Avalara : DoorDash jumps into a booming, under-regulated alcohol delivery market

In a new development in the battle to control on-demand alcohol delivery services, DoorDash is now facilitating the delivery of beer, wine, and spirits in 20 states and Washington, D.C., as well as in Canada and Australia. According to the DoorDash press release, this is the next step in a "multi-year journey of fulfilling alcohol on-demand delivery for many national and local merchants via their own channels with DoorDash Drive, DoorDash's white-label fulfillment service."

The extensive DoorDash alcohol catalog now contains 30,000 SKUs nationally and includes cocktails-to-go from restaurants as well as beer, wine, and spirits from convenience stores, grocery stores, and retailers. Adding alcohol could boost the average order values of restaurants and grocers by 30%, while convenience stores could see order values grow by 50% or more.

Consumers should welcome the news: According to the National Restaurant Association, 56% of consumers (age 21+) would likely add alcoholic beverages to a restaurant food delivery order. DoorDash says it's working closely with state and local governments to ensure alcohol deliveries occur only where allowed. Approximately 20 states have made takeout and delivery sales of alcohol permanent since the start of the pandemic, and another 15 currently allow them on a temporary basis.

Pandemic pushes creation of a new normal

New, more contagious coronavirus variants are helping to rapidly reshape the beverage alcohol industry. Although in-person dining and drinking has resumed nationwide, some restrictions remain and others are in development: Proof of vaccination rules recently came into effect in New York City and Seattle, and soon will be in Los Angeles.

Online marketplaces and delivery apps like Drizly (which is being acquired by UberEats), Instacart, and now DoorDash allow consumers to enjoy their favorite drinks without leaving home. As these new entrants become more predominant, regulators and legislators are simultaneously grappling with how to best regulate these unlicensed entities.

Compliance in the beverage alcohol industry's fourth tier

There's a fourth tier in the traditionally three-tiered beverage alcohol system that can no longer be overlooked. COVID-19 has catapulted the beverage alcohol industry into the on-demand delivery sphere; consumers want to purchase alcohol as they buy other products, and state and local governments have loosened regulations to allow that to happen. Now U.S. alcohol regulators are attempting to get in front of this rapidly changing ecommerce environment to gain and maintain control.

As a heavily regulated product, beverage alcohol traditionally moves through three tiers:

Tier 1: Licensed manufacturers and importers sell beverage alcohol products to licensed wholesalers

Tier 2: Licensed wholesalers sell beverage alcohol products to licensed retailers (on-premise and off-premise)

Tier 3: Licensed retailers sell beverage alcohol products to of-age consumers

Checks and balances occur at each state of the journey from barrel to glass. However, with the emergence of the fourth tier, that's no longer the case:

"Tier 4": Unlicensed third party providers ("TPPs") solicit sales and/or deliver alcoholic beverages to consumers

Industry standards hold that licensees must control all aspects of the sale of beverage alcohol products, and 100% of revenue from those sales. Online marketplaces and delivery apps have gotten around that roadblock because they facilitate sales for licensees rather than make the sales themselves. Nonetheless, they need to work with licensees to ensure alcohol regulations are met (e.g., that the products they deliver don't fall into the hands of minors, taxes are collected, etc.).

The rapid growth of TPPs is putting pressure on regulators to establish ground rules for these evolving practices. According to Jeff Carroll, general manager of Avalara for Beverage Alcohol, "Additional regulation of TPPs will become increasingly likely as household names like DoorDash appear as new options for consumers. The question will be whether states employ a lighter touch and focus on areas like preventing sales to minors and ensuring proper reporting, or attempt to license and control third-party providers more fully."

A recent example of the latter is the Empire State. In August, the New York State Liquor Authority (SLA) capped fees for TPPs at 10% unless they're listed as a co-licensee. As the use of unlicensed marketplaces and delivery apps grows, other states will be forced to acknowledge and regulate the fourth tier.

See our Alcohol Marketplaces 2.0 blog series where we cover related regulatory issues in detail:

• Part 1: Solicitation of sales by unlicensed third-party providers
• Part 2: Collect sales tax from marketplaces or comply with alcohol guidance?
• Part 3: Follow the money
• Part 4: Who's responsible for ensuring legal drinking age?
• Part 5: Looking ahead

The experts at Avalara for Beverage Alcohol will continue to keep a close eye on future TPP and other legislative changes as they happen. You can watch on our blog for further updates.