When it comes to purchasing alcohol, the United States relies on a complicated series of Prohibition-era drinking laws. To reach a consumer, a bottle must pass through several levels of distribution, getting stamped with taxes along each stop.
These laws were put in place to increase public safety, collect tax revenue and stamp out tied-house plays, but in the digital world that Covid-19 has bred, the three-tier system is more glaringly outdated than ever.
One company is looking to help small brands navigate the complicated regulations of the three tier system.
Speakeasy Co offers integrated solutions for beverage brands—including front and back-end technology, customer service, order fulfillment, warehousing, website store design, Google Analytics and customer service—while smartly integrating itself into the three-tier system.
Founder and CEO Josh Jacobs crafted Speakeasy Co almost by chance. In 2015 during the subscription box boom, Jacobs began putting together cocktail boxes and selling them to friends and family.
His near and dear would pay $40 a month for a box packed with all the fixings for a new cocktail, plus spirits from local craft distilleries.
“It blew up, doubling the second month, then the third,” describes Jacobs.
As the subscription grew, Jacobs and co-founder and COO Michael Bowen started picturing the next chapter: a craft liquid store. But as this idea took form, the duo realized how many hurdles and constraints American craft distillers faced in the retail world.
“The first partner we pitched it to said, rather than a page on our website, why don’t you build us an entire website?”
Now, Speakeasy builds out a complete online presence for alcohol brands, quietly housing the shopping arm on Speakeasy to remain three-tier compliant. (It’s done so seamlessly that an average consumer would have no clue they ever left the brand’s website.)
While Speakeasy filled a white space in the market pre-Covid, the pandemic has created the perfect environment for the company. With restaurants and bars shuttered, consumers are buying alcohol online more than ever. Brands without an online presence are clamoring to get digital.
Jacobs jumped to joining Speakeasy full-time in February—fortuitous considering the flux of online ordering that Covid-19 would bring. “We were already working to scream from the rooftops about direct-to-consumer.”
But on other spirited e-commerce platforms like Drizly and Minibar, brands have little control of how their bottles are perceived. They are merely a photo and a short description on a website.
Jacobs pointed out that while these e-commerce solutions move impressive sales (particularly in 2020), these websites are designed to sell products, not specifically your product. “There’s little consumer loyalty,” says Jacobs. “Our distribution remains three-tier compliant, but because it’s on our website, there are no other distractions.” No bottle sales or specials to woo drinkers away from your brand.
“We also have, and share, access to Facebook, cart insights, abandonment emails—all the data.” Valuable intel that brands can use to further focus marketing and distribution efforts. “They can truly control their own growth and own their destiny, as opposed to relying upon distributors, restaurants, or liquor stores to do all the sales.”
Since the start of the pandemic, “We’ve seen our growth expand from 40 brands at the beginning of the year to almost 150 now.”
The company now counts 10th Mountain, Slow and Low Rye, AMASS, Beau Joie Champagne, Desert Door Sotol, Gem and Bolt Mezcal, Tromba Tequila, Westward Whiskey, Siempre Tequila, and, most recently, Tesla Tequila among them. “It was also really exciting as we’re seeing the brands themselves drive really significant sales.”
The Three-Tier System
Why does the three-tier system pose such a problem to small distillers?
The system is over 80 years old—first instilled with Prohibition-era ideologies and the hopes to crack down on reckless drinking by dividing the industry into three separate tiers: producers, importers/distributors, and retailers.
At each level, taxes are added and prices spike. So said, if a winery sells a bottle for $10, the distributor marks it to $20, and retailers place it at $30. A restaurant will then mark it up anywhere between two and five times what the distributor paid.
This bludgeons local producers. Why would a restaurant or consumer pay that mark-up when they can buy a higher-end bottle from Europe, or a bottle from a massive American producer, for that price?
It’s particularly fist-clenching for small distilleries. With tasting rooms shuttered, distillers just want to get their liquid in the hands of thirsty Americans.
Under the three tier system, the United States operates as 50 different markets, rather than one. Each state controls its distribution, putting hurdles in front of distillers who want to ship out-of-state and causing huge disparities across the country in terms of selection, availability, and pricing.
In order to expand, a small distiller has to work with each state to meet distribution requirements and find retailers. Then, the brand has to go about building a presence with consumers and bartenders in each market. The onerous process often isn’t worth the effort for a small brand.
The system also favors major producers who have the finances to easily navigate the complexities of the system. Many small producers simply can’t produce the volume needed to sign with a distributor, which leaves them struggling to get product in stores (a few weeks ago I spoke about how Richard Kneipper of Shady Knoll Distillery drives across the country to meet with distributors with product in the back of his truck).
If small brands do get picked up by major distributors, they often get lost in a portfolio filled with better-known products.
“A lot of the brands realize they need direct-to-consumer, and some are willing to dip their toes in, but we have to work with them to really carve out significant budgets,” says Jacob. “If your website is outdated or you never invest resources into your website, you won’t drive traffic and you won’t see the throughput—it’s a chicken and egg game.”
Especially right now, when funds are limited with a lack of on-premise sales—it’s hard for brands to justify spending more. “Brands are terrified they will need to lay people off,” Jacobs continues. “They’re just trying to stay afloat and we’re asking them to make an additional investment.”
But in an age when drinkers are shopping more online than ever, it’s an investment that could get small brands in front of a whole new crowd of digital drinkers.
“I would say there are a couple of different elements of why brands truly value our platform. The first is owning that experience end-to-end: we integrate the shopping cart into their website so there are no clunky hand-offs to a retailer. It means the messaging is consistent, and brands can make changes on the fly. There are no other brands or distractions present so they can own that conversation.” No major brands or bottle sales to distract a potential costumer.
“And they can continue the conversation.” The Speakeasy back-end allows customers to sign up for newsletters, letting brands nurture connections with consumers. “That’s what presents so much scalability. There may be upfront costs, but you’re finding, educating, and indoctrinating a new potential customer.”
Amidst a distribution system that is intentionally inefficient, the digital age, and solutions like Speakeasy, are allowing small producers to weather, and thrive, amidst the storm that 2020 has brought.
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