tequila-lime flavored chicken sausage. And Mojito? It conjured sweet midget pickles. Apparently Instacart made the changes on the fly. After pulling alcoholic beverages from the search engine, the sign-in screen still showed a category for “Beer, Wine and Spirits” in the background.

The service lets users in San Francisco and the Palo Alto and Mountain View areas order groceries on the Web, with the promise of a delivery in three hours or less. The big plus of the service is nighttime delivery – a customer can order as late as 9 p.m. and still expect the items within three hours.

The company essentially acts as a delivery service: Instacart shoppers pick up the groceries from a local Safeway and bring them to a user’s door. But that’s where compliance becomes an issue. According to the California Department of Alcoholic Beverage Control, all transactions of alcoholic beverages must be made directly through the vendor that holds the liquor license – in this case, Safeway. An Instacart shopper is not allowed to simply buy alcohol off the shelves and sell it like any other grocery item. So, instead of a customer paying Instacart when buying booze, the money should go to Safeway, and then from Safeway to Instacart.

So why doesn’t Instacart just have its customers transact through Safeway? The two companies don’t have any formal relationship, and Safeway has its own (less flexible) delivery service. Apoorva Mehta, Instacart’s founder and chief executive, says his company is working quickly to restore the service, though he said there is no timeline. “We have worked with our attorneys to come up with a solution that is in-compliance and still gives customers the seamless experience that they have come to expect from us,” he said in an email.

That solution could be any number of things, but it’s likely going to take a considerable amount of restructuring for the company behind the scenes. It’s not as simple as just applying for a liquor license; California law also states that an alcoholic transaction must come from a physical brick and mortar reseller, or an authorized shipping point like a public warehouse. Instacart has neither, and doesn’t likely have the funds to build them. The company could also consider officially partnering with a more realistic retailer than Safeway. While more plausible, it would require a shift in operations as well, since a smaller retailer (or a group of smaller retailers) is likely to have fewer locations in fewer areas.

Mehta said he was unavailable to speak verbally this week, and did not answer all of my questions when I resorted to email, but he did leave this statement:

We take alcohol compliance very seriously. Since our launch, we have given our customers an amazing experience and stayed incident free. We'd like to stay that way. As such, we are not going to be delivering alcohol until all Instacart shoppers have been trained to follow standard alcohol delivery procedures. While growth is important, it should never come at the cost of putting any individual's (customer or driver) safety at risk.
Mehta clarified that he was talking about the procedures like making sure to check identification, but this seems a bit like corporate messaging sleight of hand. The real issue has to do with selling liquor with no liquor license.

From day one, selling alcohol was the linchpin of Mehta’s pitch. In a first person essay he wrote for TechCrunch, Mehta told the story of his late application to Y-Combinator, explaining that he wowed YC partner Garry Tan into giving him an interview by sending him a case of beer using Instacart’s service.

What’s of note is that all throughout the YC program, the issue of alcohol compliance never came up. Or if it did, it was not addressed. Y-Combinator founder Paul Graham did not comment on specifics, only saying, “We don’t usually have insights on tactical matters" like the decision to stop selling alcohol.

Instacart’s situation is another reminder of the tightrope that is innovation. Several companies, in the name of disruption, have shunned regulations in favor of a “don’t ask permission now, ask forgiveness later” attitude. Most recently it was Uber. In the Web’s Wild West days, it was Napster. But some are sympathetic to those working around a set of rules that never anticipated the advances of the Web.

“If you’re not an alcohol attorney, how would you know?” one entrepreneur tells me.

You make it your business to find out. It's called due diligence.

[Image credit: Luiz Roberto Galetto]