How Alcohol Brands Can Tap The ECommerce Opportunity

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White PaperHow Alcohol Brands Can Tap the eCommerceOpportunitySelling alcohol online represents a huge opportunity, one that’s barely been tapped to date.By Keith AndersonSVP, Strategy & Insights at ProfiteroContributorsDanny BragerSVP, Beverage Alcohol Practice,NielsenSheldon KailDirector of Customer Solutions,MillerCoorsNick RellasCo-Founder and CEO,Drizly.com

HOW ALCOH OL B RAN D S CAN TAP T H E ECOMMERCE OPPORTUNITYContents Size of the Prize: Bigand Getting Bigger Making a Case forAlcohol Online So Who’s BuyingAlcohol Online? Unique Hurdles CanCause a Hangover Navigating US OnlineAlcohol Models Keeping Tabs on OnlineAlcohol Around the Globe Last Call: 10 Ways AlcoholBrands Can Play OnlineInside You’ll Learn Key Factors Driving OnlineSales Growth Unique Hurdles FacingeCommerce Alcohol Sales Online Delivery Models inThe US and Globally 10 Ways Alcohol BrandsCan Play OnlineIn the US alone, consumers spend more than USD230 billion annually on alcoholicbeverages, according to the US Department of Commerce. While today just a tinyportion of alcohol sales is conducted online, the category is poised for spiritedgrowth in the coming years.Plenty of factors point to increasing demand for alcohol sales online. Perhaps thebiggest impetus is the ongoing shift in retail sales from brick-and-mortar to digital.A growing roster of stores with click-and-collect programs and the emergence ofmobile apps that offer instant gratification through on-demand delivery are certainto drive more alcohol sales online.“For the US, alcohol is a much less developed ‘online’ categorycompared to many others, but one that’s growing fast and certainlyhas the interest of the industry, and a growing number of consumers.Alcohol is not as easy to do online as other categories, especially inthe US, given the much more significant regulations that govern thesale of alcohol as compared to other categories.”Danny Brager, SVP, Beverage Alcohol Practice at NielsenAn expanding population of drinking-age consumers provides another boon. It’shard to overlook the coming of age of 75 million millennials – and that’s only inthe US. The youngest millennials turned 21 in 2015. These tech-savvy consumersexpect to buy beer, wine and spirits over the Internet or with the tap of a smartphonejust as they do any other product.In contrast to most other consumer goods, however, some unique challenges areinherent to the alcohol category. Age-gating, for example, is a huge obstacle toselling alcohol online. And in the US, a legally mandated tiered distribution systemand laws restricting delivery of alcohol across state lines present barriers for acategory ready to soar online.Nonetheless, alcohol sales growth via the web looks inevitable. eCommerce ismaking an impact on just about every industry imaginable, and alcohol looks set tobe the next sector to be disrupted by the continued shift to digital.As consumer demand increases, online models evolve and efforts to sell alcoholonline expand, alcohol brands that address and meet changing consumer needs,wants & shopping patterns will be best positioned to tap the onlinealcohol opportunity.PAG E01

HOW ALCOH OL B RAN D S CAN TAP T H E ECOMMERCE OPPORTUNITYSize of the Prize: Bigand Getting BiggerMaking a Case forAlcohol OnlineLittle wonder everyone’s scrambling to figure outhow to sell alcohol online. The size of the prizeis significant. Some industry observers say itcould explode to anywhere from USD7-15 billion in thenext few years.According to Nielsen’s Global Connected Commercestudy from September 2016 – which surveyed morethan 30,000 respondents with online access in 63countries – the average percentage of consumers that boughtalcohol online across all countries surveyed was just 8%,making it one of the least-shopped categories online.MillerCoors estimates that about 5% of the US beer industrycould be going through online channels by 2020, according toSheldon Kail, Director Customer Solutions. “But it could be alot more than that too,” said Kail. “It all depends on how fastthings happen, that is, retailer online capability roll-out andconsumer adoption.”Nielsen’s SVP Beverage Alcohol Practice Danny Brager said,“When you look across 18 different categories, like fashion,travel, furniture, beauty, packaged groceries, fresh groceries,and others, beverage/alcohol online penetration is at thebottom. The data says that alcohol – in general globally andspecifically in the US – is a relatively immature category onlineMillerCoors points to data from the UK that shows as many as relative to other categories.34% of beer consumers routinely buy beer online comparedwith about 4% in the US. “The UK is much more developed“Additionally, of those that buy alcohol online in the US, the dataonline than we are in the States,” said Kail. “That’s anothershows that, on average, 17% of these shoppers say they buyreason why we think it’s going to grow here. We just started.alcohol more often online than in stores, while a significantlyThe UK has been doing it for years.”larger 45% say they buy it more often in stores than online.The remaining 38% say they buy alcohol almost equally inIndeed, Europe and the UK are much further along the lifestores and online.”cycle than the US – not just as it pertains to buying alcoholonline, but online grocery shopping in general. Some ofWhat it means: Plenty of runway remains to grow onlineEurope’s largest retailers, including Metro (Germany), Tescoalcohol sales in the years ahead.(UK) and Sainsbury’s (UK), are recognized as early adopters ofthe click-and-collect grocery model, which offers curbside orFactors that will drive future online alcohol sales include:drive-through order pickup at the store or another designatedlocation. In contrast, click-and-collect is just now beginning to Continued Migration From In-Store to Online Shoppingtake root in America.Consumers are becoming increasingly comfortable withshopping online and using the Internet as their “go-to”shopping source not only to buy products, but also conductresearch, check prices, read reviews and more. A fifth ofUS shoppers bought groceries online last year, up from16% in 2015, according to Nielsen data. These numbers willonly get bigger. Online grocery is gaining traction due inpart to the expansion of retailer click-and-collect and homedelivery services, not to mention Amazon’s growing grocerypenetration. Nielsen data shows that more than half of onlinegrocery shoppers in the US use Amazon’s Prime deliveryservice for groceries, while just 22% use traditional grocery’sburgeoning offers, like Kroger ClickList and Walmart’s GroceryPickup programs.(Continued on page 03)www.profitero.comPAG E02

HOW ALCOH OL B RAN D S CAN TAP T H E ECOMMERCE OPPORTUNITYEmergence of Online Alcohol ModelsA host of online alcohol platforms –e.g., Drizly (2012 launch) and Minibar (2014 launch) in theUS – have come on board in recent years, transforming theway consumers can shop for and order alcohol. For example,Drizly operates an alcohol marketplace allowing consumers tobrowse the inventory of multiple local stores simultaneouslyand then select the best mix of product, price and availabilitythat suits their needs, often receiving their order within thehour. Drizly currently operates in more than 40 marketsacross the US and Canada.Online Attributes that Favor Alcohol-BuyingAttributes of online shopping that bode well for alcoholinclude the convenience component, ease of click-and-collectpickup and home delivery models, price competition betweenretailers operating in marketplaces, the ability to compareproducts, and consumer access to an “endless aisle” ofproducts, particularly wine.Finding “Challenger” Brands OnlineThe growth of “challenger” brands, such as craft beers,coming online at breakneck speed, is propelling online alcoholsales. Craft beers – which often have a larger-than-life digitalpresence and offer a unique, experiential component soughtby millennials and other well-heeled consumers – have beeraficionados around the globe scouring the web in search ofthe latest specialty brew.Millions of Millennials Can Now DrinkIn 2015, the last of the millennials turned 21, the legal drinkingage in the US. And millennials have huge spending power totap, an estimated USD3.8 trillion, according to Pew Internet/Javelin research. This tech-savvy generation has grown upwith computers, the Internet, smartphones and mobile apps –and will want to buy alcohol online just as they do manyother products.Event-Driven Online Alcohol SalesMixing big events, like the Super Bowl, World Cup or MarchMadness, with alcohol isn’t new. But more recently, a host ofdrink-worthy “events” - driven in large part by television andsocial media sharing - have cropped up: red-carpet events,awards shows, even The Bachelor viewing parties. In fact, acollection of wines inspired by the reality TV show launchedlast December and can be purchased online through AmazonWine, BachelorWines.com and other sites.www.profitero.com*Note: Base consumers who buyonline; ** Represents the averageacross 60 countries. Source: NielsenGlobal Connected Commerce study.PAG E03

HOW ALCOH OL B RAN D S CAN TAP T H E ECOMMERCE OPPORTUNITYSo Who’s Buying AlcoholOnline?Drizly said the typical user for its app and websiteservice is “urban-based with an average age in thelow 30’s, they skew slightly male ( 60%), two-thirdsare millennials, they drink 40% wine and are comfortableusing technology to shop outside of the physical retailer.”Nick Rellas, Co-Founder and CEO, went on to explain,“However, as we continue to build up our marketplace shoppingexperience, we are broadening our view of who that targetcustomer is. As an example, the consumer who wants a largewhiskey selection that he/she can pick up on their walk homefrom work is very different from the suburban parent whowants to schedule a wine delivery for dinner after thekids go to bed.”“The online alcohol consumer is in linewith what we would have expected:younger, higher income, more urban.Higher income might relate to anumber of factors – online prices mayoften be higher, some consumers goonline to purchase as gifts, and in the case at least forwine, while the average price of a bottle of wine boughtin-store is about US10, if I am buying from say a Wine.com, the average price for a bottle is in the US30 range.And if I am buying from a wine club, I am typically buyingproducts that are at a significantly higher price point thanthe typical assortment found in a grocery store.”Danny BragerSVP, Beverage Alcohol Practice, NielsenKail of MillerCoors, remarking on who buys alcohol online,said it really plays across all demographics because alldemographics are interested in grocery shopping online. “Buton average, the online beer shopper is younger, more in that35-45 age range, they also tend to have more income thanthe average beer shopper. And when they shop online theytend to buy a lot more, almost double what they’d buy in thestore,” Kail said.Source: Nielsen study, online survey conducted by The Harris Poll, Nov 9-11, 2016 among 2,060 adults aged 21 www.profitero.comPAG E04

HOW ALCOH OL B RAN D S CAN TAP T H E ECOMMERCE OPPORTUNITYUnique Hurdles Can Causea HangoverSelling and delivering alcohol through the web canbe a regulatory nightmare – at least in the US.Some antiquated laws (dating back to the 1933repeal of Prohibition) are prohibitive, presenting a barrierto online alcohol sales.Coupled with age-gating and cold chain-related issues, thereare a sobering number of obstacles to deal with before alcoholbrands, retailers and online purveyors can sell alcohol online.Three-Tier Distribution SystemAmerica’s three-tiered distribution system originated whenthe US Constitution’s 21st Amendment repealing Prohibitionbecame law. The three-tier system requires a middleman (i.e.,distributor or wholesaler) for alcohol distribution. This meansthat alcohol producers can’t sell directly to retailers (includingliquor stores, bars and restaurants) nor can they pay them tomarket or promote their products in any way, e.g., by payingfor shelf space or furnishing coolers. Alcohol brands also can’tsell directly to consumers, only state licensed retailers can.Consequently, tiered distribution prevents alcohol brands fromoperating their own eCommerce sites.“Drizly has clearly demonstrated thatin the alcohol industry, there is roomfor technology and innovation withinthe current framework of the three-tierdistribution system. In effect, Drizly isan online portal to find products thatare sold and delivered by retailers, distributed throughthe three tiers, and experienced by the consumers in amarketplace. With Drizly’s solution, retailers can engagein eCommerce with consumers, and the three-tier systemdoes not prevent them from doing so.“Consumers in some markets are even starting to useDrizly to access information about inventories of productsthat may be less popular or not routinely in stock at theirlocal retailer. Organizing and surfacing such informationfor consumers is more efficient and likely more accurateif the information is centralized at the wholesale tier ratherthan at individual suppliers. The three-tier frameworkmakes this efficiency in information sharing and searchfor eCommerce experiences possible.”Nick Rellas,Co-Founder & CEO, DrizlyIn an increasingly global marketplace, some internationalcompanies have voiced concerns that the US tiered system isnot only inefficient, but violates free trade agreements – thatit’s easier for American brands to penetrate foreign markets(Continued on page 06)Source: Nielsen study, online survey conducted by The Harris Poll, Nov 9-11, 2016 among 2,060 adults aged 21 www.profitero.comPAG E05

HOW ALCOH OL B RAN D S CAN TAP T H E ECOMMERCE OPPORTUNITYthan it is for foreign brands to penetrate the US. The tieredsystem also makes it impossible for international alcoholbrands to sell direct-to-consumers online.Shipping Restrictions and RegulationsAs part of the 21st Amendment, individual states weregiven the authority to regulate the production, importation,distribution, sale and consumption of alcohol beverages withintheir own borders. Individual state laws still hold today, whichmean alcohol companies must navigate at least 50 differentregulatory frameworks in the US.their online customers. For example, Amazon Wine states:“Adult Signature Required: You must be at least 21 years ofage to purchase wine. Adult signature is required on delivery.”The same holds true for any home delivery of alcohol. Lawrequires that an adult of legal drinking age be present to signfor the product upon receipt.Age-gating also presents problems for online grocery clickand-collect models. Customers can’t pay for beer or liquorbefore an ID is verified. So, instead appropriate steps mustbe put in place to verify age at the drive-through or curbside.Age-gating also limits or prohibits use of alternative deliveryoptions like off-site lockers (e.g., Amazon Lockers). Drizly hasworked to solve this challenge by developing a proprietarymobile ID verification system that allows drivers to verify ageat the door just as it would be verified at the checkout counter.Retailers, bars and restaurants that sell alcohol must belicensed by the state and obey all state (and sometimes,individual municipality) laws regarding the distribution, saleand shipping of alcoholic beverages. State-by-state lawsextend to selling alcohol online too. Some states restrict theamount and type of alcohol that a consumer can have shipped Temperature ControlTemperature – i.e., keeping beer ice cold – is of particularto their state, posing a barrier to online alcohol sales.concern for instant gratification models. Keeping wine “fresh”and at the right temperature is also important. Amazon WineAge-Gatingactually uses the following statement on its site: “WeatherUnlike other CPG products, age-gating is an issue withRelated Delays: The seller may delay shipment if theselling alcohol online. The same age restrictions for buyingtemperature at the shipping or delivery address is not betweenalcohol in stores (e.g., 21 years in the US) also apply online.45 F and 80 F.Consequently, sellers must take steps to verify the age ofNavigating US OnlineAlcohol ModelsThree fundamental ways to shop for alcohol onlinehave emerged in the US, each with its own setof pros and cons that can be compared on a fewsimple, yet critically important, shopping attributes: selection,price and also convenience.National ModelWhere consumers order from a national player, like Wine.comor Amazon Wine. Conceivably, anyone in the country can buywine online this way as regulated by states that allow crossstate-line shipping.These national models win on selection. The endless aislewine selection makes a Wine.com or Amazon Wine aninteresting option because they have infinitely more itemsthan any single store can carry.Nielsen’s Brager said, “Having no boundaries or walls onlinepresents an opportunity for consumers to shop from a muchbroader product assortment than they would find in a typical(Continued on page 07)www.profitero.com“Often online models playing in thisspace differ based on the occasionthat people are buying for. Forinstance, shoppers might go toone site for gift-giving occasions –birthdays, anniversaries, Christmas/New Years – where delivery in acouple of days works, and/or they’re searching forsomething special. But there are other occasions whereconsumers might not be seeking anything really unique,but want their alcohol ‘right now.’ This is where a Minibaror Drizly works because it’s an immediate consumptionoccasion that might not have been planned for, or notenough alcohol was bought for a certain occasion likethe Super Bowl, where the consumer can’t wait for two orthree days. And for some consumers being able to orderonline as part of a larger grocery shopping trip might beconvenient. So the online model needs to be sensitive tothe consumer, and their drinking occasion(s).”Danny BragerSVP Beverage Alcohol Practice, NielsenPAG E06

HOW ALCOH OL B RAN D S CAN TAP T H E ECOMMERCE OPPORTUNITYstore. For example, I might find 14,000 wine choices on asingle day at Wine.com, or several thousand on Amazon.com in contrast to an average liquor store that might makeavailable 1,000 wine items. Shopping online is great for thevariety seeker.”Key drawbacks, however, of the national model are lack ofconvenience and immediate consumption. Also, it is primarilyrestricted to wine and not available in all states. If you don’tmind waiting, this option is great because delivery might takea few days.Marketplace ModelWhere consumers have the choice between on-demanddelivery, shipping, in-store pickup, and the option to buyfrom multiple retailers. A marketplace’s goals are to offerconsumers the widest selection of products available atcompeting prices.Retailers fulfilling product compete on price, selectionand service to win consumer business. Additionally,marketplaces give consumers the ability to shop forproducts that aren’t currently in their local liquor stores butare scheduled for delivery the next day. If a product is inthe distributor’s warehouse, customers are able to buy thatproduct from retailers.Drizly is one of the few true marketplace providers today,giving the customer the choice between a more immediatedelivery after selecting among retail options in the area andalternative methods such as in-store pickup or next-daydelivery for greater selection. As is true about the national andon-demand models, the marketplace model is currently notavailable in every state.Online Grocery ModelWhere consumers use an online grocer like Amazon Fresh,FreshDirect, Peapod or any one of a number of retailer-specificmodels (e.g., Kroger ClickList, Walmart’s Grocery Pickup, andH-E-B Curbside to name a few) cropping up across the nation.The online grocery model outweighs the national model on theconvenience factor. If Amazon Fresh or Peapod carry

eCommerce Alcohol Sales Online Delivery Models in The US and Globally 10 Ways Alcohol Brands Can Play Online HOW ALCOHOL BRANDS CAN TAP THE ECOMMERCE OPPORTUNITY In the US alone, consumers spend more than USD230 billion annually on alcoholic beverages, according to the US Department of Commerce. While today just a tiny