Monday, September 21, 2015

The Fourth Tier and the Uberization of Liquor Sales

Since the end of prohibition, most of the United States has had a three tier system for sales of alcohol. A producer sells alcohol to a distributor (i.e. a wholesaler) who then sells it to a retailer who can sell to the public. The booze sees a mark up at each step so each player can make a profit. Many, including myself, have suggested that the three tier system is outdated and needlessly complicated and should be eliminated. However, rather than moving in that direction, it appears that the system is growing more complicated, and more expensive, with an emerging fourth tier.

Have you ever gotten one of the emails from Caskers offering high priced whiskey and claiming that nearly everything scored higher than Pappy Van Winkle? Meet the fourth tier. Companies like Caskers are not producers, distributors or retailers. In fact, they don't handle any alcohol. They are marketing firms. They advertise booze and solicit sales for retailers, who then complete the orders. It's an Uber-like system, where Caskers acts as the app and individual retailers sign up as drivers. Alcohol delivery sites like Saucey, DrinkFly and Drizly appear to use a similar model (though Saucey employs delivery couriers).

One area that's unclear is how payment works.  If these companies sell alcohol, they would need to be licensed retailers.  If you purchase a bottle on Caskers, they take your credit card information like any other site, but their terms state that they do not sell alcohol and that all sales are made by the vendors. It will be interesting to see if the government sees it the same way.

These companies may be a good thing for people in states that don't get large selections on the shelves, but the fourth tier adds another complication and another party that needs to get paid, which presumably explains the high prices. It would be much easier if retailers could ship directly across the 50 states, but unlike Caskers, licensed retailers are subject to the liquor laws of their states and shipping can be a grey area. Prominent retailers like The Party Source and Binny's have stopped shipping spirits in recent years. Caskers benefits from being able to access multiple retailers in different jurisdictions who are subject to different shipping laws, though there are shipping restrictions on each bottle they offer.

Given the complications of retailer shipping, we are likely to see more of these companies in the future. So on balance, is the emergence of a fourth tier of alcohol sales a good thing or a bad thing? What do you think?


Nick said...

Great post SKU. This is a highly relevant topic. To your question on whether this is good or bad I'll add to that - What do we gain and what do we lose when alcohol sales becomes more efficient? On one hand, there are many, many options people just don't have access to locally or even online due to the current distribution system, state laws, etc. Companies like Casker's seek to place more options in front of many of us (for a price... but efficiency and competition could eventually cause the price to drop considerably, though shipping cost could remain a sticking point when competing with local options). With that said how many consumers have gotten lucky and found a limited release at or near MSRP? Paid below average for their everyday favorites? These examples of inefficiency help some of us sometimes, and with an efficient market say hello to options, shipping costs, and more consistent pricing but say goodbye to the occasional stellar deal or random score (generally speaking of course). Do we as consumers want alcohol sales to be like everything else (think Amazon for alcohol), or is there a value in having a somewhat antiquated system when it comes to buying our booze?

sku said...

Thanks for your thoughtful comments Nick. One point about your analogy with Amazon. Amazon acts as a traditional retailer; they just do it on-lien. They don't have to buy products from Target and then sell them on-line, so they don't add another party which needs to make money from the single transaction. If liquor sales were truly like anything else, liquor stores could simply sell on-line, but that's not what's happening here. Of course, there are so many impediments to that happening, from local laws to shipper policies, that maybe it just can't happen and this is the quickest path to an efficient, albeit expensive, national distribution system.

Also keep in mind that the issue is not restricted to limited releases. Caskers mostly advertises more readily available products. The email I got from them today included Eagle Rare and Junipero Gin, products which I have no problem finding on the shelf, though presumably some people do or are willing to pay a premium to not have to look.

Ravensfire said...

I guess you could call flippers the fifth tier (or fifth column, seeking to undermine the system).

To the point, sites like Caskers provide marketing far beyond what most stores can handle. So a 2-3 store chain can partner and sell more product. From a consumer perspective, sites like this offer an alternative to potentially higher priced local stores. I've seen ER10 at gouging price levels in stores, this makes it harder to continue that practice.

But i think the main point is that each party can focus on their strengths. Far too many liquor stores with online sales are archaic, difficult and i question their security. On top of that, they often lack the time and knowledge for effective online marketing. Now they don't have to deal with it. Might not have as much profit per bottle but if they can get higher sales the total profit could be higher.

sku said...

Great points Ravensfire. It would be interesting to hear from some of the shops that use Caskers or similar services about their experiences.

Funky Tape said...

It's growing more incompetent, that's for sure. From the top down; TTB all the way to the mom and pop shops. Everyone in the know certainly is aware but there's little motivation to fix it because there's too much $$ to be made as is.

Which keeps 'flippers' in the trenches because they are the experts in the field, on the ground. See, everyone hates them until they get what they want (regardless of price). And people only piss and moan about it when it's something they want. If some guy is flipping bottles of tequila, no one cares. If it's Pappy and now Willett, well then throw a temper tantrum. The blatant irony never ends and the market rolls on anyway.

Jennie E. said...

Caskers reminds me more of Grubhub/Seamless than anything else. Both aggregate and streamline the process for services that already exist, but for one reason or another, are complicated and balkanized. Is it good or bad? Well, I like the idea of liquor delivery, but I’d rather it come direct from the producers or my local shops.

I don’t see Caskers being all that beneficial to anyone but Caskers and the few vendors they’ve paired with. Better selection for the customer? Baloney. They don’t even ship to over half the states in the union (including some where it’s legal) and to the states they do service, only some of their “in-stock” inventory is available. You could argue they’re more convenient than running to your local store where you never know what’s in stock. But are you willing to pay an extra 20%-30% plus shipping for that convenience? Are you an informed enough consumer to realize you’re paying a premium, or are you misled by the little gray price they have crossed out? WOW Larceny is normally $36.99 and I’m getting it for $29.99? (Meanwhile I can walk down the block and get it for $22.99 and no shipping).

That’s not even taking in to account the borderline-dishonest-hyping they put in their email blasts. Nor the actually-dishonest-hyping they do on their website. I emailed them a month or so back about the Templeton case and linked to the settlement because their website still had the misleading verbiage about being aged in Iowa, being original recipe etc etc. “I’ll bring this to our curators attention.“ Nothing. No change. Still there. 5 weeks later. Bringing us "the finest artisanal spirits"? Baloney.

These guys are slimy. And their website is a boilerplate off the shelf ecommerce site. I think direct-to-consumer shipping for alcohol is a good thing, but Caskers is not. We need meaningful legislation and updated interstate commerce laws so the actual alcohol producers and retailers can offer these services without being hamstrung by archaic government nonsense. USPS still can’t ship alcohol? Because of a law in 1909? PLEASE.

Billy Destro said...

Hey all,
I think producer selling direct to the consumer is ideal, but unrealistic. Let's say a producer in Texas sold their product online. As a consumer in New York, they are not allowed to ship to me, so I would never get any of their product. With a distributor, the Texas producer could get their product to New York for me to buy.

In my opinion, I think that should be the end of the line. Any other tier just adds to the total cost to the end consumer. Consumers are becoming more and more savvy, and should have direct access to products at lower prices. I know it isn't exactly the same but if you could buy a cheaper iPhone from a distributor rather than from an Apple store, would you do it? Some people don't need a Mac Genius to sell them on the features of an iPhone.

Anyway, it seems like that will never happen, but instead, we are more likely to have another tier. I have been a Caskers member for about 3 years now. I ordered from them once, and when I got my delivery, I realized it was shipped from a place I already was a customer of! Even though I don't buy through Caskers anymore, it doesn't look like they are going away any time soon. They got a formula that works for them. I believe they capitalize on "impulse" buying. They have "limited time" sales on "limited edition" items, and consumers that are afraid of missing out, pull the trigger before doing any research. I heard they advertised a limited edition bourbon recently and it sold out on their site in less than 8 seconds. I walked down to my neighborhood shop and they had it on the shelf, at a lower price.

So what do we do, SKU? Do we wait until this new tier becomes a norm, like high fructose corn syrup in food? and then try and boycott it after the fact?

How do we tell new consumers not to buy from a fourth tier before it's too late?

Anonymous said...

What you are seeing is someone attempting to end-around the traditional systems. Systems that seem archaic, but remember, these systems were put into place for a variety of reasons. Namely to legitimize the Good Ole Boy network and give an organization that may be connected to the underworld a legitimate business venture. Meaning the third tier system is a front for the mob, among others, to legitimately establish laws within each state that benefits them in some way. Therefore, any fourth party that attempts to go around these Byzantine rules will run afoul of the entrenched system and get shut down. Think eBay.
If you think any business is going to give the consumer what they want by way of unfettered capitalism, you have another thing coming. Unless they get a piece of action, these organizations are not going to let that happen without a fight.
Just sayin'.

Jake said...


Totally. Though the mob is so terrible at business they're forced to distribute wine because crime doesnt pay enough... Anyway, an efficient and smart business could easily destroy their terrible system in a heartbeat. Caskers just aint it. An 'amazon of booze' would be a godsend for many people, but we're not there yet. I think the bourbon/cocktail/craft boom's most important legacy is yet to come-- long overdue legal reform.