As the Delta variant surges across the country, restaurants feel new pain as customers again feel hesitant about dining indoors. And new restrictions are in place: New York City and San Francisco are now requiring on-premise operators to verify that guests over the age of 12 are vaccinated prior to seating for indoor dining.
These renewed challenges for restaurants come as temporary allowances for cocktails-to-go laws have expired—and winter approaches.
Over the last 18 months, more than 35 state governments acted swiftly to enact temporary measures to allow on-premise operators to sell cocktails, wine, and beer to-go. Restaurants, and the wholesalers and suppliers that support them, celebrated these provisions as a lifeline during the pandemic that allowed restaurants to stay afloat.
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As we are again mired by COVID-19 and the resulting restrictions, the permanent codification of these new laws is a commonsense modernization for a three-tier system conceived in a very different time.
The Cocktails-to-Go Lifeline
At least 16 states plus the District of Columbia have passed legislation to make cocktails-to-go laws permanent, and 14 other states enacted laws to continue them on a temporary basis. Many of these bills sailed through legislatures with little opposition because the measures were seen as lifelines for a reeling hospitality industry.
Yet some states, including Pennsylvania and New York, put an end to this revenue stream for restaurants; New York’s move was particularly newsworthy due to former governor Andrew Cuomo’s abrupt end of the COVID state of emergency in June. Focus then turned to the legislature to quickly enact laws to make the privileges permanent. But legislators failed to pass a bill before recess as pushback from package stores ramped up.
Although many retailers saw their business increase by 50 percent during the pandemic, thanks to online ordering and curbside pick-up, some view cocktails-to-go as a threat. Though restaurants sell alcohol to-go in very limited quantities and their mark-ups are far higher, retailers remain concerned.
“It was okay with the homemade drinks to go, but now that COVID is over with, they can go back to their normal business,” New York State Liquor Store Association president Stefan Kalogridis told the New York Times as to why he thought restaurants should not merge into the off-premise lane.
“Cocktails-to-go, delivery from off-premise retailers, and DTC shipping from breweries, distilleries, and online retailers are a few of the many issues that regulators, legislators, and industry actors will have to grapple with as consumer preferences outpace aging statutes and traditional operating lanes.”
Yet it’s clear that the pandemic is far from over. On-premise operators are once again on edge as comfort levels surrounding dining at a restaurant for U.S. adults dipped six percent in August compared to July, according to Morning Consult. Because alcohol sales represent substantial shares of both sales and profits for restaurants (as much as 30 percent of revenue and 50 percent of profit, according to Distilled Spirits Council of the United States (DISCUS)), it seems like an obvious way to support small businesses in crisis.
Mounting Pressure on an Outdated Regulatory System
The cocktails-to-go debate represents just one example of how the pandemic has exposed the need to modernize the three-tier system. We’re soon approaching the 90th anniversary of the repeal of Prohibition. Although a few exceptions to the three-tier system, such as direct-to-consumer (DTC) shipping by wineries, have gained a foothold in the last few decades, the original three-tier concept has remained largely intact. In the standard channels, suppliers sell to wholesalers, who sell to on- and off-premise retailers, who then sell to consumers.
However, as the shift to online ordering across all channels continues to accelerate, the original lanes begin to overlap.
The pandemic accelerated alcohol ecommerce trends that were already in motion. Instacart, Uber, GoPuff, Drizly, Vivino, and many others benefited substantially as consumers felt more comfortable ordering alcohol online. Cocktails-to-go, delivery from off-premise retailers, and DTC shipping from breweries, distilleries, and online retailers are a few of the many issues that regulators, legislators, and industry actors will have to grapple with as consumer preferences outpace aging statutes and traditional operating lanes.
In addition to pressure from changing consumer behavior and demand, modernization may also be accelerated by efforts by the Biden administration to reduce barriers to competition in the industry. It’s unclear what the outcome will be of the Alcohol and Tobacco Tax and Trade Bureau (TTB) request for feedback on competition in the industry. However, based on the 300+ comments that are already posted online, many industry members are proposing modernizations in response to consolidation in the wholesale tier, and the corresponding access limitations for smaller suppliers. Breweries and distilleries are demanding access to direct shipping and pointing to the market challenges due to franchise laws.
Of course, any modernizations will come with new sets of compliance challenges. As ecommerce ordering becomes more prevalent, jurisdictions will need to create safeguards to ensure alcohol is not ordered by or delivered to minors, for example. Also, as the (mostly unregulated) “fourth tier” of unlicensed providers (Instacart, Uber, Drizly, Vivino) that solicit and/or deliver alcohol on behalf of licensees continues to grow in market share, the industry will be forced to develop and adopt policy frameworks that address the myriad issues associated with third-party providers.
Entrenched interests will continue to fight against most changes to the traditional three-tier system, but modernization is an inevitable by-product of changing consumer preference and continued advances in technology that drive those preferences.
I expect 2022 to be an active and dynamic legislative year as states continue to confront the push for change from consumers, producers, and buyers, including whether to codify cocktails-to-go laws. When we pass the centennial anniversary of the repeal of Prohibition in just over a decade from now, alcohol commerce and the associated regulatory landscape will likely look substantially different than they do today. I also suspect the debate over whether to codify cocktails-to-go laws will seem like ancient history.
Editor’s note: Nothing in this article is intended to be—and should not be—construed as specific legal advice.
Dispatch
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Jeff Carroll is general manager, beverage alcohol at Avalara. He’s responsible for leading the overall strategy and growth for the business unit. Jeff’s experience includes more than 14 years of senior leadership in beverage alcohol and sales tax compliance SaaS solutions. Jeff joined Compli in the fall of 2017 and was subsequently promoted to chief product officer, responsible for product development, sales and marketing, and business development prior to the Avalara acquisition in 2019. Jeff also sits on the board of directors of Free the Grapes.
