Fulfillment of Spirits Is No 'Happy Hour' for E-Tailers

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Drinks.com is expected to begin offering home delivery of wine and liquor in New York next week, but the obstacles it faced along the way reflect the unique fulfillment problems for e-tailers of alcohol.

The site will not offer beer right away because it has yet to obtain a beer license for New York, which requires separate licenses for the sale of beer and wine/liquor.

Drinks.com, Chicago, will sell wine, liquor and beer to New Jersey residents in August. It has been delivering orders to California, Florida and Illinois for several months.

Todd Holmes, vice president of marketing and co-founder of Drinks.com, said the New York/New Jersey area is tough to break into because of the extensive products that larger markets demand. Drinks.com will offer residents of those two states 18,000 products, compared with the 5,000 products it offered to Illinois residents at the start of that launch.

"It shows the difficulty of our business in the sense that you have to create essentially a different Web site for every state," Holmes said.

Holmes said his firm also spent considerable time and money to comply with regulatory agencies overseeing alcohol distribution in the four states it serves. He said meeting regulations in numerous states at once is "a herculean task."

Before Drinks.com and other companies can start serious marketing initiatives, they must convince the appropriate agency that people younger than the legal drinking age will not be able to receive alcohol orders. Drinks.com, for example, uses a system operated by the database company Lexis-Nexis to match the credit card billed online with driver's license records to verify that the customer is 21 or older. The carrier delivering the order is required to obtain the signature of someone of drinking age at the customer's doorstep.

Other legal difficulties are due to state-by-state laws that many industry players consider idiosyncratic and sometimes archaic.

Although state regulations differ, most states follow the three-tier system implemented decades ago to stop organized crime from gaining a monopoly over the sale of alcohol.

The system mandates that producers, wholesalers and retailers operate independently. For instance, a beer producer cannot have its own stores or provide home delivery.

To sidestep these technicalities, Holmes said Drinks.com created fulfillment provider Drinks America, Fort Wayne, IN.

Drinks America acquires a retail liquor license and handles fulfillment exclusively for Drinks.com in every state Drinks.com enters. However, Drinks America does not sell alcohol from its warehouse-like spaces unless a customer in the area requests an order for pickup.

The two companies are not under a common corporate flagship, thereby complying with the three-tier system. However, Holmes said the two firms would be one company if it were not for the law.

Drinks.com also has been researching the legalities of launching an e-commerce initiative in Texas by year's end. Holmes said many Texas laws affecting alcohol e-commerce predate Prohibition.

For example, he said alcohol is legal in some Texas counties and illegal in others. By the same token, one side of a city street might be designated "dry" and the opposite side "wet."

Holmes added that his company, one of a handful of firms attempting alcohol e-commerce, would eventually benefit from the legal difficulty of entering this market.

"You might think that we'd want these laws to be done away with, but since we are either in compliance in certain states or working [toward] compliance in others, we hope everything stays the same," he said. "We feel that since we're doing the compliance work, it's to our advantage that the laws stay the same."

Wineshopper.com, launched last year, plans eventually to have a presence in all 50 states. In 20 states in which home delivery is illegal, the Web site will offer customers the legal option of picking up orders at third-party retail stores.

The firm also plans to ship its products through third-party fulfillment companies and retailers in all 30 states that do allow home delivery.

Even if it does not handle its own fulfillment, Wineshopper.com's storefront must give its fulfillment providers orders that comply with laws in each state. The wine retail site currently serves California, Illinois, Missouri and New York.

Suzanne Gannon, spokeswoman at Wineshopper.com, said her company has spent more than $15 million on technology to develop a Web site that complies with laws in those states. Her firm also has employed three lawyers who have done legal research for a year and a half, she said, although a figure representing accrued legal expenses was not available.

"The laws themselves are an incredible boundary," Gannon said. "Viewers kind of see this simple storefront that belies an incredibly complex back-end system. It's like building 50 back ends. All the different state laws make us like a lawyer who has to take 50 different bar exams to be in business."

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