Earlier this week, it was announced that the alcohol delivery service Drizly would be ceasing operations at the end of March. Founded in 2012, it was purchased in 2021 by Uber for $1.1 billion in cash and stock. Moving forward, bourbon delivery, tequila delivery, and the delivery of beer and wines will be folded into the services offered by Uber Eats. The closure raises questions about the future of alcohol delivery services, often referred to as the "fourth-tier" of U.S. alcohol distribution, which over the last 10 years have been poking holes in the primacy of the traditional three-tier system.
The three-tier system was established after the end of Prohibition and keeps alcohol producers, distributors and retailers in three separate lanes which, in most cases, are prohibited from overlapping. Those who make or import alcoholic beverages sell them to distributors or wholesalers who then sell them to retail outlets, including brick and mortar shops and online stores. While the initial intention was to prevent monopolies and ensure fair competition, the states also wanted a way to control and tax alcohol sales.
Online delivery services gained traction in the early 21st century, delivering consumers their every want in real time. Companies like Drizly, ReserveBar, Flaviar and Minibar saw a similar need for alcohol delivery, and the fourth tier was born. Fourth tier companies, don't hold liquor licenses to produce, distribute or sell alcohol, and they don't hold inventory. They provide a technology platform, usually built on an enterprise-version of Shopify, which directs sales to local liquor stores who then fulfill the orders. In return, fourth tier companies take a portion of sales from the liquor stores, ranging from 12-25%.
By taking advantage of the inconsistencies in the sale of alcohol from state to state, fourth-tier companies have been able to circumvent local and federal law to sell beer, wine, and liquor. Drizly was an early leader and innovator in the field, partnering with producers in some instances and offering sales initiatives which took advantage of loopholes within the three-tier system.
The profitability of fourth-tier entities grew exponentially during the COVID-19 pandemic lockdown, with stores closed to the public and alcohol use skyrocketing. The major players were soon being courted by investors. This included the venture capital wings of major liquor distributors like Southern Glazer. Though the exact investment funding is hard to trace, distributors have invested in start-up delivery services to reclaim profits, manipulate prices, and hedge their bets against future changes to the three-tier system.
The improbable economic gains of the COVID pandemic are now in a state of contraction. Drizly’s downfall is a classic example of big eating small, with Uber adopting their business model, and then folding it under the Uber Eats umbrella, eliminating a competitor and increasing their market share. So much for preventing monopolies. Fourth-tier companies are now looking around and wondering how much longer investors will be hungry for acquisitions.
The ongoing changes in the industry, fueled by technological advancements, consumer preferences, and current events, pose questions about the future of both the three-tier system and the emerging fourth tier. Critics argue the current system limits economic competition and consumer choices. As the landscape evolves, the impact on the alcohol industry's regulatory framework remains uncertain, opening discussions about potential shifts and the need for innovations in alcohol distribution.