Corkscrew Turns

In a perfect world, Internet retailers would know exactly how to provide the content, product selection and pricing their customers most want. Overall, online wine retailers have done just that. Their sites are rich with expert analysis, hard-to-find products, competitive pricing, appealing designs, free shipping with minimum orders and large inventories—an enthusiast’s e-paradise.

But this is not a perfect world. Labyrinthine state laws make getting slices of that paradise to the doorstep a long and perilous journey. “Until the online wine sellers find a way to get around all the state regulations, their growth will be hindered,” says Heather Dougherty, a retail analyst with Jupiter Media Metrix, New York. “The infrastructure is incredibly expensive.”

Dealing with those laws is keeping sites from being profitable and causing a rapid consolidation among wine dot-coms. The laws governing the interstate sale of alcohol differ from state to state and often from county to county. Although some states are relaxing laws, others are tightening the screws and mounting sting operations to crack illegal shipments (see “By the Bottle and by the Book”). These pressures are causing online wine retailers to invest heavily in warehouse and distribution centers or enter agreements with local wholesalers and retailers. Consolidation, like the pending merger between Wine.com and WineShopper.com, is escalating as costs climb.

In that way, the online wine segment is like the rest of e-retailing. Web presence alone is not enough; wine merchants need real-world warehouses and distribution centers. And, just like the other retailers, they wrestle with delivery issues-although in this case delivery concerns go far beyond whether the customer is home and extends to ways to avoid delivering to minors. And as profitability pressure mounts, consolidation is overtaking the segment.

To overcome state rules online wine retailers are building distribution centers and creating partnerships with local retailers. San Francisco, Calif.-based Wine.com, which began selling online in 1995, for instance, has agreements with local wholesalers and retailers in 41 states and the District of Columbia. In most cases, customers order the wine online and Wine.com ships it through those local wholesalers and retailers to comply with local laws. But this model adds expense of having more fingers touching the pie. And it causes the online wine seller to lose control of the fulfillment process. “Wine.com has been trying to make its model work for quite some time,” Dougherty says. “It has taken them years and they still don’t have it perfect. I don’t know what makes other people think replicating that model is a good idea.”

eVineyard takes another approach. It holds retail liquor licenses in the states that require one, allowing it to do business as would any brick-and-mortar retailer. The company maintains no inventory, rather it establishes relationships with local wholesalers. “We don’t have the complex issues related to interstate shipping,” says Brett Lauter, Portland, Ore.-based eVineyard’s vice president and chief marketing officer. The company is in 27 states that account for 70% of the premium wine drinking population. Its goal is to reach 92%, putting it in 37 states—a mark Lauter expects to reach next year. eVineyard started in May 1999 on $13 million from private investors.

Some states require a physical presence to hold a retail license. In those states, eVineyard has retail centers—eight in all—that act as a pass-through from wholesaler to consumer, Lauter says. However, in some states, such as Virginia, the license requires that the retailer be capable of selling to someone who walks in the facility. Each state has different licensing requirements and the time to get licensed and running varies greatly. In New York, getting the license took nine months. In North Carolina a company can get a temporary license the same day it has a building and a general manager on staff. eVineyard plans to be profitable by the third quarter of 2001.

Another model is the one that Drink.com uses: It is pursuing a distribution model similar to online grocer Webvan. Drinks.com partnered with Drinks America to construct and operate distribution facilities in various states. Drinks America is the licensed retail partner that buys from local wholesalers and delivers to consumers. But unlike Webvan, it uses the distribution centers to sell off-line to retailers or end-users. “It’s one of the most interesting models we’ve seen, but it is definitely one of the most expensive,” Dougherty says. So expensive, in fact, that it recently announced it will shut down if it cannot get additional funding or merge with eVineyard. Drinks.com recently laid off 40 of its 60 employees.

Come together

WineAccess.com takes yet another approach. WineAccess is a host site that connects visitors with local wine dealers. By entering a ZIP code, a WineAccess.com visitor is taken to the home pages of wine retailers that sell in that area. Customers can order online and pick up the wine from the local store.

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In short, every wine retailer is re-inventing the distribution system, based on what each thinks will work. But what they all have in common is that the retailer must develop partners. And those relationships require a great deal of trust. The retailer must be confident the product will be properly packaged and shipped. “It requires more effort and deal striking than most markets,” says Evie Black Dykema, an analyst with Forrester Research, Cambridge, Mass.

Industry insiders believe online wine sales cannot support many players, and that consolidation and attrition will occur at an even faster rate than in the rest of e-retailing. In August, former heavy-weight competitors Wine.com and WineShopper.com agreed to merge in 2001. eVineyard recently acquired Winebuyer.com to bolster its b2b business. And WinePlus.com launched a wine consortium of small California wineries. Even WineAccess believes it could be bought down the road. Dykema expects the online wine retail industry to consolidate at twice the rate of the rest online retail.

WineShopper.com and Wine.com will operate under the Wine.com name. WineShopper.com reported raising $46 million ($30 million from Amazon.com), while Wine.com is believed to have raised $100 million. Industry consultants Gomez Advisors Inc. reported earlier this year that, once merged, the new wine dot-coms would be looking for more money either through an IPO or another round of venture investment.

Real money

Dave Moore, director of retail marketing for WineAccess.com, says the merger between Wine.com and WineShopper.com is telling of the inherent flaws in pure-play wine retailing. “The two most highly funded sites are having to merge because they can’t cut it on their own,” he says. “They’ve spent close to $150 million so far and they’re looking for more money. At what point do you say ‘This doesn’t work?’”

Plenty to go around

“Since buying wine is so consultative, people don’t like to buy it online without some kind of guidance,” Moore says. “People are shopping online, but they are not buying wine online in numbers that make it profitable.” Moore contends that the Internet will enhance but never replace buying wine from a physical store.

The next few years will determine if these online retailers can convert wine into profits.