It’s 10pm. The dinner party in your apartment is going splendidly. Everyone is chatting after the meal, with no desire to leave your living room. Just as you’re about to pat yourself on the back for a job well done, you notice that your glass is empty… the conversation might be freely flowing, but the wine just ran out!
With no bottles in your fridge and no liquor store for miles, what’s a good host to do?
This is the kind of consumer problem that inspires the leaders at Drizly: an e-commerce platform in the US for alcohol direct-home delivery.
What is Drizly?
Drizly is a two-sided market that connects end users (drinkers) and retailers (local liquor stores that deliver) through a website/app.
There are obvious cross-side network effects; the more Drizly users there are, the more liquor stores want to be enrolled (and vice-versa). Drizly monetizes via a monthly membership fee to stores, rather than a cut of sales or a fee to consumers1. As of 2020, the company has raised $85M in venture funding and sells in 100 cities in North America.
How is Drizly combating disintermediation?
Consumers and liquor stores are located near each other, and a typical consumer living at one home address probably repeatedly gets Drizly deliveries from the same 1-2 stores. Since fulfillment of orders falls on the store to perform, it would be relatively easy for a store to encourage a customer to order off-app next time if they wanted to cut Drizly out.
However, Drizly has built in many value-add functionalities and an incentive structure that discourages disintermediation. For example, Drizly provides a proprietary app for ID age verification that member-stores can equip their drivers with. In addition, since Drizly only charges stores a flat monthly fee, there’s no marginal cost savings from switching individual consumers off Drizly. In other words, Drizly acts like an advertising platform for a liquor store, rather than a costly middleman.
Delivery is crowded. How does Drizly defend against bigger rivals?
Evidence suggests delivery has become a price-driven commodity business. Multi-homing is rampant: every Drizly drinker likely also has Amazon, UberEats, DoorDash, etc. installed on his/her phone. However, one thing that makes Drizly unique is its understanding of the idiosyncratic regulations that apply to alcohol.
Alcohol distribution in the US is heavily regulated and operates under a “three tier system”, requiring retailers or bars/restaurants to purchase from distributors rather than from manufacturers themselves. In most situations, end consumers are also not allowed to purchase from manufacturers, so DTC isn’t an option. Laws, taxation policies, and age verification requirements vary state-by-state, adding more challenge to the picture.
This might sound like a reason to be pessimistic about alcohol e-commerce, but Drizly sees this complexity an opportunity for competitive advantage. Most other delivery players (Uber, Amazon) have shied away from alcohol because compliance with liquor laws would compromise their core businesses. E.g., Amazon can’t leverage its warehouse network for alcohol in most jurisdictions, because state-level Liquor Control Bureaus doesn’t permit it to take possession of product and sell to consumers without a liquor license.
Drizly is different, because it never takes possession of the product (delivery is executed by member-store employees) and because it doesn’t take a cut of sales (it charges a flat monthly fee). This operating model design is a strategic advantage that protects Drizly from the entrance of Amazon or other scaled delivery incumbents. Says CEO Cory Rellas: “The proposition [of Drizly] is so much more than delivery.”
Is Drizly’s platform sustainable?
Drizly has many of the characteristics of a successful platform business: strong network effects, regulatory barriers that dissuade players from entering, and mitigated disintermediation risk. However, I suspect that maintaining scale in all 100 of its cities is going to be a constant battle.
Alcohol delivery, in my opinion, is not a winner-takes-all market. Like Uber or Lyft, it’s a clustered network. Due to geographic constraints, Drizly’s business only works in highly dense urban markets where there are both a lot of drinkers and a lot of retailers nearby willing to deliver. A determined competitor in a single market (or even a large multi-unit liquor chain) could copy the Drizly business model and steal share without too much trouble.
In my view, the only sustainable line of defense for Drizly is to create best-in-industry user experience through data. While network effects are clustered, its nationwide scale gives Drizly a data advantage. Drizly can use its deep knowledge of drinker preferences to curate recommendations and orchestrate the most seamless, user-friendly in-app experience. All of that is difficult for an upstart to copy.
- Drizly also typically charges consumers a delivery fee, but it is passed on to the retailer to cover its costs for the driver time and not retained by Drizly.
“Amid Shift to Online Liquor Buys, Here’s Why Startup Drizly Sees Delivery as a ‘Commodity’.” Yahoo! Finance, Yahoo!, 21 Dec. 2019, finance.yahoo.com/news/americans-are-projected-to-buy-nearly-135-b-worth-of-alcohol-online-by-2024-heres-who-that-helps-130027878.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAKlwpiogBz4-J5U5EfeusgbaSoTm6t8eqxDV2fTsbQtI6JieuOEf69y0CXY81zWwLCsFaF9OJIYTbFvqC6eg45mquXwwMiHe2TwSCzi0ngEy50ZB0N-yKLzaDwmNDINAPVP6RS_Oc7HPM9_2T264ho0RaDS6-tm9ggtnDkxS5Hgz.
Newhart, Beth. “Alcohol’s Three-Tier System Slows Ecommerce and Dates the Industry.” Beveragedaily.com, William Reed Business Media Ltd., 17 Feb. 2020, www.beveragedaily.com/Article/2020/02/17/Alcohol-s-three-tier-system-slows-ecommerce-and-dates-the-industry.