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Drinks.com works around intrastate sales laws

The online liquor seller launches a service in Illinois, the third state it's signed up in a strategy aimed at complying with myriad state and federal laws that have hampered Net booze sales.

Prohibition is over again in Chicago.

This week, online liquor seller Drinks.com launched a service in Illinois, the third state it's signed up in a strategy aimed at complying with myriad state and federal laws that have hampered Net booze sales.

The company announced yesterday that it will use a network of brick-and-mortar retailers to fulfill online liquor orders in 30 states by 2001. By partnering with national retail chain Drinks America, Drinks.com said it can offer customers their choice of spirits from wholesale inventories throughout their state.

In addition, the company said it will be able to ship the alcohol without crossing state lines in compliance with state and federal alcohol laws.

If it works, small wine producers and others who looked to the Web as a way to cut distribution costs won't necessarily benefit. But liquor wholesalers who have lobbied hard to kill online competition may yet join the Internet party.

"This is basically the only way you're going to be able to sell alcohol online," said Argus Research analyst Alan Mak.

For many, the Net has promised to sweep out antiquated and inefficient business processes and reshape traditional supply chains. But the revolution has eluded online liquor retailing, in part because of a patchwork of laws banning direct liquor sales.

Almost 40 states have banned direct shipments of alcohol under laws going back to the end of Prohibition, according to industry observers. At that time, the Mafia controlled liquor distribution in the country, and the U.S. government encouraged these laws in an effort to weed out the mob.

But now some analysts believe the key beneficiaries of such policies are the bottom lines of liquor wholesalers, who take a big cut of the estimated $109 billion wine, spirit and beer business. Wholesalers last year helped convince Congress to add new teeth to laws banning direct liquor sales by enacting legislation allowing states to sue in federal court companies that ship alcohol directly to their citizens.

"The problem is that states do have legitimate rights to protect their interests," said Forrester Research senior researcher James McQuivey. "If they make a conscious decision to protect a franchise or industry, then they can do that."

The wholesalers have been opposed principally by small wineries, which have looked to the Internet as a way to build a national market.

Vintners in California and Virginia sued New York state last month, trying to overturn a law that bans wine sales over the Internet. The plaintiffs argue that New York's law is unconstitutional because it allows Internet sales within the state while preventing out-of-state companies from shipping wine to New York.

Going with the status quo
Rather than oppose the government, Drinks.com and other online liquor vendors are playing ball, inking deals with offline distributors to keep politically powerful wholesalers happy and comply with liquor regulations.

Under its plan, Drinks.com will process the liquor orders and allow Drinks America, a licensed liquor retailer in 30 states, to fulfill them. Because Drinks America distribution centers in each state buy their supplies from wholesalers in those states, they also should be happy.

Gail Zelitzky, chairman and founder of rival Liquor.com, said her company is pursuing a similar strategy.

"We have an affiliate network of licensed retailers," she said. "We offer delivery normally between three to five days, but we do offer same-day or next-day delivery in many areas. It depends on the location of the retailer."

Louis Amorosa, chief executive of Chicago-based Drinks.com, acknowledged that competitors such as Liquor.com and Wine.com also have partnerships with wholesalers and retailers. But he said none has yet partnered with a national retailer like Drinks America.

"The other guys have to find a retailer or have to ship to a retailer, and this takes time," Amorosa said. "Drinks America can deliver between 24 to 48 hours, and we think because of that we offer more convenience."

Whether there is a major market for online liquor sales has yet to be proven, however.

Forrester's McQuivey said that the Web could offer the alcohol industry the same thing it offered porn: a discreet way for consumers to buy.

"People don't want to go in public many times and let people know that they are into it this," he said. "Just like porn, alcohol has some stigma to it."

Online food sales have been lackluster, however, and there is little to indicate that alcohol would fare better. Companies such as online grocers Webvan, Peapod and HomeGrocer have yet to report sales that compare with those of their brick-and-mortar counterparts.

And Drinks.com is facing stiff competition from outside the liquor industry. Online convenience store Kozmo.com, for instance, has begun selling beer and wine, and Webvan has expanded its beer, wine and hard liquor offerings.

"They already have a mechanism working that could offer customers delivery in a half-hour," Argus' Mak said.