THE GIST
This week, Uber Technologies, Inc. announced it will buy Drizly—the U.S.’s largest online alcohol marketplace—for $1.1 billion in cash and stocks, with the deal expected to close in the first half of this year.
With the U.S. poised to overtake China as the world’s largest e-commerce market by the end of 2021, the acquisition throws gasoline on an already-blazing fire. The country’s e-commerce alcohol market was valued at $24 billion in 2020, with Drizly’s own year-over-year sales up +350%. Now, this deal provides the strongest evidence yet that e-commerce alcohol sales will grow to a greater portion of the U.S. alcohol market. Drizly recently estimated that 20% of off-premise beverage alcohol sales will occur online by 2025.
The acquisition will nest Drizly’s marketplace within the Uber Eats app, though it will also maintain a standalone Drizly app. It’s also expected to vastly expand Drizly’s service area:
Uber Eats was operating in all 50 U.S. states and roughly 6,000 cities globally as of Feb. 2020, while Drizly currently operates in 1,400 North American cities across 27 states and the Canadian province of Alberta. (Drizly also offers 2-3-day shipping to 15 states where local delivery isn’t available.)
According to Credit Suisse, the number of U.S. consumers purchasing alcohol via e-commerce has hovered between 2.5-3 million over the past six months, up from a pre-pandemic average of 1 million. Spirits have been the big winners, gaining share from beer and wine. Wine remains the most popular type of alcohol purchased through e-commerce.
Lantern, a cannabis delivery company that operates in three states, has been an independent subsidiary of Drizly. Following the Uber acquisition, president Meredith Mahoney says it will operate as a fully autonomous private company, with Drizly’s founders, investors, and board members serving as strategic advisors.
Uber’s acquisition of Drizly is likely to further change how a huge number of Americans purchase alcohol. Credit Suisse estimated that ecommerce accounted for 1% of alcohol sales before COVID-19, but would end 2020 at about 4% of alcohol sales. In light of the increasing simplicity of buying beer, wine, spirits, and flavored malt beverages (FMBs) online, it will likely grow to an even greater percentage in 2021.
WHY IT MATTERS
The pandemic and subsequent loosening of regulations on home delivery of alcohol have only bolstered previously underwhelming alcohol e-commerce sales. According to a survey of e-commerce alcohol shoppers conducted by drinks market analysis firm IWSR, 44% of Americans who shop for alcohol online began doing for the first time in 2020.
For almost a full year now, industry analysts have been charting this boom in popularity. “We believe that once the pandemic subsides, e-commerce will emerge as the third major channel for alcohol purchases on par with on-premise and off-premise,” Michael Weiss, CEO and founder of Spirit Hub, a craft spirits delivery service based in Illinois, told Beverage Industry in June 2020.
But just because Uber will likely expand Drizly’s reach doesn’t suggest increased e-commerce sales would benefit all companies and alcohol categories equally. Drizly’s sales have skewed toward wine and spirits over beer, though beer is the most-consumed alcohol in the U.S. Beer as a percentage of the overall U.S. alcohol market has been losing ground to wine and spirits for decades, dropping from 56% of the market in 1999 to 44% in 2020, according to Distilled Spirits Council data cited by The Wall Street Journal.
But beer—even including the fast-growing hard seltzer category—made up just about 20% of Drizly sales in 2019 and 2020, with wine and liquor splitting the remaining share roughly equally. (Notably, the top-selling beverage in Drizly’s beer category is White Claw, a hard seltzer FMB.) Ready-to-drink cocktails from brands like High Noon, Jose Cuervo, and Cutwater Spirits exploded on Drizly in 2020, with sales jumping +1,518% compared to 2019.
What is clear is which beer companies stand to benefit most from Drizly’s growing reach, given how its marketplace is currently structured.
Within the beer category, the largest producers like Anheuser-Busch InBev, Molson Coors, and Constellation Brands dominate on Drizly. A current “Game Day Favorites” promotion on Drizly’s beer homepage flags Bud Light, Michelob Ultra, Michelob Ultra Organic Seltzer, and Bud Light Seltzer as featured items. These brands are legally able to pay for such featured placements because Drizly is not a retailer but a marketplace. In the U.S., tied-house laws prevent producers (including beer, wine, and spirits companies) from paying a retailer for preferential placement. There is no such law preventing these brands from paying to be featured on a digital marketplace like Drizly.
“It is important that the buyer for Drizly—Uber—is not a retailer. Some people thought that Amazon would be the natural buyer of the Drizly business, but the Drizly revenue model depends heavily on spending from brands looking to promote their products on the platform,” says Bourcard Nesin, a beverage analyst at Rabobank. “That revenue would disappear if they were purchased by a licensed entity.”
All these trends can be shifted into high gear thanks to Uber’s penetration in every major U.S. city, offering Drizly massive scalability. But Uber’s controversial (many say exploitative) model of considering its drivers third-party contractors rather than employees is a potential growth factor as well.
Currently, Drizly does not complete alcohol deliveries itself; it’s merely a marketplace that connects customers with existing retailers like liquor stores or big-box stores. When a customer places an order through Drizly, the retailer’s driver completes the delivery and verifies that the customer is of legal age. Once it becomes a wholly owned subsidiary of Uber, Drizly can use Uber Eats’ drivers to complete orders. Retailers would likely find it much easier to outsource the delivery work to Uber drivers rather than employ, train, and be responsible for their own drivers. This could translate to more retailers signing on to offer alcohol via Drizly.
Integrating Drizly with Uber Eats also makes strategic sense for the parent company, which has struggled to turn a profit and is increasingly dependent on its food-delivery business. Last year marked the first time the company took in more revenue from Uber Eats than from ride-hailing. Once pandemic-inflated food delivery sales begin to return to normal levels, Uber Eats will be looking for another way to keep orders coming in.
“Alcohol is critical to attracting high-value customers to your e-commerce platform, and it’s one of the least-tapped categories in the grocery and food-service industries,” Nesin says. “This means the category will be an important source of growth as the pandemic-driven boom in food and beverage e-commerce starts to drop.”
Whether Uber’s acquisition of Drizly will change which alcohol producers sell the most through the platform remains to be seen. Drizly’s expansion into new markets via Uber Eats could encourage retailers with more specialty beverage offerings to sign up, making it worthwhile for smaller alcohol producers to also advertise on the platform. Or it could cement the largest companies’ status as giants in the alcohol e-commerce space, just as they are in brick and mortar.
Words by Kate Bernot