Ripening in the wine e-commerce industry: Will the VC graveyard turn around?

In the last few years, technology has changed the way America buys things. Yesterday’s New York Times article about Groupon’s success, Funny or Die: Groupon’s Fate Hinges on Words, once again highlights how tech companies are changing the way America buys. In only a few years, Google, Facebook, Groupon, Gilt Groupe and thousands of clones have transformed how people shop, and how businesses and brands sell products and services.

One industry that many of you know is close to my heart, is wine e-commerce. This is still very much an under developed space in the tech world, and if done right, is a gold mine of opportunity. But, why hasn’t someone really nailed it yet?

The size of the market is huge. The opportunity for wine e-commerce is estimated at between $30 Billion to $40 Billion in the US. This makes it larger than the music industry, or even larger than Hollywood’s entertainment industry, if you look at it on a global scale. In addition to pure wine sales, we can also look at sub-categories like Vinotourism. This is estimated to be a $5B business – again with no dominant players.

But despite these numbers, wine e-commerce is also known as a VC graveyard. It seems like a no brainer investment, but the industry is complicated and riddled with legal issues. There are so many companies that have tried without success. Alcohol is probably one, if not the most highly regulated products to sell in the US, and even makes the travel industry seem so easy. If we look at the most dominant players in US wine sales, Costco is at the top of the list, with 3% of the market and retail wine sales of $1.4B a year. It is interesting to see where America currently buys wine. The other interesting point here is that wineries that do have licences to direct ship to consumers in certain states, do not necessarily understand how to market themselves online and here comes the challenge for wine sites, especially flash sales sites. Just like the mom and pop merchants that Groupon has been able to educate on why they should embrace the group buying model, wineries are no different. There is still a disconnect with many wineries on how to reach today’s consumer and create demand for their businesses, hence there is an education challenge for many wine sites.

From a marketing perspective, the wine consumer is divided into three parts; the Wine Spectator crowd, a small part of the market but highly influential; the “two-buck chuck” crowd who don’t care so much what they drink as long as it’s cheap; and then everyone else. Everyone else is where the opportunity lies. There are 25 million people in the US that enjoy wine on a regular basis but don’t know enough about it. Although wine is not their primary passion, they will spend between $8-$80 per bottle. With a consumer that is becoming accustomed to online purchasing, flash sales and coupons it is certainly seems like a hot space to watch.

It’s not quite harvest time yet in the wine e-commerce business, but things are certainly starting to ripen. Just take a look at these players:

Flash sales sites to watch:

Lot18 – Recently closed a $10 million Series B round making total investment over $13 million. Investors include New Enterprise Associates (Groupon, CareerBuilder, Diapers.com) and FirstMark Capital (StubHub, TheStreet.com).

Invino – Formerly known as WineryInsider, rebranded in November 2010 as Invino

Gilt Groupe – although not a wine specialist, they have been showcasing opportunities for wine. With the recent launch of Gilt Taste this could be one to watch.

Cinderella Wine – Gary Vaynerchuk was quick to start this site after the huge success of Wine Library and his daily video.

Online retailers
Wine.com Over $40 million per year in wine sales

Wine Library – By 2008 Gary Vaynerchuk raised annual revenue in wine sales from $4 million to $60 million (and also launched flash site, Cinderella Wine)

Vinfolio – Sought bankruptcy protection in Jan 2010 and by May had landed an investment from Steve Case’s Revolution. Revolution also invested in LivingSocial and ZipCar.

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11 Comments on “Ripening in the wine e-commerce industry: Will the VC graveyard turn around?”

  1. Arnold Waldstein May 29, 2011 at 7:57 pm #

    Mindy

    Thanks for this piece and the research. Really well done.

    We have a shared passion around wine but I approach the issue from a different point of view.

    Yes, you are correct that the wine industry is in its online infancy. And as well that the investments in this are minute even though the possibilities for change are huge. And the maze of legislation, laws and restrictions are something that can be overcome.

    But the online businesses you quote, with a few exceptions are more about efficiency that they are about disintermediation and truly bottoms up change.

    And few of them, while the numbers are significant (thanks for them!) address the really challenging 10% margin that wine resellers, online or not, deal with.

    Did Amazon originally change the book biz by disintermediating the archaic distribution system. Yes…but the real kicker was giving the population of readers a soapbox to speak their mind, to move recommendations away from experts to well… you and it. This was the first and very powerful inklings of the social power of the web.

    For the wine industry, Lot 18, as well executed as it is, is simply efficiency and evolution of a commerce model, not revolution and not cognizant nor it seems supportive nor exploitive of the powers of the social interest graph.

    The battle that is happening, is for the mass market, not the elite, nor the chuggers, but the real battle will be to create community now that Parker and the absurdity of the point scale is finally and thankfully gone. Most of the resellers you cite, to my knowledge are building off of the efficiency matrix of the web, not the social power of a new type of referral driven commerce.

    Take a look at the model of Naked Wines as an example of a bold step for change:

    Naked Wines…a social approach to online wine markets that really works @ http://t.co/kmyNUzQ

    And if interested in my personal passionate nitch of Natural Wines, this post:

    Natural wines… a perfect storm of social change for the wine world @ http://t.co/q10mwuk

    Great piece, thanks for writing.

    • Dave Pinsen May 30, 2011 at 7:03 am #

      Mindy,

      Seconding Arnold on this being a good post (though I know a lot less about wine than either of you).

      A couple of off-topic comments:

      Please consider using Disqus for comments. I can almost guarantee you will prefer it to this system.

      Also, next time you are in Paramus and in the mood for a burger, consider stopping in here: BUCU Burger Bar & Bakery. I copied you on a tweet about this over the weekend, but I’m mentioning it here in the event you didn’t see it. This is the current reigning champ among burger places in Manhattan and North Jersey, in my opinion (the original Shake Shack was great, but something seems to have been lost as it expanded). Try the classic single on a potato bun with blue cheese, dill pickles, coleslaw, and BUCU Burger sauce (similar to thousand island). Simply excellent.

      • arnold waldstein May 30, 2011 at 7:10 am #

        +10 on Disqus

        Take this as a formal invite for you and Mindy for wine @ 10 Bells. Wine list is constantly changing, constantly great and almost entirely natural. Sparkling Rose’s this weekend hiding from the heat of the day in a LES hangout were a dream.

      • Dave Pinsen May 30, 2011 at 7:22 am #

        Nothing like a cool drink, in a cool place, on a hot day. We’ll have to do that sometime.

      • Mindy Joyce May 30, 2011 at 10:23 am #

        Thanks Dave. Ugh, I tried to install Disqus but am not a tech wiz like you. lol. One of these days we can meet and you can do it for me. Will check out BUCU for sure. Sounds awesome. Thanks for your comments on this post…appreciate it!

      • Dave Pinsen May 31, 2011 at 1:07 am #

        Sure Mindy, I’ll try to set it up for you (we could log in from the Starbucks in the same strip mall as BUCU).

    • Dave Pinsen May 30, 2011 at 7:15 am #

      “the real kicker was giving the population of readers a soapbox to speak their mind, to move recommendations away from experts to well… you and it. This was the first and very powerful inklings of the social power of the web.”

      Arnold,

      Interesting contrast there with the expert approach with wines. One difference, it seems to me, is that most casual wine drinkers would be a little more hesitant to opine online than book reviewers, because they lack a critical framework and vocabulary with which to describe wine. After all, we all did book reports in school growing up, but fewer of us were formally taught about wine (I had a highly literate and opinionated French teacher in high school who took scrapped the French one day and gave us a lecture on wine, but the knowledge he attempted to impart evaporated long ago).

      So an app like this one might help in giving people a vocabulary and framework with which they can feel confident ranking wines. What might make it a killer app (to connect the dots with what you mentioned in your tweet) would be to build a social layer on top of it. And to have a way to aggregate the data. I wouldn’t eschew a ranking system though; instead, I’d consider one for wine similar to what Zagat’s has for restaurants.

    • Mindy Joyce May 30, 2011 at 10:19 am #

      Thanks Arnold. Great comments and I love getting your perspective. Thanks for pointing out Naked Wines. Very interesting. I haven’t really promoted it yet in the blog, but I’m about to in my next post….I actually just joined Lot18. Will be handling the experiences and travel side of the business. Have had a bit of a crash course in the wine industry over the past week (as you know my background is not in wine, but more of a passion), but it’s interesting to see similarities regarding the flash model and businesses’/wineries understanding of it. Look forward to chatting with you further over a glass. Let me know when you are around.

      • arnold waldstein May 30, 2011 at 10:58 am #

        Congrats!!!

        They are lucky to have you on the team. Huge potential and upside tempered by lots of risk of course.

        Glad to discuss at whatever level of detail you want to.

  2. Arnold Waldstein May 30, 2011 at 7:40 am #

    Large discussion.

    Yes and no…the mass market wine consumer is in a wonderful frenzy without Parker. He was a crutch that not only legislated taste but confirmed a top down pedantic view of wine. So glad to have him gone.

    We need a bottoms up system where interest and articulation precedes and drives the interest to learn more.

    Certainly there is a lack of filters to help guide through the wave of wine out there now.

    But…we do not need ‘Garanimals’ for wine to fill this void. And the Zagat’s approach without severe surgery will not work for something as limited and as ephemeral as a bottle of wine. For the winery…maybe.

    I have some ideas and a project that is coming out of a few years of thinking around this. Although no one has figured this out yet. I am passionate about wine, about the social web and about apps that help me pursue my interests. None in the wine world have become a staple of my life in wine as yet.

    • Dave Pinsen May 30, 2011 at 8:00 am #

      Have you considered that your knowledge & sophistication about wine might be a handicap in approaching the mass market? Or that maybe you really aren’t interested in the mass market (i.e., those of us who have bought Yellow Tail or Kendall-Jackson on occasion)? We (I and the millions who have enjoyed Yellow Tail in the past, without knowing we weren’t supposed to; not you & Mindy) may need ‘Garanimals’ to feel confident weighing in on wine.

      There may be a real opportunity there, in starting with the “Garanimals’ approach, to refine our palates and steer us to new brands of wine, while at the same time democratizing the evaluation of wine and disrupting the distribution of it.

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