How Ordering Liquor Online Could Open Up the Local Marketing Industry

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Dx4DNFDn_400x400Nick Rellas was not around to experience the dot-com collapse. But the twenty-something founder of Drizly, a liquor logistics service based in Boston, is well aware of the pitfalls of a past generation.

“The Kozmos and Webvans of the world are not so far away that investors forget,” said Rellas, referring to the now-defunct delivery startups that came to epitomize the bubble in the late 1990s. “By and large, we’re recognizing that there are some business models that did not work with ecommerce — and they will not work now with mobile.”

Investors, on the other hand, seem unfazed. They poured more than $1.4 billion into on-demand mobile last year, according to CB Insights, making it one of the most active startup sectors of the years. The models undoubtedly vary from the dot-com era with many startups offering access to services, which provide more flexibility. These product delivery firms — companies such as Instacart which recently closed its own $200 million round —  often rely on local businesses instead of managing their own supply chain.

Drizly has raised a little over $7 million of its own capital. The three year-old company manages a liquor fulfillment network that spans twelve cities with thousands of partners. Consumers search a database of beer, wine and liquor available nearby — all drawn from the point-of-sale terminals of the participating businesses  — and can have the product delivered within an hour.

But unlike many other logistics firms, the company has managed to avoid the delivery process altogether. A transaction made through the site is between the consumer and the local partner, and the delivery is managed by a partner’s existing couriers. The company provides a companion application to help couriers plan out deliveries and scan IDs, but the handoff in the doorway mimics an exchange in the store.

This decision stems in part from the impediments implicit in regulated industries. Processing a transaction or delivering a product on behalf of a merchant, as Uber does, would expose the startup to the responsibilities and red tape of a liquor license. “We spent a lot of time convincing regulators and the public that what were doing is the same thing that’s already been done, just using a mobile phone. We’re this 2015 fax machine,” said Rellas.

It also means the company has a slightly different business model than its competitors. Drizly charges merchants a licensing fee — anywhere between $100 to $10,000, depending on the size of the business — to access its inventory and use its software. The software-as-a-service model shields the company from the churn endemic in transactional models, but also limits the flexibility with which it can monetize more active users.

“Unless you can pass off the fixed costs — the overhead of doing delivery to the consumer — the economics of just being a delivery service often will not work. That’s a slippery slope;  the pricing typically becomes a race to the bottom,” he said. “We’re a software company. We are not a delivery company.”

Last week, I used the service to order a few bottles of champagne and wine to my apartment in Chicago ahead of New Year’s Eve. All went well — the ordering process was simple and straightforward, the products were not marked up, and the courier arrived in less than 40 minutes.

The experience was enticing, though it lacked the astonishment I found with ordering my first Uber. That’s likely in part because immediacy is simply not as important in the liquor business. Unlike a cab, I can easily project when I’ll want a drink; and with a product, as opposed to a service, you can always save some for later.

I asked Rellas about the value of immediacy in a delivering something like liquor, and he offered a not-uncommon-response among the on-demand community. “On-demand delivery,” he said, “doesn’t mean, get it right now. It means you can get what you want when you want it.” The company rolled out a scheduled delivery feature in the fall and he believes it will account for a meaningful portion of the orders quickly.

Rellas says the scheduling feature also opens the door for wider use of the company’s API released last month. One of the launch partners, MillerCoors, now uses the service to allow customers to order beer through its home page. “The bigger opportunity for us is to talk to upper-funnel marketers and offer them an opportunity to move down the purchase funnel by allowing customers to click and pay and have something delivered,”  said Rellas.

In the first half of 2014, performance pricing models accounted for 65% of total digital spending, according to the IAB. Unable to send users into a commercial system, local marketers more often than not missed out.  The adoption of Internet-connected commerce systems, from consumer-facing network such as Drizly to modern point of sale networks such as Square, is the single most important development governing the shift of local marketing dollars from print to digital.

Steven Jacobs is Street Fight’s deputy editor.