Get the door. It’s the liquor store.
Drizly does what Burt Reynolds couldn’t (and what Amazon can’t).
It’s Friday, and you just got smoked by your Marketing final. You’re running late for your section’s holiday party and decide to run to the nearest corner store for a bottle of wine. There’s only one problem: you go to HBS and live on the retail wasteland that is campus.
Enter Drizly. A few quick taps on your smartphone will have your drink of choice at your doorstep within the hour. You breathe a sigh of relief; technology for the win; Christmas has been saved.
But wait. You’re a smart, analytical person – you (sort of) learned something at business school. How does a startup handle such a high number of SKUs (more than 2,000 in some markets)? How does it deliver in such a quick amount of time (20-40 min)? How did millennials succeed at delivering alcohol – a historically insurmountable problem so closely tied to the American way of life that it birthed the most American of all sports? (Not baseball. NASCAR, you guys).
In short: they didn’t. Er, it doesn’t. They and it does…not. Whatever.
Drizly’s Business Model
Drizly provide’s on-demand delivery of beer, wine, spirits, and mixers. Essentially, the company exists to connect local liquor stores with near-by buyers. The business creates value by saving customers the time and hassle of procuring alcohol in person. Drizly charges no mark-up over in-store prices, but creates value for retail partners in the form of increased sales and increased customer base. In their own words, Drizly offers “speed, convenience, selection, and price.” The company captures value by charging liquor stores a monthly licensing fee to participate in the network.
“That’s interesting,” you think. “But why is this any different from the myriad mobile startups I can’t keep up with?” The reason goes back to NASCAR. Alcohol regulation in the U.S. is cumbersome. In 1933, the 21st Amendment was passed, bringing an end to Prohibition. In order to protect against the abuses of “tied-houses,” the “three-tier system” of brewers, independent distributors, and retailers was developed. Additionally, some states developed their own regulations (Oregon and North Carolina enjoy state-run liquor stores; Colorado and New York prohibit companies from owning more than one liquor store at a time).
(*Yawn* “Enough with the history.”) Why does that matter? Delivering alcohol has basically been impossible. Even if a company developed a system that worked in one state and didn’t ruffle too many regulatory feathers, chances are the same system wouldn’t work one state over. So how did Drizly do it?
Drizly’s Operating Model
As mentioned, Drizly connects buyers and sellers of alcohol. They don’t mark up the prices (point: consumers), and they bring a lot more business to their retail partners (point: liquor stores) (One liquor store owner / Drizly delivery woman the author spoke with estimated Drizly-specific monthly revenue to be $50,000). But the salient point is that Drizly doesn’t touch a single bottle of booze nor a single cent of the transaction. They succeed in bypassing the three-tier system by simply not being a part of it. (However, Drizly makes it a point to maintain very good relations with the existing regulator system). Drizly sends the order to a local liquor store, then lets the buyer and seller handle the rest. This means no inventory, no liquor license, no drivers, and most notably: no booze.
Drizly does take multiple steps to make the process as simple as possible (and differentiate themselves from the competition). They provide liquor stores with “proprietary ID scanners” that “scan more than just a barcode” (no one’s sure what that means. The point is liquor stores are given additional information to enable them to make responsible delivery decisions). As a first-mover, Drizly enjoys the lion’s share of users and liquor stores. This ensures the benefits of network effect for the retailers. While customers may be indifferent to which app they use, retailers will be sure to partner with whichever company boasts the most users.
You do you, Amazon
In addition to a few copycat startups (Saucey, Thirstie, Minibar, Swill, BrewDop), Drizly faces competition from Amazon. After recently acquiring three liquor licenses for the Seattle area, it seems alcohol delivery will be part of Amazon’s forthcoming grocery service. While the presence of such a large online retailer must make Drizly a little nervous, Amazon won’t be able to make it in the booze delivery arena. Amazon will use it’s current operating model focused on warehousing to try and compete with Drizly. But as was described above, there are (and have always been) significant issues with delivering alcohol on your own. Amazon won’t be able to deliver in Oregon and North Carolina, and will only be able to operate a single facility in Colorado and New York (say goodbye to the 1 hour delivery guarantee). Drizly’z operating model allows it to flow seamlessly across state boundaries.
Disrupt the Disruption
Much like “counterinsurgency doctrine” in Security Studies, the term “disruption” gets thrown around so flippantly that no one remembers what it means, and everyone assumes its good. Given that Drizly operates most often as a mobile app and the company doesn’t actually do what it helps you to do (i.e. it’s Uber), it’s easy to assume Drizly is “disrupting the alcohol industry!!!”
It’s not. And if it was, the young startup would not be able to have such a cozy relationship with the established three-tiers. Amazon’s approach to the alcohol delivery problem (cutting out distributors), would be disruptive (if it worked). Wine & Spirit Wholesalers’ President Craig Wolf (i.e., the guy a small startup doesn’t want to tick off) defended Drizly, saying “Drizly’s business model [is] three-tier compliant and not disruptive but complementary.” This is because the app protects wholesalers’ (and retailers’ ) positions in the three-tier system. In fact, the Wine & Spirit Wholesalers are so open to the company, they acquired a minority stake in Drizly last May.
Thank you for selecting on a business near and dear to our hearts. I find it very interesting that Wine & Spirit Wholesalers acquired a minority position in Drizly. Their investment would seem to violate the arms length principle; W&SW is best positioned to spur adoption of Drizly amongst its member organizations, which in turn increases the value of its investment. I am sure W&SW is also well connected to local regulators which will help protect Drizly from some of the political risks you have outlined. The deal seems like a major coup for Drizly and a significant impediment to its competitors.
I wish I’d known about this after the Marketing final. Oy!
This is certainly a creative loophole to the age old challenge of connecting consumers to alcohol through a complex regulatory spider’s web. It’s also interesting that they’ve been able to position themselves as “complementary” instead of threatening. It begs the question, though, of what their competitive advantage will be moving forward aside from their first mover status. Will that be enough to remain number one in this highly coveted space?
Ok, good talk. Now please excuse me while I go download the Drizly app…
I wrote about Drizly as well, but I like yours better! It’s interesting to know that Drizly has a close relationship with the wholesalers and Amazon tries to break into this market too. But from what I know, Amazon plants to act as a wholesaler & retailer. Let’s see how it pans out.
Thanks for the great post, Corey. Word around campus is that our classmates have really enjoyed making use of Drizly—strictly for virtuous and respectable purposes, of course.
Given your take on the the competition, I was curious to know what you think about Amazon’s entry into Manhattan’s alcohol-delivery market, which came just a couple of days after your post, complete with a one-hour delivery guarantee:
http://recode.net/2015/12/09/amazon-to-offer-one-hour-delivery-of-beer-wine-and-other-booze-in-manhattan/
They’re still a bit mum on the details, but they seem to have abandoned the own-license model that they pursued in Seattle in favor of contracting with licensed merchants and delivery providers, much like Drizly. Do you think they can pull off a “hybrid” model that conforms to local regulations and captures as much value as possible depending on local laws? Or is Drizly’s complementary model most likely to succeed over the long-term?
I would suggest that Amazon (and its offering, Prime Now) has two promising advantages in a space like this: a massive customer base and an aggregation of more than just liquor retailers. If Prime Now takes hold as a one-stop destination for any on-demand delivery purchase—either from Amazon itself or its retail partners—niche competitors like Drizly may simply not get a second look from consumers. Sure, people might comparison shop, but how many will expect Amazon to lose on price or selection?
I also wouldn’t count Amazon’s “traditional” retail model out too quickly. As I understand it, they have built a number of specialized distribution centers for Fresh, their next-/same-day grocery delivery service. Alcohol would be an obvious complement to the goods that they already offer. And though the regulatory environment favors politically-powerful incumbents, Amazon does have a carrot of “job creation” (i.e., building and staffing new distribution centers) that it might try to offer politicians to change laws enough to ease Amazon’s entry.
Great point, Micah, and thanks for the update on Amazon’s actions. I think their move to abandon owning their own alcohol licenses was smart on their part. Moving to a hybrid model allows them to offer a similar service to Drizly at much lower headache to themselves. If I’m Drizly, my biggest worry would be losing customers who are already shopping on Amazon for other on-demand items. As Amazon roles out more of these features (like it’s partnership with Eataly referenced in the article you posted), it will make more sense for customers to use Amazon as a one-stop-shop for all their on-demand purchases. This means highly concentrated cities, like NYC, may fall Amazon’s way (since they’re the easiest places for Amazon to execute 1-hour delivery). Other dispersed metro areas, e.g. Atlanta, may still be better served by Drizly. It’s a bold strategy, Cotton. Let’s see if it pays off for them.