Zacks Small Cap Research – LQR: Leveraging Digital Marketing to Grow e-Commerce Platform & Advertising Operations as Sector Online Channel Expands – Earn Charter

NASDAQ:LQR

Online alcohol beverage sales expected to continue to increase…

Founded in January 2021, LQR House Inc. (NASDAQ:LQR) is an emerging company that operates a growing online marketplace in the wine and spirits e-commerce space to facilitate overall sales and promote various brands. The company’s e-commerce platform is CWSpirits.com. LQR House is the company’s marketing agency focused on the alcohol industry. LQR is executing a strategy to become the go-to online source for alcohol brands. Some 44% of alcohol purchases were made online in 2020, according to IWSR Drinks Market Analysis, up from a pre-pandemic 19% in 2019. The company believes
this bodes well for its strategy.

The company’s digital marketing activities are conducted through LQR House, while e-commerce is operated through the CWS platform. LQR is pursuing a three-pronged strategy built on three key pillars: e-commerce; growing its product portfolio and marketing emerging brands. The strategy includes providing full-service digital marketing and brand development services to brands in the alcohol sector. The company expects revenue to continue to grow as consumer awareness of the platform increases and as it expands the number of brands in its marketing portfolio. Moreover, the company’s strategy is to complement this anticipated organic growth with strategic M&A, including the potential purchase of and / or investments in marketing clients that might benefit from becoming a majority-owned LQR subsidiary.

To become what the company calls the “digital face of the alcohol space,” LQR is developing the infrastructure to offer a one-stop-shop of service and solutions to help alcohol and spirits brands grow and to make CWSpirits.com a leading platform for consumer engagement and purchases in the competitive alcohol industry. To boost brand visibility and drive consumer demand, the company uses a variety of marketing tools, including promotional activities leveraging a growing network of more than 255 influencers that have more than 38 million followers in the aggregate.

CWS alcohol marketplace…

The company believes that its e-commerce platform, CWSpirits.com, is among the largest liquor retailers in the U.S., offering a broad selection of popular and emerging brands. CWS was formed as Country Wine & Spirits in 2003 and by 2013, CWS began to shift its business focus to e-commerce sales and shipping of alcohol with the goal to become a major alcohol e-commerce platform.

LQR acquired www.cwspirits.com in late 2023. The CWSpirits.com platform offers a broad array of emerging premium and luxury spirits, wines, and champagnes from retail partners. CWS specializes in helping brands reach customers and delivering product directly to customers.

… and marketing campaigns backed by key influencers driving traffic to CWSpirits.com

LQR House uses software, data analytics, and artificial intelligence (AI) to help consumers find the brands and products they seek and improve consumer engagement. The alcohol industry is competitive. Leveraging AI-backed tools, LQR conducts targeted brand marketing to generate traction for emerging brands looking to gain market share. LQR House’s network of influencers who generally target a younger demographic is a key component of the marketing strategy to drive brand awareness, as well as boost traffic to CWSpirits.com. Additional marketing tools include e-mail promotional campaigns. Consumers who shop at CWSpirits.com also benefit from direct-to-consumer (DTC) shipping of their alcohol purchases.

Direct-to-consumer delivery continues to gain traction within the alcohol beverage space, which could act as a tailwind for the company’s growth plan, in our view. According to Beverage Dynamics, this trend accelerated during the pandemic. The magazine notes that “Among many trends in the alcohol industry supercharged by the Covid-19 pandemic was direct-to-consumer (DTC) shipping.” The company expects the online and direct-to-consumer sales channels to grow in importance.

Company believes it is disrupting traditional alcohol industry…

In fact, the company views its platform as a disruptor within the traditional alcohol industry that delivers customized marketing solutions to brands and offers a broad choice of products and recommendations to consumers to facilitate the purchase of and delivery of alcohol products.

Moreover, with a growing customer base, CWSpirits.com generates data that the company uses to increase customer satisfaction and stickiness and improve its ability to match products and consumers in order to gain brand traction and boost e-commerce sales. To supplement and enhance its current applications, analytics and distribution tools, LQR’s investment strategy includes potentially purchasing leading edge technology to facilitate market insights and advertising opportunities.

Brands – focus on growing beverage categories; strategic investments to capture upside

Consistent with LQR’s strategy to augment its brand portfolio via acquisitions and / or strategic investments, the company purchased rights to the SWOL brand of tequila from its CEO in June 2023. The tequila category has enjoyed strong growth over the past several years. Overall tequila sales volume has grown by 72% over the past decade, according to industry market research firm IWSR.

Mystery Tequila campaign piqued consumer interest…

SWOL is manufactured by a local tequila distillery in the Tequila region in Jalisco, Mexico on an as needed basis to fulfill CWS orders. SWOL Tequila is a limited-edition small batch tequila produced in batches of up to 10,000 bottles. SWOL Añejo Tequila retails for $89.99.

The company plans on expanding the brand by increasing marketing for SWOL and developing new flavors. SWOL Cristalino and SWOL Peach are examples. SWOL Peach Tequila is bottled in glass blown flasks and retails for $79.99. SWOL Cristalino Tequila is a crystalline tequila that is also bottled in glass blown flasks. It retails for $79.99. Both beverages are labeled with the SWOL patch specific to each flavor. According to IWSR, flavor is a “key driver of US beverage alcohol consumption.” IWSR notes that
flavored tequila subcategories are significantly outperforming the traditional non-flavored general category growth.

The company’s marketing team has overseen branding and promotional efforts for SWOL. LQR created a marketing campaign around SWOL “Mystery Tequila” that generated about six million views, according to LQR, where CWS’s influencers network promoted SWOL without showing the bottle or label. The company is encouraged by the results of this promotional activity and believes it led to growing anticipation for the SWOL launch. The company believes its efforts around brand identity and product innovation will enable it to continue to expand the product line carrying the SWOL trademark within high-growth niches.

$1 million purchase order…

Reflecting what the company believes is the growing popularity of SWOL, LQR House secured a $1 million purchase order from Cannon Estate Winery earlier this month for SWOL Tequila. Cannon Estate is developing a high-end lounge where it intends to serve SWOL as the featured tequila, according to LQR. Cannon Estate Winery also has indicated plans to expand SWOL’s footprint in Canada to retailers and other venues that carry its wines. The company views this agreement as a milestone that will help expand SWOL Tequila to retailers and private clubs across Canada.

… As successful campaigns help to generate new leads

The company measures the success of its various promotional campaigns by increases in sales on the CWSpirits.com platform and believes that its growing database correlating its marketing activities with growing brand revenue can demonstrate a proven return on investment (ROI) for brands that leverage its marketing services. LQR also points to its marketing efforts as a key driver of its e-commerce revenue growth and earlier this month announced that December 2023 revenue recorded a greater than 5-fold
advance to $339,713 compared to December 2022. LQR House is optimistic that this momentum can continue and expects revenue from the e-commerce platform to grow significantly in 2024.

LQR believes that it is developing a portfolio of successful marketing campaigns that will generate positive word-of-mouth about its capabilities and generate new marketing referrals of alcohol brands looking to gain market share. The company points to its strategy of leveraging influencers with large followings as an important competitive differentiator that it believes will enable it to continue to attract start-ups and emerging brands.

As the company expands its portfolio of alcoholic beverages marketed through CWS and other venues, LQR intends to focus on the spirits, wine and specialty mixed drink segments of the market. The company has set a 2024 goal of expanding LQR House’s marketing contracts to 50+.

Potential future initiative: Brand incubator…

In addition to developing its e-commerce and marketing arms, future potential initiatives include incubating certain emerging brands, with LQR leveraging funding, its marketing tools and influencer network, plus management know-how to incubate and grow emerging brands in high growth segments of the alcohol space. With its access to data from the CWS platform and AI-enabled technology tools, LQR House believes it can help these brands build awareness and accelerate growth.

Management’s longer-term strategy also includes using data generated from the CWS platform to identify prospective investment opportunities to expand its portfolio of niche brands, focusing on specific categories that would be complementary or offer incremental revenue opportunities. Once LQR House has made an investment, the company expects to be integrally involved with developing the product, including creating the formulation for the beverage. For example, once LQR decided to acquire rights to the SWOL brand, the company sent a team to Jalisco, Mexico to meet with the manufacturer to jointly develop the SWOL taste. The company’s potential incubation strategy would also extend to brand
development whereby the LQR House creative team would create marketing materials, including designing the brand’s logos and labels and implementing an influencer campaign and other promotional activities such as website banners and ads, email outreach and SMS advertising before the launch.

Another potential future initiative: Wine Club – Subscriptions

Another potential future initiative for LQR is to create a wine club and offer member subscriptions. In May 2021, LQR acquired rights to Soleil Vino and related intellectual property. Soleil Vino could be one of the elements down the road integral to launching a virtual wine club that offers members subscription services through cwspirits.com. Members would have access to sommelier-curated wine selections.

Takeaways from Drizly; company optimistic about market share gains…

Drizly is one of the largest online alcohol marketplaces in the U.S. According to its website, it is available to more than 100 million customers across the U.S. and Canada. Uber acquired Drizly in 2021 for $1.1 billion. According to trade publications, Uber intends to close Drizly in March 2024. Because Drizly did not rely on its own delivery service, many trade publications questioned the synergy behind Uber’s original purchase of Drizly. LQR is optimistic about the opportunities the exit of a sizable player such as Drizly might present and believes it is well-positioned to benefit. Specifically, LQR believes the void
created by Drizly’s pending closure could lead to increased market share for CWSpirits.com.

Many trade publications have also cited cybersecurity issues as a factor behind Uber’s decision to close the service. Drizly had confirmed that a hack exposed information on roughly 2.5 million customers and the Federal Trade Commission subsequently imposed restrictions on the types of customer information that Drizly could collect and retain. We believe this underscores a challenge that e-commerce operators generally face in accepting private personal information from online purchasers.

Management

The company believes its management team has the collective expertise to execute the company’s growth initiatives. Sean Dollinger founded LQR company in January 2021 and has been CEO and a member of the board of directors since January 2023. He is also on the board of directors of Veg House Holdings Inc. and serves as its CEO. He has significant entrepreneurial background and was involved in founding and developing PlantX Life Inc., a public company in Canada, according to LQR, as well as of Lifeist Wellness Inc. (formerly Namaste Technologies). The company believes his prior experience in e-
commerce and digital marketing will help LQR execute its growth strategy.

Kumar Abhishek has served as LQR’s CFO since May 2023. Prior to LQR, he owned India-based Boston Crest Private Limited and also served as the director of finance and operations at PlantX Life Inc. and at Lifeist Wellness Inc.

Financial activities…

LQR completed its IPO in August 2023. With cash on hand of about $7.5 million, plus potential additional capital financings, the company expects that its cash and equivalents are sufficient to support operations for about 12 to 18 months.

LQR has a prospective pipeline of investment and acquisition opportunities but has indicated that there likely is not an imminent transaction. In fact, the company has recently increased its authorized share repurchase plan to $5 million.

Risks

Risks LQR faces include that the company is at an early stage in development and might not reach its targets in the timeline that management anticipates. In addition, many of the company’s competitors are better-capitalized and also have greater brand awareness, which could make it easier for them to grow market share. Another critical risk is that the company could need to raise capital earlier than it currently anticipates, which could prove costlier than expected, particularly given the current interest rate environment, among other risks.

Moreover, CEO Sean Dollinger is the subject of a compliance review by the British Columbia Securities Commission related to Namaste Technologies Inc.’s sale of a subsidiary when he was CEO. In addition, as an e-commerce platform, LQR faces cybersecurity risk, which, as noted, also impacted Drizly.

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