Speakeasy flattens the three-tier system

If you go to the website for East Village booze maker Old Harbor Distilling Co. these days, the Shop link will take you to a product page featuring the brand’s assorted craft spirits, including Barrelflag “navy strength rum,” or its “southwestern gin, San Miguel, so called for a botanical infusion including cucumber, sage, and cilantro. You can order a couple bottles, and within days have them shipped to your home.

By now, we all know the drill — we can order just about anything online. But in the case of craft spirits, it actually took a lot of behind-the-scenes work. The sort of work done by the San Diego company, Speakeasy.

Unlike most online retail, hard liquor distribution is complicated by laws dating back to the end of Prohibition. Specifically the three-tier system, which restricts a spirit maker from selling directly to the consumer, or even directly to a liquor store. Instead, the first-tier producer must sell to a second tier distributor, which sells to the third tier retailer.

So while the Old Harbor web shop appears to offer direct to consumer shipping, on the back end, Speakeasy’s order and fulfillment system manages the financials of the producer to distributor to retailer transaction. So on paper, everything is three-tier compliant, while for all practical purposes Old Harbor can drive its own consumer ordering.

Five years ago, Speakeasy co-founder Josh Jacobs was operating a subscription box business built around cocktail recipes, and it was his efforts to feature craft spirits in the boxes that showed him the need for this sort of white label ordering system. “It was the distillers who initially educated us,” says Jacobs, “on the challenges of the three-tier system.”

Part of the challenge is distributors who only nominally rep their craft spirit clients. Larger and better-known brands provide the bulk of their sales and receive the bulk of their attention. The three-tier system might force small spirit producers to strive for such a distribution deal, despite knowing it would effectively cede control of their own fates.

Jacobs and co-founder Michael Bowen spent many years and plenty of legal fees setting up the Speakeasy platform, which launched in February 2018. Still, “the biggest hurdle,” says Jacobs, “has been finding partners that are open to collaboration and innovation in an industry that has seen little disruption over the past 87 years since Prohibition.”

Speakeasy’s role adds a new wrinkle to the traditional three-tier transaction. It operates the tech and fulfillment, and owns the relationships allowing its spirit brand clients to maneuver through its distribution and retailer tiers. But ultimately, Speakeasy’s part of the action doesn’t even require a license. Rather, “We are the ecosystem,” Jacobs explains, “bringing all of the licenses together.”

The platform saw solid growth through 2019, working with about 40 spirit brands. But since the pandemic hit, craft distillers’ need for direct to consumer sales has grown. By the end of 2020, Speakeasy was working with more than 180 alcohol producers nationwide.

Though the business still faces obstacles due to different state by state regulations and corresponding interstate shipping issues, its clients’ ability to self-market spirits is evolving. Case in point: Tesla Tequila. The hyped limited release of añejo by Orange County agave spirit brand Nosotros Tequila quickly sold out through its Speakeasy-backed web store.

“Looking ahead,” Jacobs says, “we’d like to do similar kinds of ‘celebrity partnerships.’” He envisions Speakeasy’s platform providing greater autonomy for the spate of celebrity backed tequila brands that have seen the likes of George Clooney and Ryan Reynolds hashtag their ways to nine-figure buy-outs.