Making the most of a difficult situation in 2020, distillers and retailers tapped new opportunities to ship spirits directly to consumers last year, and they experienced strong growth. “Our spirits business represented 10% of the total revenue within the four states where we operate,” says Mike Osborn, founder and executive vice president of Wine.com, the country’s leading online wine retailer. “We thought we would hit 10% in those markets in the second year we shipped spirits. But we’re already where I expected to be in 2022.”
While the San Francisco-based online retailer ships wine to consumers in 42 states, it only ships spirits in California, New York, New Jersey, and Florida. “It’s not easy to be a spirits retailer with e-commerce because of the lack of support of regulations,” Osborn says. “We would love for our trade partners to support intrastate shipping of spirits. Customers do inquire regularly why they can’t have spirits shipped to their home. Small distillers and large alike benefit from e-commerce.”
Premium Customer Base
After launching its spirits business in July 2019, Wine.com received its license to ship in California last February. “We had quite a bit of positive results from our spirits business in California with the lockdown in March,” Osborn says. “There was a run on whisk(e)y. People weren’t necessarily going to the liquor store for it. We were fortunate to be licensed in California just before the global pandemic.”
When it comes to purchasing wine and spirits online for home shipments, consumers are spending more per bottle than in retail stores. “Looking at the wine industry, DTC is a small amount of the volume, but a larger amount of total sales,” says Chris Swonger, president and CEO of the Distilled Spirits Council of the United States (DISCUS). “When you look at the types of products moving through e-commerce channels, it’s the super-premium, exactly the type of products most craft distillers sell.”
Wine.com more than doubled its overall business in one year, increasing sales 119%, or $179 million, to $329 million in 2020. Spirits shipments are helping raise order amounts and profits. “The average wine order value is about $160. When an order consists of only wine, our average selling price in calendar 2020 was $25 a 750-ml., substantially higher than the average, but in 2019 it was $29,” Osborn explains. “When an order includes spirits and wine, the average value is $246. The average selling price for a 750-ml. bottle of spirits was $49. We start higher than the industry does. We have a premium customer base and a premium product offering.”
Distilling in the U.S. has revolutionized since 2005. Over the last 15 years, the number of distilleries increased from 70 to more than 2,000 and there are over 6,000 spirits products in the marketplace, according to DISCUS. “Increasingly, consumers want to have access to the new and exciting spirits products that often may not be available in their state,” Swonger says.
Prior to Covid-19, ten states allowed DTC spirits shipping. Since the pandemic began, eight additional states are permitting in-state distillers to ship their products to in-state consumers as a temporary economic relief measure. “This has been an important lifeline for distillers who have had to shut down their tasting rooms and tours since the start of the pandemic,” Swonger says.
Since June 2020 in California, distillers are temporarily permitted to make intrastate DTC shipping limited at 2.25 liters or three 750-ml. bottles a person. “Micro and craft distillers are small, usually family-owned businesses,” says Earl Brown, co-founder of Wright & Brown Distilling Co. in Oakland, California. “We make unique, very small-batch products, often seasonal, using local ingredients. These small batches are very difficult to sell through the traditional distributors because the higher cost of production makes them very expensive when sold through two other tiers, and the unique details of each batch are difficult to communicate through the distribution and retail layers.”
Specializing in whiskey and rum, the average direct shipping order Wright & Brown fulfills runs about $90, plus shipping costs that range from $13-$17 through FedEx or GLS US. “Direct shipments benefit small, locally owned businesses that ultimately support other California suppliers such as farmers, cooperages, designers, and printers,” Brown adds. “I’m hopeful the state legislature will consider making the privilege permanent after the Covid-19 pandemic passes.”
Swonger notes spirits should have the same market access as the wine industry. “Laws and regulations are already in place to ensure the safe delivery of distilled spirits to adults of legal drinking age,” he says.
At Black Button Distilling in Rochester, New York, online sales shipped to consumers increased from $15,000 in 2019 to $240,000 in 2020, representing about 5% of the craft distillery’s overall sales. “It’s still an incredibly small percentage of the overall spirits market, but it’s a massive increase over 2019,” says Black Button president and master distiller Jason Barrett. “The vast majority of our sales go to New York liquor stores. We self distribute across the state and call on a thousand liquor stores every two weeks.”
Black Button partners with online spirits retailer Mash & Grape for its direct shipping. “It’s a complexity issue—direct shipping requires a lot of permits and submitting tax forms from other states,” Barrett says. “Now the retailer will work with our systems and manage it. I want to make my Bourbon and my gin. I’m happy selling it and getting in touch with consumers. I don’t want to be filing 30 quarterly reports that I shipped one bottle to Iowa and I owe the state of Iowa $1.10 in tax.”
Founded in 2014, Mash & Grape fulfills orders in 41 states through licensed retail partners, with California, New York, and Illinois the top three states by dollar sales. The company offers about 2,550 SKUs, working with just over 100 distillers—90% of which are craft distilleries. “Our average order is around $130, so the selection is definitely heavier on premium and super-premium categories,” says co-founder Adi Pal, who notes that orders on the site tripled in 2020.
Black Button’s top-selling brands online are its Lilac gin ($35 a 750-ml.), Citrus Forward gin ($35), Double Barrel Bourbon ($75 a 750-ml.), and Empire Rye whiskey ($75). “Direct-to-consumer is huge, and it inspires innovation,” Barrett adds. “It will help build brands that don’t have the money for a Super Bowl ad. The importance cannot be overstated.”
Barrett is optimistic that the interstate direct shipping market will eventually open to the spirits category. “If we can safely and effectively deliver wine to people’s doorsteps, then why not deliver Bourbon?” he says. “It’s going to happen, it’s just a question of how and when. Direct shipping levels the playing field for smaller producers. I would love to see DTC made available both for both retailers and producers.”
State By State
Nationwide direct shipping of spirits to consumers remains a long-term project. “From the perspective of getting the laws changed to allow DTC, it is a state by state battle,” says Erik Owens, president of the American Distilling Institute. “With the leftover legacy laws from Prohibition on the books, and the current setup of the three-tier system, there are different challenges depending on which state you are in right now.”
The global pandemic, nevertheless, has pushed shipping spirits to consumers forward. “There are no national players as DTC in the few states it was allowed only allowed shipping within the state,” Owens says. “DTC shipping has been so limited it hasn’t been able to be a part of the business plan before the Covid-19 shut down and recent temporary loosening of laws.”
Distillers and retailers shipping spirits to consumers face significant regulatory issues and limitations. “The biggest challenge the distilled spirits industry faces related to direct-to-consumer shipping is it is simply not allowed in 40 states (not including those with temporary measures related to Covid-19),” Swonger of DISCUS says.
Rapidly Evolving Expectations
Kentucky added DTC through legislation last April, and the law went into effect in December. Owens says this provides a framework for other states to follow. “There is very limited legal direct shipment of spirits which can make it impossible to try most of the spirit brands in the U.S.,” Owens says. “Wine sales have a 25-year lead, and are much more widely accepted and utilized by the consumer. Many smaller successful wineries have a tasting room and a wine club as their business model. Most distilleries do not have this as an option currently.”
Shipping spirits to consumers, however, is gaining momentum with support from some big control states. Of all online orders placed in Pennsylvania Liquor Control Board’s (PLCB) Fine Wine & Good Spirits stores between November 24 and December 31, 2020, 89% were shipped to the customer’s house, while 11% were shipped to a store for customers to pick up. Of total PLCB online sales, 36% were spirits, according to the PLCB. “We’ve learned a lot over the last year, and as we plan for the future of our stores and our website, we’re looking at a new normal e-commerce demand that may remain double what it was before, even in traditionally slower times of year,” says PLCB chairman Tim Holden.
The Covid-19 pandemic has intensified the need to adjust business models in response to a sharp consumer focus in online shopping and product shipments. “It’s clear that rapidly evolving expectations of consumers, accelerated by the pandemic, are driving intensified interest in this issue,” Swonger says. “A number of new platforms have emerged through companies, including Spirits 360, Avalara, and UPS to help ensure regulatory compliance, safe delivery, and the appropriate tax collection.”
Some wine, spirits, and beer retailers have complained about customers not being home to sign for and accept beverage alcohol deliveries, but that’s not an issue for Wine.com, Obsorn notes. “For almost a year, most of our customers have been at home,” he says. “Integrated into our cart, we offer local pick-up at stores like Walgreens and Dollar General. Those stores sign up with FedEx because they want the volume. The customer already bought the box, and they’re betting the customer is going to buy something else while they’re there.”
By spirits category, the respective leaders at Wine.com in 2020 were whisk(e)y, Tequila, liqueurs, vodka, and gin. Whisk(e)y, including Scotch, Bourbon, and Japanese, has more than a 50% share of overall spirits sales for the online retailer. “Young millennials and younger were 44% of all new customers last year. That is the force you cannot stop,” Osborn says.
Wine.com’s typical assortment of 2,500 SKUs includes its share of offerings from craft distilleries, including Aaron Paul and Bryan Cranston’s Dos Hombres mezcal ($60 a 750-ml.). The actors and their brand were recently featured in a Wine.com virtual tasting. “Their explanation of why they are in the mezcal business is a great one to watch,” Osborn says. “E-commerce is uniquely qualified to combine visions and storytelling with commerce. We are all learning at this.”