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Diageo bemoans three-tier "barrier" to e-commerce in the US - Diageo Capital Markets Day 2019

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Diageo has flagged the three-tier system for selling alcohol in the US as a major hindrance to the prospects for e-commerce in the country.

e-commerce has a long way to go in the US to catch up with China

e-commerce has a long way to go in the US to catch up with China

The US has a unique distribution method for alcohol that dates back to the repeal of prohibition in the country in 1933. Producers and importers are bound by law to sell their brands to wholesale distributors who then sell to retailers. Only retailers are allowed to sell alcohol to consumers.

The system means that the e-commerce channel for alcohol in the country is far behind the likes of China, where the online sales opportunity is far greater.

Speaking at the group's Capital Markets Day in the US late last month, Diageo's CFO, Kathy Mikkels, warned that e-commerce is unlikely to take hold in the US anytime soon. "E-commerce penetration is really different market by market," said Mikkels. "Here in the US, it's still quite low and some of the impacts of the three-tier system are a bit of a barrier in terms of e-commerce."

The company's North America head, Deirdre Mahlan, echoed the comments: "It's inhibiting because everything has to go through that three-tier system," Mahlan said. "Where e-commerce has picked up more penetration, it's a pretty significant shift in the channels to consumer. The regulations don't really allow for that in the US.

"Our view is that it has some way to go before it's going to reach some kind of scale. It's going to stick in click & collect ... unless there is some kind of change in state regulation."

Online sales in China, however, offer Diageo a far stronger opportunity. "With our Chinese white spirits business [Shuijingfang], one of the things e-commerce can do for us is to give us more distribution reach than we otherwise would have," said Mikkels. "We feel really good at what we're doing in that market."

Mikkels noted, however, that the group needs to focus more muscle on its Scotch whisky portfolio in the country. "In China's spirits market, 95% of consumers are still drinking Chinese white spirits," she said. "Scotch is still a very new category and experience that we need to build. We're doing that both in digital - information that we can push to consumers - but also how we can create off-line retail experiences that are more enriching for them."

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