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March 22, 2018 • Volume 8


Online spirit sales soar — despite being put on the rocks by regulations

The fact that any alcohol is bought and sold online -- at all -- is a testament to the human spirit, or at least to humans’ desire to consume spirits [and beer and wine]. The labyrinthine set of regulations and protections, made and enforced at the state and local level, make it extremely daunting to sell alcohol online, whether you’re a local grocer looking to include a six pack of beer in a grocery order or an artisanal spirits maker looking to ship across state lines.

This chaos has created opportunities for retailers, vintners, distillers, and brewers with enough scale to cut through the bureaucracy, and for intermediaries like Drizly and Minibar, which are able to provide local liquor stores with an easy retailer solution for a monthly fee.  

A three-ingredient cocktail for online alcohol growth

The fact that we saw 33 percent growth in beer, wine, and spirit sales in 2017 is a function of both availability, driven by these companies’ pioneering efforts, as well as by three key customer cohorts: connoisseurs of hard-to-find beer, wine and spirits, those seeking the convenience of having bulky wine delivered, and bro’s looking to replenish their dangerously dwindling stocks of Jack Daniels and Bud Light before halftime. Online ordering provides the added benefit of keeping those that have already started drinking safely planted at home while the professionals handle the driving.

Online sets a different bar for beverage popularity

In the offline world, beer dominates sales of alcoholic beverages, accounting for roughly half of sales, while spirits account for more than a third of sales and wine accounts for the remaining 15 percent. 

Online is a different story, though. The online grocery channel, which would be a key natural distributor of readily available beer brands, is only now starting to pop [at long last] as grocery retailers are starting to work through the thicket of state and local regulations. 

Wine sellers, though, with early systems set up before e-commerce to meet national demand for wineries, and then cemented by five wine-loving Supreme Court justices back in 2005, dominate sales of online alcoholic beverages to this day. Between January 2016 and January 2018, 65 percent of online alcoholic beverage sales went to wine.

Wines pair well with basket building

The most interesting opportunity that I see on the horizon is for an unprecedented level of personalized pairing of food and drink.  In a brick and mortar grocery store, wine and beer sit in their own special aisle, creating food and drink decisions that are largely independent of each other.

But imagine the basket building potential when aisles become irrelevant. As soon as we pop that pork loin into our shopping cart, the algorithms can go to work, recommending side dishes and wine or beer to complement our protein. Then imagine if our past preferences are thrown into the algorithmic stew. The short-to-medium term potential for dynamic e-commerce basket building is perhaps illustrated no more clearly than in the case of wine and beer coupled with grocery.

This seems futuristic, but at this point the limitations here aren’t technological, they’re regulatory. 

Prediction: regulators will keep online booze flowing freely

Because of past practice, it seems unlikely that regulatory change will provide anything but a strong tailwind for sales of alcoholic beverages online. We have a President inclined toward de-regulation, Republican control of most statehouses and governorships, and a Democratic party generally inclined to de-regulate controlled substances more controversial than alcohol.

Amazon's fuzzy math

Last week, Reuters published an internal Amazon company document that shed some light on the company’s Amazon Prime Video strategy. We’ve known that Amazon sees its Netflix competitor as a $5 billion annual investment in acquiring new customers, but this data shows us more specifically how Amazon thinks about executing on that vision. 

The data that Reuters revealed showed us that Amazon takes the production and marketing cost of a series and then divides that by the number of new subscribers who watch that particular show as their first on Amazon Prime Video.   

This would be a blunt analytic tool if it were the only one that Amazon uses to evaluate its video content investments. Clearly, there are many people that subscribe to Prime for the free shipping and then just happen to watch a show. And there are other benefits beyond customer acquisition, most notably customer retention, which would be harder to measure. 

Is Prime Video a prime driver or the tail that wags the dog?

The reality, I think, is that new programming may occasionally spur a consumer to join Amazon Prime. But far more commonly, we join for free shipping and may become hopelessly hooked -- on that and a desire to avoid missing out on the shows that we’ve become addicted to. I’m certain that Amazon doesn’t myopically focus on this one easy-to-use metric to evaluate its programming decisions, but if they were they would be in good company.

We have a tendency to assign causal influences to the things that we can measure most easily. This is why we pay too much for the last click prior to purchase and not enough for the actions that lead to that final click. This also explains why Amazon is now worth more than Google, which is worth more than Facebook, which is worth more than Disney. 

​ Data creates more TV drama

Last point here: Nielsen [full disclosure – I worked there for 10 happy years] recently announced that it was going to begin measuring the audiences of streaming services. Netflix, for one, came out with a strong statement discrediting their numbers. 

There is a reason, though, that the streaming services would prefer that their viewership numbers were opaque, and the leaked Amazon documents illustrate it very well. The best performing Amazon Prime show, on a cost per acquisition basis, is The Grand Tour [one of the few shows that my wife, my 12 year old son, and I all love]. The show is a spin-off of Top Gear, which ran on BBC for decades before the star, Jeremy Clarkson, decked the producer. I’d not want to be Mr. Clarkson’s agent when the apparently volatile star realizes how little he is being paid relative to his impact to Amazon.

One last word on Toys R Us

Last week, we talked about Toys “R” Us’ decision to liquidate its business. The failure of Toys “R” Us has created a bit of a divide amongst those that pontificate on things retail. One camp argues that it was competitive forces, notably from mass retailers and then from Amazon, that killed Geoffrey the Giraffe. The other camp argues that it was poor financial management tied in with Toys “R” Us’ move to go private in 2005 that saddled the company with a level of debt it couldn’t withstand.

Toys “R” Us had been the leading toy seller in the U.S. until 1998, when Walmart surpassed it, offering the most in-demand toys, at better prices than Toys “R” Us. Over 10-20 years, Toys “R” Us slowly became relegated to the place that you’d shop on Black Friday, or where you’d hope to find long tail items that Walmart and Target didn’t carry. 

In fact, when Toys “R” Us was taken private in 2005 by KKR, Bain and Vornado, it was disposition of the real estate that the company owned, not its viability as a retailer that was the principal motivator for the deal. So, Toys “R” Us was doomed well before its private equity owners piled it with debt. To say that debt killed Toys “R” Us would be like saying that it was knives, not 60 senators, that killed Caesar.

About Ken

Ken Cassar is vice president, principal analyst at Slice Intelligence, where he looks at trends in the e-commerce industry armed with Slice’s robust set of online sales data.

Ken brings a rich online retail background to Slice Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet. 

Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Slice profile. He also has the appropriate jacket for every occasion.