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.