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Internet wine sales: is there a net profit?

Internet wine sales: is there a net profit?

Larry Walker

As the new century opened (remember that?) there were predictions that by the year 2002 or 2003 at the latest, Internet wine sales would be between 5% and 10% of total wine sales. That’s leaving quite a bit of wiggle room, but at the top end, that would mean sales of $1.5 billion. Last fall, most financial analysts had scaled that back by half to maybe $750 million, and spread it out over ten years.

There go the stock options.

So is anyone making money selling wine by the click and point method? No one opened their books for me, but the answer is pretty clearly, no. With one major exception. The bricks and mortar stores that sell through their own Web site seem to be doing just fine, in many cases.

Scott Shrewbridge at WineResearch.com, an information site that went up in 1999, said that the bricks and mortar retailers were attracting a lot of action. “Another sector being ignored is grocery delivery companies like webvan.com. It has a good wine portfolio and is geared to the typical consumer who buys wine and drinks it within 24 hours.”

Webvan, of course, is having problems of its own, but Shrewbridge thinks if they can solve those problems, they could sell a lot of wine.

“My take on things is that if you look at the future, e-commerce-assisted brick and mortar sales will be big,” he said.

“If you just look at the numbers, Wine.com is reported to have $30 million in sales, which looks pretty good compared to a regular store, but if you look at their capitalization, it isn’t so high,” Shrewbridge said. “Also, cost of goods for the pure Internet companies could run as high as 60% of revenues with another big slice out for payroll.”

Wine.com doesn’t report earnings, or even the average dollars spent per order. A spokesman for the company said they were not showing a profit yet, but would be profitable by the end of the year.

Shrewbridge pointed out that wineresearch.com was not in competition with any Internet sales sites. The site is fee-based and offers members a chance to control their own content and to provide winery-composed tasting notes on wines they are selling. Wines can be searched for by aroma and flavor characteristics, rather than by media scores or reviews, giving the consumer the opportunity to judge for themselves, Shrewbridge added.

In support of his bricks-and-mortar position, point your mouse at forbesbest.com, click on Lux Shopping and go to wine, where there is a review of 20 Internet wine web sites. Seven of the first eight sites rated by Forbes are bricks and mortar sites. Their top site? Zachys.com, a top New York retailer based in Scarsdale.

Here’s part of Forbes’ review: “This site is a gem for online wine shoppers. It’s easy to browse, delivers a wide selection and offers low prices… From Alsace to Africa, more than 1,700 wines are easily searched by style or region. Huge selection, reasonable prices, easy to navigate.”

The View From eVineyard

However, the pure Internet play wine sites should not be counted out as yet. Brett Lauter of eVineyard.com said sales for the first two months of this year were up tenfold over the same period in 2000. “In the first two months of this year that means we almost matched the entire year of 2000,” he said. “That’s remarkable when you realize that the majority of wine and spirit sales are in the last quarter.”

All of eVineyard’s sales are handled through the three tier system. “It took us between one and two years to build the licensing process. At the moment we are licensed in ten states but can ship to 27 states because of reciprocity,” he said.

Lauter doesn’t regard federal or state regulations as a barrier. “Once we are licensed, they are not a problem,” he said.

“Our only barrier is just regular marketing hurdles, getting the customers to sign up, then fulfill delivery expectations.” Lauter said the average delivery time is 2 1/2 days.

Lauter’s reaction to the regulatory hurdles is interesting since many have blamed those barriers for the failure of Internet wine sales to take off. However, in the United Kingdom where no such barriers exist, Internet sales are also lagging early prediction. While various promotions such as deep case discounts or, in the case of virginwines.com, a free case of wine, have brought in customers during the special offer, they don’t hang around to buy more wine later. Virgin Wines marketing director Chris Mitchell, in an interview in Harpers Wine and Spirit Weekly, said wine e-tailing is “a saturated market with everyone chasing the same people.”

In that respect, the eVineyard customer profile is revealing. “As opposed to most research showing most buyers of premium wines to be over the age of 40, our average customer is 34. Some 78% of our customers are below the age of 50, which means we are bringing in the new wine consumers in the 25-to-35 age bracket. We believe these are new consumers and that we are not taking sales from other retails but are actually growing the market,” he said. The average price per order is in the $100 range.

Direct Producer Sales

John Macy, founder of VinXchange.com, believes the greatest potential for Internet wine sales is direct sales by producers to consumers because it provides increased margins to producers and makes new products available to consumers.

Macy sees several problems with Internet wine sales. First, there is the cost of establishing an Internet presence in multiple states and the shipping costs, as well as the federal and individual state limitations on direct sales.

“Because of these limitations and the problems of building a consumer database of buyers, it is unlikely that Internet sales in the U.S. will ever represent more than 10% to 15% of total retail sales. Internet sales are most effective when they offer wine products which could not otherwise be purchased through traditional outlets and where product information is readily available,” Macy said.

He added that setting up a Web site is inexpensive, and attracting visitors and buyers to the site can be extremely difficult.

Macy said that in his view, the major benefit of the Internet is the transportation of information, not the delivery of consumer goods. Macy said that VinXchange is designed to fulfill that goal by creating an online database easily searched which allows producers, distributors and sellers to list and update their specific products and where they can be purchased.

Macy said wineries developing Internet wine sales should provide incentives, such as free shipping and case discounts. “Evaluate several sites, which sell or promote wine products, and develop relationships with those who meet their Internet strategy,” he said.

He also suggested that wineries create an online wine club and offer discounts to build an e-mail base of customers and their preferences. Wineries should also build a list of retailers and restaurants offering their products and list them on their Web site.

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