Wine.com uncorks its one-to-one strategies SINCE 6,000 B.C., humankind has been drinking wine. The proof? Some 8,000-year old residue found in earthenware jugs among the ruins of the ancient Near Eastern community of Hajji Firuz Tepe. Fast-forward to a bottle of 1998 Trinity Hill Merlot/Cabernet Franc/Syrah Shepherds Croft blend from New Zealand-ordered with a few mouse clicks and delivered to your doorstep. The wine industry is coming of online age, and one-to-one will make for a smooth transition.
In 1995, Peter Granoff, a master sommelier, launched VirtualVineyard.com along with Robert Olson, an engineering executive with a strong interest in interactive electronic marketing. Wanting others to enjoy wine as much as he did, Granoff was frustrated by pretentious “wine speak” used in the industry as well as its numerical scoring system to describe wines. His favorite producers, small artisan winemakers, suffered as a result, as did beginning oenophiles who were intimidated by all the jargon. So Granoff set out to build a business that would present fine wines in a personal yet informative way.
Four years later, in September 1999, VirtualVineyard.com acquired Wine.com and shortly thereafter received $50 million in backing from investors, including TH Lee.Putnam and GE Capital. Since its launch, the company has risen to the top of the barrel, bypassing the likes of Drinks.com, WineBins.com (part of 14-year old wine cataloger Geerlings and Wade) and eVineyard.com to become the largest wine e-tailer. And in August, Wine.com announced a merger with its biggest competitor, WineShopper.com, funded by Amazon.com and AOL backers, Kleiner Perkins Caufield & Byers.
Of the $100 billion global wine market, the U.S. consumes approximately $18 billion in wine each year. And consumption is on the rise, thanks to baby boomers’ increased discretionary income and more wine-savvy consumers. Direct sales, including online purchases, currently account for 4% or $750 million of the market, though that figure is expected to grow to between $1.4 billion and $2.9 billion by 2005 – between 5% and 10% of total U.S. retail sales, according to recent figures from Salomon Smith Barney.
“Premium” wines, fetching at least $7 per bottle, account for approximately 70% of the retail market. Jim LaBelle, Wine .com’s vice president of marketing, estimates that while 20 million households purchase the high-end goods, only about 10 million are purchasing online, leaving a very targeted market for Wine.com.
HALF-EMPTY OR HALF-FULL? According Jonathan Gaw, an e-commerce analyst with IDC, the wine market is a tough grape to squeeze. “With wine, people aren’t sure what they’re getting. They need to be educated, and so the Internet seemed like a perfect place to sell wine. But that didn’t turn out to be the case,” he says. First there’s the “taste and smell” issue. “You can’t sniff wine online,” Gaw points out. Then there’s inventory. “You can’t just roll off another few cases of ’76 La Tache. When you read a wine review in the local paper and go to Wine.com to order it, chances are good you won’t find it there. It’s not Wine.com’s fault. Vineyards have a limited number of grapes; some vintners just make a few cases and that’s it.”
And there’s the question of shipping – a labyrinthine issue as a result of Prohibition-era laws, which granted states the right to regulate wine and spirit sales within their borders. Those laws spurred the development of the “three-tier” system, involving wholesalers, distributors and retailers in the producer-to-consumer route. Today there are as many variations in state regulations as stars on Old Glory (see sidebar).
Wine.com feels it is up to the challenges. Through its arrangements with importers, wholesalers and retailers, the company functions as a marketing organization for wine producers, many too small to be represented by distributors. In 19 states, Wine.com can ship wine from its warehoused inventory in Napa Valley directly to consumers. In the remaining 23 states where it operates, it relies on its in-state distributors and retailers for delivering the goods. LaBelle says that Wine.com’s 42-state network can serve over 95% of all U.S. wine consumers. “Behind the scenes, we have to comply with each state’s regulations. It’s not so much of a challenge; the only real problem is it just takes time. We’re still fine-tuning the model.”
The recent merger with WineShopper.com will undoubtedly help. Though industry experts have lambasted the company for its repeated launch delays (missing last year’s critical December rush), WineShopper .com has been recognized for building the Naxon Network, a national database of wholesaler wine inventories. Called “an extremely powerful logistics system” by Salomon Smith Barney, Naxon will allow Wine.com to dramatically increase its current inventory of approximately 2,000 SKUs. So when customers read a wine review in the local newspaper, they’ll stand a better chance of finding it online.
As for gustation and olfaction, Granoff has developed a seven-point qualitative taste charting system, making it easy for beginners and collectors alike to judge their choices. Other interactive site features like live help, an online version of the “Oxford Companion to Wine,” message boards, content from leading wine publications and writers ,and a selection tool all help visitors decide whether they want a Gamay or Grenache; Gewurtz or Pinot Gris. “Information is a huge part of how people buy wine,” says LaBelle. “With the Web, you can provide a lot more information than a local merchant, in a friendly and non-intimidating fashion. The Internet breaks down a lot of barriers.”
BUILDING BRAND AND LOYALTY Establishing brand identity has been Wine.com’s focus for the past year. With an initial customer acquisition cost of between $50 and $100 – roughly equivalent to the average order size – “It’s important to make sure the first customer experience is so motivating that they want to come back and spread the Wine.com gospel,” says LaBelle. It must be – over one-third of customers have come back for repeat purchases, and acquisition costs have dropped by nearly 75% from fourth quarter 1999.
The prospects for building loyalty in the premium wine market are good, given the lack of accessible wine information and the fragmentation that presently exists, according to a recent report by Mark Swartzberg of Salomon Smith Barney, who sees the “opportunity to create a new national brand in wine retailing.” Wine.com hopes to seize that opportunity, laying claim to an average lifetime customer value (the present value of expected per-customer revenues) of $300. Core wine drinkers and collectors nose that number up to over $1,000.
The spectrum of wine drinkers is “dramatic,” says LaBelle. “There’s a huge diversity of knowledge about wine and comfort with wine, from those just starting to learn to collectors. A `one-wine-fits-all’ strategy will never work.” In its first year as Wine.com, the company relied heavily on both online and offline advertising – a “mass-marketing approach” – to drive traffic to the Web site, according to LaBelle. Now, he notes, “with the insights we’ve gained over the past year and the tools we’ve developed, we’re better equipped to gear our message and our product line to be much more relevant to each customer.”
One of those tools is an e-newsletter, customized with wine promotions based on a customer’s preferences and past purchases. LaBelle estimates that more than 25% of the 250,000 unique monthly visitors sign up for the newsletter. Using an algorithm developed by Digital Impact, Wine.com’s vendor, a customer’s newsletter “is reflective of the wines they’re interested in. If they’ve only bought red wines from France in the $10 to $20 range, that information is used to model the types of wine we’re showing them,” explains LaBelle. Results have been “fantastic,” he says, generating nearly 20% of Wine.com’s business in the past six months.
The next step is to create customized newsletters based on “precise segments” of customers. Using Personify, an auto-segmenting tool that’s driven off of Web site behavior, Wine.com has identified numerous profiles. It’s chosen five to work with, a number “more manageable from an actionability standpoint,” says LaBelle. Those segments – gift-givers, best customers, infrequent customers, collectors and everyone else – will also be put to use this quarter when the company launches a new direct mail campaign. “We’ll have five different pieces with more finely tuned messages and product lines,” he says, “compared to last year when we sent one catalog to everyone.”
Segmenting will also be used to customize content and merchandise on Wine.com’s home page. “If you usually buy Italian wines over $20, when you get to the site, that’s what you’ll first see,” says LaBelle.
But what if you don’t know what you’re looking for? Wine.com uses NetPerceptions’ recommendation software, which continually looks at what other customers are buying in order to make suggestions. “The clickthrough is twice as high as anything we get without the software. It has twice the sales impact too.” If you don’t trust your e-shopping peers, you can always call the wine experts at Wine.com or chat online. LaBelle declined to say what percentage of customers use those channels.
Wine.com takes personalization offline also, creating customized wine labels for purchasers. Personalized wine, according to LaBelle, makes up about 10% of the company’s business.
Once the holiday rush is over, first quarter 2001 plans include the launch of MyWine.com, where Web visitors can track every wine purchase, from Wine.com and other sources, keep their tasting notes and track their personal collections. Other plans include the addition of content to the Web site. Given that the merged companies together have relationships with AOL, MSN, WeddingChannel.com, Wine Spectator and others, LaBelle is confident the enhanced site will deliver “everything encompassing the different elements of the experience of wine: entertainment, food and wine pairing, travel and more.”
With a new relationship with Amazon.com investors as a result of the merger with WineShopper.com, will we soon be able to buy wine alongside Amazon’s selection of books, CDs and DVDs? “That’s premature to say,” says LaBelle. “But I’m sure they’re interested in leveraging their investment.” And the merger did something else for Wine.com, admits LaBelle. “Those in the industry were unsure of which of the two major e-commerce companies were going to be successful. Now we can focus less on our competition and more on providing a great customer experience.”
The wine market is not without challenges. Expected revenues of $40 million this year, according to an industry observer, may have investors wondering when they’ll recoup a combined $150 million in venture capital. But Salomon Smith Barney’s Mark Swartzberg sees a place in the sun for an emerging leader. “Blue laws” limiting when and where people can purchase wine are unlikely to be overturned in the near future, making the Web a convenient option. And regulatory complexities are a “substantial” barrier to entry to this marketplace. Early movers with entrenched wholesaler and retailer relationships have an edge. They also have the opportunity to become “highly scalable.”
Blue laws and state-by-state regulatory mazes are a result of the 21st Amendment. Passed in 1933 to repeal Prohibition, the Amendment gave states to the right to regulate the sale of wine and spirits. From there the “three-tier system” (importers/producers, distributors/wholesalers and retailers) emerged, originally designed to thwart monopolies and to ensure tax collection. Each state developed its own set of laws, many barring out-of-state shipments. Direct shipping advocates (free trade supporters who believe producers should be able to ship wine directly to consumers in any state) claim the laws are no longer relevant today, but are kept on the books to protect the market of the middle tier.
Lending credence to their argument is the fact that at least two of the seven states where it is a felony to ship wine without involving the middle tier added that legislation within the past three years – suspiciously irrespective of concerns about the repeal of Prohibition. There’s a strong financial interest in maintaining the three-tier system, which adds a 100% to 150% markup to a bottle of wine. The nation’s 4,500 distributors generate an estimated $15 billion annually, and that’s not including beer and wine sales.
Challenges to direct shipping bans are under way in several states, including Florida, Indiana, Michigan, New York, Texas and Virginia. At issue is the perceived violation of the federal Interstate Commerce clause, and whether federal law supercedes states’ rights granted by the 21st Amendment. Short of a Supreme Court challenge, the system won’t be dismantled, according to an industry observer. Robert M. Cohen, a member of the Family Wine Makers of California, editor of Italian Food, Wine & Travel, and columnist with Touring and Tasting magazine, thinks “direct is going to happen, but it’s going to be a series of progressive steps.”
If or when it does, what happens to Wine.com, a company that has had to build its business model upon the three-tier system? According to Jonathan Gaw, an e-commerce analyst with IDC, producers will still need a marketing organization since their core competency is winemaking. “Wine.com isn’t going to get into the winemaking business, and winemakers aren’t going to get into its business.” At least not in any cohesive way, adds Cohen. “They’re too fragmented. You have 10 or 15 major wineries and more than 1,500 family operations. They’re not going to network.”
Jim LaBelle, Wine.com’s vice president of marketing, says no matter what happens, the e-tailer can work with wineries, helping them sell their product to more consumers than they could otherwise. In fact, business-to-business is another “major initiative” at Wine.com. The company is beginning to “custom source” wines for hotels, restaurants, etc. “We can work with a restaurant, for example, to source a `house’ brand at the price they want with the taste attributes and origin they are looking for, and we can provide a `private label’ as well,” he says. “The arena is comprised of large one-size-fits-all distributors. Personalization and customization will be our main differentiators.”
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