May 23, 2012

If you think we have it tough, check out the 5th Column E-tailers

A few days ago I wrote about the struggles and challenges we have as a 5th Column technology provider for the wine industry.  And though our job is tough, it pales as compared to the retail side of the business.  E-tailers can be broken down into three categories: e-tailers, flash sites, and marketing agents.

E-tailers may be purely online like Wine.com, Vinfolio.com or Winetasting.com or the can be clicks and mortar like Winelibrary.com, K&L, or 67wine.com.  They buy the wine and sell it online and are constrained to buy where they are based, who they can buy from, and how much inventory risk they can take.

Flash sites are sales sites that offer wines for a limited period of time.  Though they tout the value proposition of “brand building” they in reality do very little of that especially if the winery’s goal is to use that channel to get more direct sales.  However, they do help a winery gain more mindshare for in-market sales increases and expose qualified consumers to a wine brand.  But in essence their audience is only waiting for the next discounted offering.  What they are excellent at doing is creating cash flow by liquidating inventory quickly and without much exposure.

Marketing agents are companies that do not carry inventory and but earn an “advertising” or “agent” fee for helping generate the sale and deliver the customer to the winery.  A most recent (and slightly frightening) launch of a marketing agent site can be found here: http://www.winesbywives.com/.  Marketing agents can be a flash sales, emulate an e-tailer, or even power direct to trade sales.  This is an emerging channel and has a myriad of challenges ahead of it.  However it is the way of the internet and almost every major e-tailer outside of the wine industry utilizes some type of marketing agent in their business.  One of the greatest marketing agents is Expedia.com.  They don’t own a hotel, a rental car, or an airplane but aggregate the inventory of all of them and present it in a single stop shopping solution.  Even Amazon is now a marketing agent.  How many times have you bought from Amazon and gotten your package from one of their affiliates?  The key for their success will be to create a seamless process and deliver customers to wineries or other retailers.  In theory this is possible but the amount of legal, financial, and technical challenges coupled with cumbersome process will be a gargantuan barrier to success.

In our humble opinion e-tailers are the greatest and most efficient possible partners to build a brand (more about this later).  Flash sale sites are great at liquidating inventory but will have real challenges sourcing great wines with high ratings at ridiculous discounts.  I expect to see an implosion of these sites in the upcoming year.  Finally marketing agents are one of the most needed instruments in the online wine space but have so many process and legal challenges that it will be some time before they operate with scale.  Shipcompliant is working on a marketing agent enablement platform but it is still early in beta and will probably need some stress testing and working out the kinks (except for marketing agents with a low SKU count).

So now that you are versed on the different types of e-tailers let’s walk through the mountain of challenges they face:

  1. Wineries don’t really want to sell to e-tailers for a myriad of reasons.  They don’t want to disenfranchise their traditional retailers.  They “don’t want their wine sold on the internet because it is a luxury brand and an e-tailer dilutes that image.”  They don’t want their wines listed with other discount wines.
  2. It is incredibly hard to scale a business since wine, by nature, is a finite product especially at the luxury tier.  How can you grow a big business when your allocation of a particular wine is 10 cases?  Good luck.
  3. The margins suck (for all three types) unless they buy directly from a winery (which tends to be only available in a meaningful way to CA e-tailers).  If an etailer buys from a wholesaler their margins are mediocre (especially since they are buying stuff that is mostly available to other retailers at better prices).  A marketing agent has 15% – 25% margin (the latter if they are VERY lucky) to work with which is swallowed by the technology and logistics to get wine to market.  Meh.  A flash sale site kills winery margins and takes generally 25% margin
  4. The regulations are ridiculously biased against all three groups.  For e-tailers the limited state shipping is a death knell.  The SWRA fights the good fight but no one wants e-tailers to win, not even themselves.  The retailers know that pricing is better for them for their respective areas if they are closer to importers or wineries (CA, WA, NY, OR).  The wholesalers realize the same.  And wineries, despite their lack of price competition, enjoy their state sales advantage vs. e-tailers.  For marketing agents it is so unknown that we are still unclear on how to execute this perfect model.  For flash sale sites the inability to buy wine from wineries directly influences margins (although it doesn’t seem to stop wholesalers from dumping winery’s inventory at rock bottom prices).
  5. Regulations suck in general.  Ship only “X” amount of wine to “Y” consumer again limits scalability.  This also applies to wineries but is exacerbated by need for e-tailers with multiple products to customers.
  6. Shipping is expensive and problematic.  Not only is it the most expensive part (aside from the wine) of the equation the other attributes of hot and cold months, adult signature, and surcharges for wine to a residence only exacerbate the situation.
  7. Winesearcher.com and Vinopedia.com.  These URL’s is a shopping comparison engine that plagues the industry (both positively and negatively) because retailers use this as leverage to blackmail wineries to not sell to e-tailer (even if the price is wrong).  They are good for the consumer (and in reality good for the winery and retailer) but traditional retailers use them as leverage to bargain with wineries.
  8. Wholesaler mafia tactics.  There is not an e-tailer or winery that deal directly together that has not been bullied about negotiating wine directly together.  TRUE STORY.
  9. Consumer buying habits.  Consumers generally buy to get satisfaction within 90 minutes of purchase at retail.  Waiting or 24 – 72 hours to buy wine after selecting it on the Internet is a very specific customer.  This usually excludes wines that are less than $20/bottle (which adds more inventory costs to etailers).  It is also a much more discerning customer and there are far less of them than the estimated 64 million wine consumers (VinTank estimate puts the number at approximately 3.5 – 5 million US online wine consumers).
  10. Competition.  There are a LOT of wine e-tailers in the market (much more than wineries).  We estimate that there are about 10K e-tailers with about 100 of meaningful online volume (in excess of $1M annually).
  11. The conditioning of Flash Sales (including Groupon, Travelzoo, Bloomspot, Lot18, Gilt).  Consumers from this recession have been condition to perceive that they can get wines at 40%+ discount which means that the e-tailers of not only profit but also of the marketing fees these sites charge.  This means that they are upside down in most of these deals.
  12. Sourcing.  It takes a LOT of money AND work to acquire the right wines for an e-tailers portfolio.  What makes this even harder is depending on where you are based, your access to wines differs.  So a CA winery may never get to buy a boutique French producer because they are not distributed in that state.
  13. A huge segment of the target buyers (Baby Boomers) are still print media and are not digital buyers.  The cost structure for print (aka catalogue) is ridiculous.
  14. Customer service.  What is old is new.  Zappos demonstrated that customer service is the key to success on the internet.  We all lived the illusion that e-commerce was automated.  Zappos saw that they are “a service company that happened to sell shoes.”  This is a lesson the wine industry (and all other e-commerce companies) could really gain to understand.  But to do it right takes bodies.  Many of the best wine e-commerce companies employ 3 – 50 customer service representative.
  15. Technology costs.  Aside from one major e-tailer and 10% of the BevMedia.com e-tailer network who use the best of breed solution Vin65.com, most wine e-tailers develop their own e-commerce software.  They do this at huge expense which often costs $100K – $10M and 20% – 100% of those same fees maintain annually.  This doesn’t even include the huge costs of the WMS (warehouse management software) they have to use to ensure the inventory is properly accounted for and routed.
  16. Private labels.  A growing trend in the US (and a dominant one in the UK) is more private labels.  These are most excess juice (sometimes really good juice but very often very inferior) put into a private labels that can’t be price compared but from regions that have good pedigree.  A Napa Syrah.  A Sonoma Pinot Noir.  They are also often sold at 25% to 50% less than their branded counterparts and compete for wallet share from casual consumers.
  17. No ability to compete with traditional e-commerce techniques.  There are now tried and true paradigms for internet marketing but they get thrown out the window for wine.  From simple marketing tactics like “Free Shipping” (can’t do that in the wine industry) to using giant affiliate networks (you are not allowed to revenue share in the wine industry) it takes a sane e-com marketer and quickly drives them crazy.
  18. There are more but I need to close up this post . . .

And there are many more.  So how do they do it with all those challenges?  Pure fortitude.  But make no mistake, e-tailers are one of the most ignored but one of the most effective partners for wineries to sell and market wine.  If I were a wine brand with less than 10K annual case production I would be closely partnering with a single e-tailer (not a Flash Sale site) before opening another state for distribution.  The profit is better, the cost of sales is lower, the velocity could be from 1% to 20%, they sell to highly discerning and qualified consumers, and (with the best ones) their reach is close to national. Sounds like a really good partner to me.

  • Jmcann

    Doesn’t the largest wine internet site in the U.S. provide free shipping, all the time?

  • Nick

    If one thinks the wine business is byzantine from a regulatory perspective these days, one’s right.  However one only need to look to Canada for a worse model and to Hong Kong for a better one.  Take heart.  The march of economic freedom takes two steps back, but usually three steps forward.  The old adage that you can’t fight city hall is now You can’t fight the Internet.  A ver.

  • http://twitter.com/tomcwark Tom Wark

     There is no stopping the migration of consumers to an online environment, even in the realm of the logistically challenged wine industry. The percent of wine shipped will continue to grow.

    The role of the online retailer has not been adequately appreciated for a number reasons. But consider this: the only place to get a bottle of imported wine online is via a retailer. So, when retailers are banned from shipping into states (36 of them) you actually have a defacto ban on imported wines being shipped into that state.

    I’m not as pessimistic as you are about the future of the “flash” sites. There is an interesting evolution of the consumer going on that includes an acceptance and an embrace of the notion of 1-offer-per-day. I don’t think its necessary to cultivate a following for these offers only by asking for discounts. While the great deal might the occasional offer, the unique product is also the draw.

    Finally, I might venture to add that the vast majority of online purchasing from retailers is occurring at a relatively few number of retailers that have devoted their biz model or a significant portion of their biz model to online sales. I’d further add that a large number of this small number are CLICK & MORTAR retailers.

    Nice rundown, Vintank.

  • Jmcann

    Tom,

    I agree about the future of flash sites.  While there may be availability issues from one region or another from time to time, in a multi-billion dollar market there will always be plenty of juice to fill their pipelines.  A certain flash site is the most successful online business ever in the wine industry, so it’s hard to imagine they will have a sudden demise.

  • Anonymous

    In your own home town, Tom, there is one importer, Quintessential Wines, that has an ecommerce shopping cart on its site.

  • Lwfass

    Flash sites are a fad. No one wants these wines initially, tha is why they are closing them out. Recession created business that is a fad.

  • http://twitter.com/tomcwark Tom Wark

     It’s not a “fad” until they go away. They are still here….and many of them growing.

  • Jmcann

    New releases from Caymus, Phelps, Laleure, LeClerc and many others appearing on flash sites are not a “fad”, nor are they closeouts.  You apparently haven’t been playing very close attention to the category.

  • http://www.facebook.com/AgentRed Jason Seeber

    Here’s a little 5th column haiku:

    Love the discussion.
    Wine Spies changing the wine world.
    The 5th Column Lives!

  • http://vinobandito.com/?p=45 Why most wine e-tailers will fail

    [...] Home › Uncategorized › Why most wine e-tailers will fail [...]

  • Wineguy

    Paul… you delete my post?

  • Anonymous

    No. I never saw it. Can you repost?

  • Wineguy

    I’ll keep it simple this time. What if there was a high profiled virtual wine store where wineries could post their DtC wines and they control the prices? For those wineries that want to do their own flash sales, they can… or offer free shipping or whatever they want. The web site would essentially have dozens of sale priced offerings all the time instead of just one a day or week to go along with over a thousand small lot / boutique wines from 250-300 wineries from all over the country. The site would essentially be a marketing agent using a high profile URL to help wineries sell wine. If the winery didn’t want to do the DIY backdoor virtual shelf stocking then the website will do it for them. The idea is to help them sell more wine and gain a customer… the customer gets access to well made small lot wines that they can’t get in the store. The site even has a tool that helps the customer find wines by style, aroma and flavor profiles written by the actual winemaker, not a wine writer.  Wine Scores are offered if available but the focus is on the winemaker. Transactions are simple and legal. They get an order, ship it, get a check monitored through ShipCompliant. There’s a lot more but that’s basically it. Your thoughts 

  • Jmcann

    You mean like Amazon?

  • SueW

    Wineguy…comparably, this is what we have created in our website Wine Clubs Online.  It is a marketing agent to help wineries acquire new wine club members, i.e., wine sales.  As you said…the idea is to help them sell more wine and gain a customer…in our case a new wine club member.  It is simple and direct.  The wineries give their own description of their winery.  They tell their own story. As you say, there’s a lot more.  We are moving forward.  Back atcha…your thoughts.

  • http://www.facebook.com/pmabray Paul Mabray

    It sounds good in theory . . .

  • SueW

    Do theories have a range of validity?  Always enjoy your blog articles, Paul, as they are direct, straightforward and thought provoking.  And the wine industry provides plenty of material.

  • Wineguy

    Too funny! SueW has a good point. I’m not sure what is meant there… is validity similar in meaning to do-ability? Monetizing anything to do with wine on the internet is crazy difficult. There are only so many people out there willing to buy wine over the internet and the “marketing agents” are expanding exponentially weekly… good for wineries, bad for agents. Sounds kinda bass ackwards as I used to be on the winery side. Paul… I loved your answer, I’m still laughing. Glad to hear we have your approval in theory… wish we could afford your practical advise. 

  • http://www.facebook.com/cam.fortin Cam Fortin

    if you are talking about wine.com the answer is yes and no – we have our steward-ship program which gets you free shipping for $49/year, but you do have to pay for it. we’d love to be free shipping for everyone all the time, but as paul points out shipping is expensive and difficult in our industry!

  • http://www.facebook.com/karinmckercher Karin McKercher

    @Wineguy, that’s pretty close to the Indie Vinos online marketplace model. We’re definitely intent on building a site that enables consumers to find wines they can’t find in a store. We’re working on the “high profile” part. ;) There are quite a few challenges with what you’re proposing, the biggest of which is getting the wineries to help us help them. Even though we do most of the work, we still have difficulty getting information from wineries, and often their own sites are incomplete or out-dated.

  • Greg

    I don’t think that most affiliate networks would be very effective at reaching the 3.5 -5 million online wine consumers even if it were permitted.  After all Garagiste does $30-$40 million a year and hasn’t spent a dime on ads or marketing.

    As Tom Wark pointed out unless you have a robust compliance infrastructure retailers are shut out of all but 14 states.  Most state legislatures may have sympathy for mom and pop wineries but not mom and pop retailers. 

    As far as technology costs there are many low cost alternatives that cost nowhere near $100-$10k for retailers who don’t have wine clubs.  It amazes me that all these companies can justify high monthly fees and a percentage of sales when the cost of e-comm technology has fallen so sharply.

  • http://buy-beer-online.adshopez.biz/130/if-you-think-we-have-it-tough-check-out-the-5th-column-e-tailers/ If you think we have it tough, check out the 5th Column E-tailers … | AdShopEZ – Buy Beer Online

    [...] risk they can take. Flash sites are sales sites that offer wines for a limited period of time.Read More… [Source: wine for sale - Google Blog Search] Posts Related to If you think we have it tough, [...]

  • http://arnoldwaldstein.com/ awaldstein

    Paul…

    Excellent post. Provides an outsider with a project in development a lot of info. If not a lot of concerns.. Thanks!

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