Dive Brief:

• Amazon now offers two-hour delivery of beer, wine and spirits to Prime customers in a dozen U.S. cities, according to Food & Wine. 
• The rollout, which has been gradual since the service launched in Seattle in 2015, now includes New York, Phoenix, Portland, San Francisco and Chicago and other cities. 
• Amazon offers free shipping through its Prime Now service within two hours, and charges $7.99 for one-hour delivery. 

Dive Insight:

Amazon’s alcohol delivery service is scaling quickly and stands to capitalize on a growing market. According to Ibisworld, booze delivery will reach $1.4 billion by 2020, fueled by millennial consumers and others who value the convenience of having six-packs and bottles of spirits delivered to their door.

Wine sales in particular are increasing due to an upswing in interest in finer varieties of the beverage and a rise in product launches. Millennials are also contributing to increased sales of wines and wine blends. According to Wine Spectator, millennials drank 42% of all the wine consumed in the U.S. in 2015, a rate higher than any other generation's consumption. As millennials come of age and their disposable incomes rise, their penchant for premium drinks and wine should only increase.

Current competitors in the delivery space include Drizly, Minibar and Thirstie, which partner with local stores and distributors to offer delivery in cities like Boston, New York and Washington, D.C., as well as the many grocery stores that now offer online ordering.

The world’s largest e-tailer has some key advantages — most notably its superior logistics platform and free two-hour delivery. Against alcohol-only competitors like Drizly and Minibar, Amazon can also leverage the thousands of additional goods it carries. Prime members can easily tack on a six-pack or a bottle of wine onto a grocery order. If they’re stocking up for a party, they can buy all the booze and the food they need in one place.

Drizly, which operates in 40 North American markets and is Amazon’s largest competitor in this space, offers delivery for $5 in most locations, often within the hour. That beats Amazon’s $7.99 fee for within-the-hour delivery, but it’s hard to imagine that the demand for one-hour versus two-hour alcohol delivery will be strong enough for Drizly to capitalize on a three-dollar advantage.  

As the service expands to other cities, as it most certainly will, Amazon’s alcohol delivery could be a way to draw new customers to Prime. Its main value, though, is that it’s yet another lure for existing members to use Prime for grocery shopping. The service may also play a role in Amazon’s e-commerce offerings through its newly acquired Whole Foods stores.

Regulatory hurdles may throw up some roadblocks, with alcohol delivery laws varying by state. But Amazon’s ability to partner with local retailers as a distributor could circumvent those.

The biggest challenges Amazon will likely face in its alcohol expansion are supermarkets, which still enjoy considerable shopper loyalty and can offer targeted promotions on beer, wine and spirits. Target, for one, recently began selling $5 bottles of wine, while numerous other grocers offer tastings, classes and other in-store extras that delivery services can’t replicate.