The Battle Over Cocktails-to-Go Shows How Entrepreneurs Can Conquer the Status Quo

May 19, 2021 15 min read

This story appears in the June 2021 issue of Entrepreneur. Subscribe »

Want to do something radical? Order a cocktail from your local bar or restaurant, and then walk out the door with it. Prior to the pandemic, that act was illegal almost everywhere in America. Cocktails had to be consumed on premises. They couldn’t be packaged and sold for takeout. And they certainly couldn’t be delivered to people’s homes.

Then the pandemic arrived, and bars and restaurants began shutting down. To create a lifeline for these businesses, more than 30 states began temporarily legalizing the sale of to-go cocktails. In Vermont, it happened on March 19, 2020. That’s the day Sam Nelis knew he’d still have a job.

“We realized that we could bring back some staff and start doing cocktails,” Nelis says. He’s the beverage director for the cocktail bar inside Barr Hill Distillery, a maker of craft gin and vodka in Montpelier, Vt. His team swiftly got to work, serving cocktails in glasses that could then be repurposed in people’s homes, and it saved their business. “If anyone out there is listening,” Nelis says, “I would say, please, keep the to-go cocktails going forever. I don’t know why it was never allowed.”

Nelis may not realize it, but he’s pondering something very important.

There are two good reasons to wonder why to-go cocktails weren’t allowed. The first is about alcohol itself: To-go cocktails were illegal because of a tangled mess of laws that go back a century, and that still dominate the economics of alcohol today. And yet, when you really dig into the way alcohol regulations are changed, to-go cocktails reveal an important lesson about how to create positive change more broadly.

And secondly, why would you want to understand how to create change more broadly? Because that’s what entrepreneurs do in so many parts of their lives — but they may not realize it’s also possible to change laws, and therefore create new opportunities for businesses and consumers.

“Entrepreneurs can have a tremendous impact on the regulatory environment,” says venture capitalist Bradley Tusk, CEO and cofounder of Tusk Venture Partners. He sees it firsthand. He was Uber’s first political adviser, as the company initially navigated a system that protected taxis against almost all forms of competition. Now he invests exclusively in early-stage companies that operate in highly regulated industries, including FanDuel (sports betting), Bird (electric scooters), and Coinbase (cryptocurrency exchange). “The first step,” he says, “is taking politics seriously.”

Of course, that may not sound very appealing. Entrepreneurs rarely get into business to play politics; they do it to solve problems, build something great, and make people happy. But this is why to-go cocktails make for such a perfect case study in how change happens — because unlike complicated businesses like FanDuel or Coinbase, cocktails are simple and straightforward, and consumers are very happy with this newly legal (though still largely temporary) to-go option. In polling done by the National Restaurant Association, upwards of 85 percent of drinking-age consumers say they now want to-go cocktails to become permanently legal. “In my eight years at the restaurant association, I’ve never seen something poll as popular as this,” says Mike Whatley, the association’s VP of state affairs and grassroots advocacy.

As the pandemic draws to a close, there is perhaps no better time to look closely at how laws are changed — because the past year has created a molten environment, when laws were in flux and had to adapt to ever-shifting demands. Telemedicine’s burdensome regulations were eased, for example, as were restrictions on drone deliveries, zoning regulations in many cities, and more. All of these things once seemed permanent. Suddenly they weren’t. And it is likely that at some point in the future, nobody will remember why they were ever not allowed.

In other words, when someone like Nelis asks, “Why isn’t that allowed?,” it can become the first step toward a larger question — and that is “What does it take to change that?”

A lot can be learned from a simple cocktail to go.

Why couldn’t you take a cocktail home in the year 2020? The answer begins more than 100 years earlier, as America drifted toward the mother of all alcohol regulations.

“Prohibition didn’t just happen overnight,” says Jarrett Dieterle, a senior fellow who researches alcohol policy at a think tank called the R Street Institute. “Obviously, national prohibition was a very black-and-white thing, but before that started, on the local level, one county would vote to go dry and another one would be wet.”

This was a porous system. If a resident of a dry county wanted a drink, they’d just drive over to a neighboring wet county, buy some booze, and take it back home. As lawmakers saw that happening, they moved to ban the transportation of alcohol, too. When Prohibition began in 1920, it superseded all those local laws — but when it was lifted in 1933, the local laws remained on the books. “Temperance forces didn’t go away,” Dieterle says. “A lot of them just oriented their focus at the state level.”

This, he says, is the root of our ban on to-go cocktails: It’s influenced by when dry states were banning the transport of alcohol from wet ones. So why couldn’t these laws simply be updated once we evolved into a world that embraced alcohol (in moderation) and had a thriving hospitality scene? To appreciate that, you must zoom out — and look at the full, tangled mess of alcohol policy across America.

Prohibition impacted much more than to-go cocktail policy. America has a complicated patchwork of outdated alcohol laws. For example, many states still ban liquor sales on Sundays, or mandate that liquor stores be state-run. Some states also have quirky local bans, like in Indiana, where convenience stores can sell only warm beer. It is literally illegal for them to put beer in the refrigerator.

Changing these laws can be difficult. First, alcohol laws are often tied to public safety. Few lawmakers want to change a law and then be politically punished if the change is blamed for a drunk-driving death. But also, Dieterle says, laws are hard to change because they come with “concentrated benefits and diffuse costs.” The warm-beer law in Indiana is a good example. When Indiana residents are polled, they overwhelmingly want that law to change — but it’s probably not going to influence how they vote in the next election. Meanwhile, unlike convenience stores, liquor stores can legally refrigerate their beer—which means they have an active interest in keeping the law exactly as it is. The stores will punish a lawmaker who votes against their interests, and lawmakers know it. That means the benefits (keeping the liquor stores happy) are concentrated, while the costs (disappointing voters) are diffuse. The law stays.

Political jockeying aside, there’s another important thing happening in that Indiana example: One part of the alcohol industry (liquor stores) is stopping another part (gas stations) from maximizing its sales. That kind of thing happens by design in the alcohol industry, where parts of the industry are turned against each other. It’s a system that also dates back to Prohibition.

John D. Rockefeller, Jr., was one of Prohibition’s most ardent supporters, and he wanted to limit the alcohol industry’s influence. So in 1933, as Prohibition drew to a close, he helped develop a law known as the three-tier system. The rule carves up the industry into three distinct tiers — producers, distributors, and retailers. For example, there’s a brewery that makes beer, the middleman that transports and resells the beer, and the store where the beer is sold. No single company can operate in more than one of these tiers.

In the past few decades, some exceptions have been made to that rule. Brewpubs, for example, can manufacture and sell their own beer, though some states set strict limits on how much beer a brewpub can directly sell. If they go over that limit, says Dieterle, “the states require the breweries literally to make the beer, sell it to the wholesaler, and then buy their own beer back.” This, of course, sits in stark contrast to much of the business world, where vertical integration is applauded. Apple sells its iPhones in its own Apple stores, for example, and Peloton manufactures its bicycles and also produces the classes its riders watch. But in the world of alcohol, that’s not allowed.

Consequently, everyone in the alcohol industry is protective of their turf, because they have a limited ability to expand and compete. That makes otherwise simple ideas — like selling to-go alcohol — suddenly very complicated. One tier’s opportunity can be another tier’s loss.

The industry had already been inching into this tension, thanks to the rise in food-delivery apps over the past decade. Long before the pandemic, as people shifted toward Seamless and away from eating in restaurants, on-premises alcohol sales were declining — which was problematic, given that alcohol is generally a restaurant’s highest-margin item. To help the industry, some states had begun allowing restaurants to sell unopened bottles of wine or beer with takeout orders, though the states were hesitant to do it with cocktails. Then, in 2019, Texas and Louisiana took a baby step forward: They allowed restaurants to sell manufacturer-sealed, single-serving, mixed-drink containers to go. And what are those? Imagine a canned margarita you might buy at a liquor store…and therein lies the tension with that law change. “The largest opposition in many jurisdictions is from liquor stores, which are worried about this cutting into their margins,” says Whatley, of the National Restaurant Association. “Anything that happens to upset the existing three-tier system for alcohol raises a lot of concerns.”

That’s why, prior to the pandemic, the legalization of to-go cocktails just seemed too complicated for most groups to tackle. “The issue wasn’t on our radar, quite frankly,” admits David Wojnar, senior VP and head of state government relations for the Distilled Spirits Council of the United States (or DISCUS). The National Restaurant Association was similarly not focused on it.

Then the pandemic arrived. New York governor Andrew Cuomo was among the first to shut down bars and restaurants, but at the same time, he allowed the sale of alcohol to go — cocktails included. Wojnar’s team heard about this and spotted opportunity. Maybe, they thought, this was an opening for even greater change.

Why? Because when small laws get changed, big things can follow.

If an entrepreneur wants to try changing a law, they have to know what they’re up against. Bradley Tusk, the investor who works with startups in heavily regulated industries, suggests starting with these seven questions:

1. What are the punishments for breaking the law?

2. How politically powerful are the people you’re going to disrupt, and what allies do you have?

3. How much corruption is endemic in the area you’re targeting?

4/ Will your customers show up with grassroots support?

5. How sympathetic are you, compared with whatever you’re trying to change?

6. What was the original intent of the law you’re targeting? Was it meant to stop you, or was it written a long time ago for some different or outdated reason?

7. How important is the fight to you?

“Many fights are ultimately winnable, but at a cost of time, money, and effort,” Tusk says. “If you can honestly assess each of these, it becomes pretty clear whether or not you can change the regulatory environment around you.”

Industry associations are built for these fights better than individual entrepreneurs, which, of course, is why these associations exist. And in the case of to-go cocktails, Tusk’s questions do seem to apply. The political power was shifting, restaurant allies were everywhere, customers would be excited, local entrepreneurs were sympathetic, the original intent of the law was outdated, and the fight could determine whether many of these businesses survived. So DISCUS began to form a coalition among itself, the restaurant association, the bartenders’ guild, advocates for local businesses, and more. Then they went state by state, trying to push the same deal New York had struck. “We tried to pitch it as being creative, outside the box in a crisis situation,” Wojnar says. “Politicians like to feel that way about themselves — that they are creative, that they’re going the extra mile.”

It worked. Thirty-three states, plus Washington, D.C., have now allowed for alcohol to go. State governments framed it as a temporary shift, just to help during the pandemic. But Wojnar and others were betting on something else: Once entrepreneurs started taking advantage of the shift, it would be very difficult to go back.

First, of course, there were bars and restaurants like Barr Hill in Montpelier, which began delighting customers with innovative and convenient new cocktails. Then there were the companies that serve bars and restaurants. For example, Oktober Can Seamers sells a compact machine that can sit atop a bar and easily seal a can full of alcohol. It existed before the pandemic, but bars “had a little bit of reservations, thinking it was going to be more complicated than it really is,” says cofounder Dennis Grumm. Once to-go alcohol became legal, however, Oktober’s sales spiked and it began adding new styles of cans.

In short: Change creates change. It ripples outward, creating an entirely new environment around itself. Businesses were discovering new streams of revenue, and new ways to serve their customers and clients. This change, “temporary” as it may be, was becoming something people may rely on long past the pandemic.

Then the question becomes: What next?

To-go alcohol may have been a big deal for bars and restaurants, but in the grand scheme of alcohol law, it is a small change. How meaningful could it be, really?

To answer this, DISCUS’s David Wojnar tells a story about West Virginia.

West Virginia once had a lot of alcohol restrictions. Some of its counties were dry, for example, and it banned liquor sales on Sunday. DISCUS spent a decade trying to change the Sunday sale law, but lawmakers weren’t interested. Then DISCUS tried a different approach. It looked for the smallest possible law it could change — and then, Wojnar says, it found “the brunch law.”

In West Virginia on Sundays, restaurants could not serve alcohol until 1 p.m. If you showed up for pancakes before then, no mimosa for you. So DISCUS, along with its partners in hospitality, proposed a tiny tweak. What if restaurants could sell alcohol three hours earlier, starting at 10 a.m.? In 2016, lawmakers put this question on the ballot. West Virginians could vote on whether they wanted mimosas a few hours earlier on Sunday — and the overwhelming majority of voters said yes. “That gave legislators a sense of what was going on in their districts as far as beverage alcohol goes,” Wojnar says. People welcomed change. “We said, ‘Look, your constituents just voted to adopt the brunch law. Now we’re looking at Sunday sales.’ ”

It worked. West Virginia eliminated the Sunday sales ban in 2019. The next year, lawmakers voted to make the entire state wet. No more dry counties.

This, Wojnar says, is the power of making small change. Sometimes big change is just too difficult to start with. The status quo is too deeply embedded. But once people start enjoying a little change, and entrepreneurs start benefiting from it, big things can happen fast.

That’s what the spirits and restaurant industries are betting on as they manage the next phase of to-go cocktails. They knew that as entrepreneurs made these changes a welcome regular part of people’s lives, it would become very hard to change the law back. Now that’s being proven out. In June 2020, Iowa became the first state to permanently legalize to-go cocktails. Ohio became the second, in October. Many other states are looking to make it permanent or extend the change for many months or years.

“I think if you were to look at this issue without COVID, in terms of getting 33 states to allow cocktails to go, it would have taken 10 years of work to get what was accomplished over 10 months,” Whatley says.

What changes will happen in the next 10 months, or 10 years? Whatever they are, they may have all started with a simple cocktail to go.

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This article is from Entrepreneur.com