Pando

How Amazon is getting beat by an upstart alcohol delivery app in its own backyard

By Dennis Keohane , written on April 8, 2015

From The News Desk

Amazon is obviously pushing the boundaries of how we purchase, receive, and consume retail goods and groceries these days. Recently, it unveiled its new physical Dash Button that customers can press to order refills on products such as diapers, laundry detergent, and coffee pods. Eventually, the company plans to use drones for same-day deliveries

So with a recent report that Amazon has suddenly stopped offering beer, wine, and alcohol as part of its AmazonFresh delivery service in Seattle, it appears that the company's plans to be the singular source for all your e-commerce needs has taken a hit. (Amazon did not respond to requests for comments on the news.)

Playing David to Amazon’s Goliath in this space is Boston-based alcohol delivery startup Drizly, which is still operating — delivering beer, wine, etc. in Seattle — while local tech giant Amazon has mysteriously ceased offering the service.

So how is it possible that a three-year-old Boston startup is beating Amazon in its home town?

What makes Drizly able to operate its alcohol delivery service is the company’s status as a third-party (or fourth-party in this instance) marketplace software service, and its proprietary ID verification mobile app.

The ID app, an identification catalog system called Mident, was developed by Drizly in conjunction with another Massachusetts company, Advanced ID Protection. Mident is the mobile equivalent of the monstrous catalog of ID verification tactics and their variants which are used by every state. Many state IDs use infrared markings and hidden symbols to make identifying real IDs from fake ones more accurate.

It’s not the mobile app alone, however, that has given Drizly the upper hand in the industry against companies like Amazon. It's a system that dates back to Prohibition.

Known as the three-tiered system (hence Drizly’s role as a fourth party in the industry), it operates in a somewhat unique way. Once alcohol is manufactured by a brewery or distillery, it is then sold to wholesalers who distribute it to retailers who, in turn, sell to consumers.

As part of the system, companies like Anheuser-Busch and MillerCoors cannot sell directly to customers, and neither can the wholesale distributors. In many states, there are strict rules in place to ensure that the system stays intact; one reason being that it makes it easier for smaller, privately-held shops to enforce age restrictions and other rules related to alcohol sales.

Drizly has managed to gain a foothold in the space because of its partnership with the retailers, on whom the onus of regulations regarding not selling to minors, falls. Drizly has managed to operate and expand its services to more than 12 U.S. cities, mainly because it doesn’t take part in the actual delivery of goods, it only makes its software available for a fee. (By staying out of the delivery process, the company also avoids the thorny issues surrounding legal employment status and tax codes that companies like Uber and Instacart have to deal with.)

Through Drizly’s mobile application customers make their orders, pay for their booze, and receive a notification of when the delivery will be made. The actual delivery is completed by retail stores that have partnered with Drizly. When the handing off of the order occurs, it is on the person delivering the alcohol to verify the age of the customer which, because the retailer is liable if it sells to a minor or someone who may be intoxicated, is done by an employee of the store.

In many states, the consequences for selling to someone under the legal age or who is already quite drunk can be the loss of a liquor license, heavy fines, or both -- punishments that can deeply affect the bottom line of what are usually small businesses.

In Washington, Amazon’s home state, the laws regarding alcohol sales have been going through some changes. In 2011, voters decided to change the existing system, in which the retail end of supply chain was controlled by the state, to one in which alcohol sales are done by privately-held retail stores. The rules regarding the Internet sale of alcohol were put in place in 2012 and specifically state that only retail locations may deliver purchases made online. Like many other states, this prohibits the wholesale distributors and the manufacturers from delivering beer, wine, and spirits directly to consumers.

It is likely that Amazon quietly shut down its alcohol delivery services because it ran afoul of regulations. Unlike Drizly, Amazon likely skipped the retail end of the supply chain, and delivered booze from its warehouses, making it a distributor and not a retailer.

Like Washington, many states have laws that are both complicated and nuanced. Drizly has often attributed being able to maneuver the wide array of different laws to its founding in Massachusetts, a state with many alcohol regulations that date back to the Puritans.

It is a fine regulatory line that small upstart Drizly seems able to walk, making it not only possible, but lucrative to deliver booze in Seattle — the company says that the city has been its most successful launch in terms of total purchase value, which is the amount of money collected by the liquor retailers.

But what's most impressive is that on its own turf, delivery powerhouse Amazon has been made a spectator in the alcohol delivery game.

[photo by Jeremy Noble]