The Promise, Peril, and Potential of Direct to Consumer Spirit Sales

Before we start, I’d like to say that I am a fan of craft spirits. My admittedly selfish desire is to get more out into the world, not only for me but also for everyone of legal age to be able to taste and enjoy. I would like more adoption of direct to consumer (DTC) shipping in the United States.

I recognize that there are hurdles to this goal and issues to be addressed, but I also feel that the successful implementation of DTC would  strengthen the spirits industry and boost state and local economies as well. Done well, it would be a win-win. Look at wine. Forty-seven states allow some amount of wine DTC. Those sales are estimated to be in excess of $4.2 billion in sales as of 2022. With numbers like that in play, there are plenty of reasons to seek some solutions for DTC for craft spirits as well.

Currently this is thwarted by the complexities of the three-tier system in place in the United States. Rather than spend time railing against its perceived flaws, I will focus on what I hope will be positive solutions to the roadblocks that prevent wider access to DTC for smaller producers, as well as the benefits to all involved.

The Landscape

Here I will discuss the players in the current system and their wants and concerns (as I understand them). Hopefully my proposal will allow each of these players to benefit. The fact that it is easier for me to get access to spirits released in Japan or Norway than it is for me to buy from a small producer in Arkansas bothers me, as it should you.

Small producers: Let’s quote the American Distilling Institute (ADI), who defines craft spirits as: “the products of an independently-owned distillery with maximum annual sales of 100,000 proof gallons”

• Concern: Small producers often can’t afford to work with large distributors/wholesalers to get products on shelves outside of their home market. This can lead to the brand being “state locked” where they have active purchaser interest outside of the state in which they produce but can’t legally sell to those customers. This results in leaving potential revenue on the table for producers, and denies the State and Federal government additional taxable revenue.

• Big producers: These producers sell over 100,000 proof gallons per year. Please note that there are levels of big producers: 500,000 proof gallons makes one larger than several small craft producers combined, but other producers in this cohort will be producing millions of proof gallons per yea
  • Concern: As a larger producer with more access to revenue, working with distributors and wholesalers is less of an issue. The main concern is access to DTC.
• Distributors/Wholesalers: Liquor wholesalers are businesses that purchase alcoholic beverages directly from manufacturers or importers in large quantities. They store, distribute, and sell these products to retailers, rather than selling them directly to consumers, and are an important part of the three-tier system. These wholesalers are intermediaries between all manner of producers and retailers, making it more efficient for producers to reach a broader market without having to deal with individual stores on their own. Liquor wholesalers have extensive distribution networks and warehouses to store the products until they are ordered and shipped to stores. Often the term “distributor” is used interchangeably with wholesalers. That said, some states in the U.S. differentiate between the two based on the size of the business or the types of alcohol they handle. For our purposes, we shall stick with the term “wholesalers.”
  • Concerns: Wholesalers are concerned with underage consumers using DTC to access spirits, loss of state revenue if DTC alcohol shipping opens the door to widespread tax evasion via illegal shippers, and counterfeit or adulterated products entering the stream of commerce. An unstated but present concern is how DTC might play out with big producers. Due to the logistics, large domestic or international brands would not seek to shift a large portion of their releases to DTC — but exclusive bottles, which often go for well above the MSRP, might make sense as they could then retain the bulk of the sales price.
• States and Federal governments: The individual states are the homes of the distilleries and craft spirits producers, and they and the Federal government receive the tax revenue from the sales of spirits.
  • Concerns: Underage drinking, loss (or gain) of tax revenue, and increase in sales of their local spirits as that also impacts tax revenue.
• Small Stores: Small stores refers to single shop/owner stores that are not part of regional or national chains.
  • Concerns: The primary concern is Some stores are supportive of DTC, but they fear that widespread adoption could cannibalize their businesses as people could access the smaller brands that these stores curate directly.
• Big Stores: Large stores with multiple locations in big cities, states, or regions; think Total Wine, BevMo!, Binny’s and K&L Wines.
  • Concerns: Similar to the smaller stores, access to DTC and the incoming new brands would be paramount to any solutions proposed.

So, we have a Gordian Knot of a problem before us featuring powerful and entrenched interests who have different needs and wants. While some might desire a system closer to those in Europe, I do not believe the three-tier system in this country will be changed in my lifetime. Every person I spoke to regarding this, from the small stores to the head of DISCUS, felt that any solution had to work with the existing system.

“First and foremost, DISCUS fully supports the three-tier system, 100,000%,” says Chris Swonger, president and CEO of DISCUS. “It is the foundation that makes the beverage alcohol marketplace thrive. But the world has changed dramatically over the last 30 to 35 years.” Swonger compares the DTC landscape for wine, which extends across 47 states, to distilled spirits, which includes just 11. “Direct shipping of wine has not broken the three-tier system, and direct to consumer shipping of distilled spirits won’t break the three tier system, either. It’ll make the three-tier system stronger, and DISCUS supports the great foundation of the three-tier system, but it just needs to evolve with the times. And that’s what we advocate for,” says Swonger. Allowing producers to ship directly to consumers in some instances increases consumer interest and demand, which would benefit everyone in the industry. “And when there’s consumer pull through direct-to-consumer shipping, then that is going to create a need and a pull for those brands to be distributed through the three-tier system and sold in our great retail outlets,” says Swonger.

My Proposal

Here is where I pull out my sword and try to cut the knot that has bedeviled everyone.

We will need a consortium/marketplace of the States. This consortium will provide waivers that allow distilled spirits to pass from one member state to the other. All states are welcome to join, so long as they abide by the rules that would have to be put in place —  like a cap on how many distillers from an individual state could be part of the marketplace. Would a cap of 50 be too much, or too little? Would 100 be enough? The member states would have to decide, but a cap is necessary so that Texas, California, New York, etc don’t overwhelm the products of New Hampshire and Arkansas. A cap would allow products from all across the country to shine. As brands grow in size, they would transition out of the marketplace and enter the standard distribution system to make space for other small brands. The marketplace may also need rules about how big a brand can be to participate.  If the idea is to give smaller brands a shot in out-of-state markets, they will need to be protected from being overwhelmed in this space as are in big stores.

Why do I think a common marketplace is necessary? Because it resolves several issues. If all DTC sales are conducted here, then state and Federal tax will always be collected and properly distributed. It helps deal with wholesalers’ fear of a flood of counterfeit products. If all DTC must go through this marketplace, then the States will have every ability to confirm that the products are legitimate. Also, releases would be coming directly from the producers, so they would have no incentive to provide counterfeit spirits.

With one marketplace, the States can set the rules regarding delivery. As one entity, they can put pressure on FedEx, UPS, or other carriers regarding details such as what types of IDs are acceptable for signing for a package — and they’ll have the ability to confirm that checks are actually being done. In fact, a pre-sale ID check can be implemented along with the ID check upon delivery to add another layer of protection against underage consumption.

Next, half of the products sold via the marketplace must also be available to be sold in stores. I would split the case allocation so that one small store and one large store in a state are exclusive for a brand, so each store will have incentive to promote the releases they have. The marketplace can make it clear which stores have these releases so that people can also buy them in person. For example, if a New Hampshire farm that makes American single malt puts 100 cases into the marketplace, 50 would be sold to consumers via DTC, and the remaining 50 would be sold at stores within the States that are part of this system. This will drive business to stores, keep retailers from being shut out of a flow of new releases and will drive traffic to regular distribution channels, as they would still have to get these bottles to the stores. A lottery/randomized system could ensure that the award-winning brands don’t get cherry picked first. This will also give small brands a network of store partners all over the U.S. they can work with as they outgrow the marketplace.

Since big producers exceed the levels set, the bulk of their general releases would not be part of the marketplace. However, they could be allowed to have a certain number of limited releases as part of the marketplace — perhaps four annual releases per brand of a certain, predetermined number of bottles. This would give them a presence on the marketplace, but prevent them from overwhelming the smaller brands.

Conclusion

I’ve put forth a set of ideas that would give all concerned some of the things they want. Remember the numbers that I mentioned: DTC for wine has generated more than $4.2 billion in sales. There is peril in DTC for spirits, but there is promise as well. That kind of revenue coming into the craft spirit space would transform the craft spirits industry.

Is this solution perfect? No. Are there issues I haven’t addressed? Certainly. Would making this work be difficult? Yes. I fully admit that I cannot solve a complex issue like this with a single article. I’m sure that every flaw will be illuminated in time — the same way that I’m sure someone will try to game any system that is designed.

But that is OK. I concede that I have just put forth an outline and that others will have to fill in the blanks. But if this rough sketch results in something better than what we have now, wouldn’t it be worth it?