What Business Model Will Emerge as the Winner in Direct-to-Consumer Wine Sales?

There is no doubt that direct-to-consumer (DtC) is the growth engine of the wine industry. 

While overall wine sales in the U.S. generally hover around 2-3% annually, DtC wine sales are up double digits and now represent approximately $2.5 billion in annual sales.

With new states like Pennsylvania and Oklahoma easing restrictions to allow DtC shipments, and with a proliferation of web and mobile based services offering wine delivered to your door, it is easy to see how the growth trends will continue.

The question, therefore, is what business model will emerge as the winner?

There are multiple variations of the DtC business model, but when you break them down there are basically 3 differentiating models:

1. No Commitment Required (NCR) - as the name would suggest, buyers simply take advantage of the deal and/or inventory available at the time of purchase, with no obligation to make any future purchases.  This is much like the traditional e-commerce model pioneered by wine.com in the original dot-com era and now include variations ranging from flash sites such as Lot18Garagiste, WineAccess, Last Bottle and SommSelect, to more ingenious options like Underground Cellar, WineBid and Vinfolio. Note: I have excluded Amazon and eBay from this category even though both have tried (multiple times) to get into wine.

2. Commitment Wine Clubs (CWC) - unlike the NCR model, the commitment clubs are based on a subscription model. The terms of the subscription may vary from monthly to quarterly or even annual shipments, but the basic premise is to generate recurring revenues, much like Blue Apron does with meal kits. Some examples include Winc, Tasting Room (now part of Lot18), Uncorked, Bright Cellars as well as wine clubs sponsored by media outlets such as Wall Street Journal and NY Times.

3. Membership Wine Clubs (MWC) - unlike the CWC model, there are generally no automatic shipments of wine, however members pay a fee (typically annually or monthly) with the membership proceeds used to subsidize wine purchases and/or shipping costs.  This is much like a Costco membership or Amazon Prime account. Some examples include Splash Wines, Naked Wines and Plonk.

Despite the variety of options across these three business models, we have yet to see a real winner emerge.
Source: Isocline Ventures, LLC

Source: Isocline Ventures, LLC

Yes, there are some thriving businesses listed above, but nothing that even compares to the consumer direct brands from other industries.  

Where is the Warby Parker, Dollar Shave Club, Chewy, Bonobos, Casper or Everlane of the wine industry?

Surely in a $38B annual industry, there will be at least one dominant brand to emerge in the direct-to-consumer wine business.

There are several unique qualities of wine that make it hard to conquer in the direct-to-consumer world: wine is heavy, temperature sensative and expensive to ship, it is a consumable and therefore does not lend itself well to returns, and is mired in antiquated regulations.

That said, all of those problems are solvable. Companies like Casper and Wayfair ship heavy goods, Blue Apron ships perishable consumable foods every day, and a variety of third party services like ShipCompliant make navigating the regulations easier than ever.

So back to the question of what business model will emerge as the winner, in the end, it may not be the model that defines the winner, but rather the characteristics that have made other DtC businesses successful.  The winner(s) will likely incorporate the following:

  • Free shipping - this has become almost the ante to be a top DtC player and many of the wine companies listed above already offer free shipping (typically with a minimum purchase). 
  • No haggle returns - you obviously can't return an opened bottle of wine, so this means when a customer complains, the winners will give the customer a credit, no questions asked.
  • Loyalty programs - the goal is to create lifetime value (LTV) and the winners will utilize innovative loyalty programs to maximize repeat purchases and minimize subscription churn.
  • Improving quality of wine sourcing - the mistake that others have made is starting off by offering name brand wines at low prices, only to shift to lower quality private label brands over time - consumers will notice and churn will follow.  Winners will constantly up the quality levels through scale.

All the other features like personalized tasting algorithms, large wine content libraries, online cellar tracking features, etc. are all "nice to have" but not what will truly define the winner.

Given the DtC growth trend in wine, and the good examples of DtC brands to follow in other industries, we will see one or two household names emerge in the wine category... it is just a matter of time. The companies that focus less on the business model and more on delivering superior quality wine with exceptional service - the hallmark of all the great DtC brands - will be the winners.

Why Has "WineTech" Ignored the Wine Supplier-to-Wholesaler Relationship?

This post was based in part on a recent conversation I had with a technology entrepreneur who is interested in developing solutions for the wine industry, but I've had similar conversations over the years on this very topic. 

TL;DR - there has been little innovation supporting the $15B+ annual market of wine that is sold between the wine supplier (i.e., producer or importer of wine) and the wine wholesaler (state licensed distributor), but there is a tremendous opportunity for someone who can develop and market the right product.

Here is how many of these conversations begin...

Entrepreneur: I would like to get your feedback on a great idea I have for a new [app / website] to help wine retailers sell more wine based on [artificial intelligence / machine learning / social data] and we will revolutionize how wine is sold, just like Uber and Airbnb revolutionized their industries!

Me: that is a great idea, but there have been many such attempts and many more that are still playing out. The retailer-to-consumer market segment is fairly saturated with technology products and unless you have a sustainable advantage in customer acquisition, it will be a long hard road ahead.

Entrepreneur: is there a part of the market that is not already saturated?

Me: Yes! While I would say that SevenFifty has the wholesaler-to-retailer segment well covered, there has been very little innovation in the supplier-to-wholesaler tier of the 3-tier system. This segment seems to be largely ignored.

Entrepreneur: that sounds very interesting, I do not know much about that segment of the market, can you tell me about some of the common problems or issues that could be solved with technology?

Me: how much time do you have, because I could go on for hours about that?

Common sense would suggest that by solving a problem, there would be an opportunity to earn a return in relation to the size of the problem solved. Unfortunately, few entrepreneurs are familiar enough with the intricacies of the wine supplier/wholesaler process to even know what problems to solve.

Below is just an initial list of problems that, even today, remain largely manual and inefficient for both wine suppliers and wholesalers.  This is not an exhaustive list, but merely a starting point to demonstrate the opportunity for innovation through technology:

1. Finding New Wine Suppliers - there is not an easy or effective way for a wine wholesaler to find potential suppliers of a given wine that may be available for distribution in their market.

For example, let's say Wholesaler A is looking for a producer of Rioja wines to distribute in Florida. If that distributor is on SevenFifty, they could rule out those brands that are already represented in FL, but what about all the other potential options?

Chances are, Wholesaler A will ask their network for recommendations, look through various wine review publications and/or perhaps search Google. These are generally not very effective, especially once you consider the process of reaching out to the supplier and trying to form a relationship.

There are a few industry publications that offer various postings in a "wanted" format, but those are generally not well followed.

This is a classic problem that can be solved with a "two sided marketplace" business model whereby a non-industry participant sets up an offering that brings together supply (wine suppliers) with demand (wine wholesalers) and creates value by building and maintaining the marketplace. Think eBay or Uber - neither own or sell the goods or services that are transferred between buyer and seller, rather they facilitate the transaction.

2. Finding Potential Distributors - this is just a variation of above, but from the other side whereby a wine supplier searches for a wholesaler to distribute their wines in a given market.

Just like above, there is no real effective way for suppliers to locate distributors so most rely on recommendations and Google.  

This is another problem that can be solved through a two sided marketplace. The value is in the ability to facilitate efficient interactions between suppliers and wholesalers.

3. State Licensing and Compliance - everyone's favorite subject in the industry! 

Let's face it, nobody in the industry enjoys the paperwork of getting licensed to do business in a new market and the various compliance processes that come with it. Yes, Tennessee, with your 4 distinct "markets" - we are talking about you!

While there are firms that can take care of this (for a cost of course), there could be a much more effective way to handle at least the initial setup process, especially if done at the formation of a new supplier-wholesaler relationship.

Once a supplier and wholesaler agree to work together, and if the supplier is not licensed in the State, most of the time the supplier is left to figure out what needs to be done by either asking the wholesaler for guidance (who may or may not give good answers) or sifting through unclear instructions on the State-run website.

Given the many-to-many relationships between the 10,000+ wine suppliers and 5,000+ wholesalers, all it would take is for one well organized tool to figure out the process for each State and simplify it for everyone.

4. Lack of Responsiveness/Payment/Trust Between Wine Supplier and Distributor - the supplier to wholesaler segment is notorious for relationships that can "go dark" at a moment's notice, whereby one side seemingly falls off the grid and cannot be contacted.

This is made worse when one side is in need of information, such as depletion reports or product details, but can be devastating when one side is waiting on payment or product to sustain the business.

In a network where parties in a transaction do not share the same risk or incentive, there is generally value to be provided by a third party to mitigate this asymmetry. Think about financial markets where traders of a financial instrument do not necessarily know each other and a seller of stock would never agree to sell with only the "promise" to pay by the buyer.

In a two sided marketplace, this is often solved through the process member reviews or ratings.  In a more heavily controlled market, often a 3rd party facilitator is used to hold escrow and regulate the behavior of market participants.  The wine supplier to wholesaler segment could conceivably use a combination of both to facilitate a more healthy interaction among participants.

There are many other problems and related use cases (payments for example - see previous post on Blockchain for Wine), but the four listed above are the most common that I hear among the industry.

Now, I will invite everyone to imagine the following scenario:

  • Wine Supplier sets up a comprehensive profile on a well designed website, with contact and product information (perhaps linked to SevenFifty).
  • Wine Supplier then indicates which markets (and wholesalers) they are working with today AND indicates markets of interest where they would be interested in connecting with a new distributor.
  • Wine Wholesaler sets up a comprehensive profile, with contact and existing supplier information along with markets served.
  • Wine Wholesaler indicates product/region categories of interest for new suppliers.
  • Wine Supplier browses for a distributor in a market and finds that Wine Wholesaler is interested in a product that Wine Supplier offers.
  • Wine Supplier clicks to "connect" with Wine Wholesaler and start a message dialogue that is facilitated via email (think LinkedIn messaging).
  • Wine Supplier and Wine Wholesaler agree to form a relationship and this is affirmed on the website (via double opt in), at which point a simple workflow is initiated to both sides outlining the steps for licensing and custom instructions.
  • Wine Supplier and Wine Wholesaler are able to provide regular updates through the website (or mobile app) for actions such as requesting depletion reports, posting invoices, scheduling market visits, etc.
  • Wine Supplier and Wine Wholesaler are able to provide, if desired, a public review of each other for other community members to see.

There are countless additional use cases that I could include in the above scenario, but at this point I hope the potential value of such a solution is clear.

So rather than focus on yet another "me too" app to sell wine to consumers, I would encourage all aspiring #winetech entrepreneurs to really consider the supplier to wholesaler segment.


The Forthcoming Disruption in the Wine Industry

What do we mean by "disruption" ?

If you follow the technology and venture capital world, or if you've seen an episode of HBO's hilarious comedy Silicon Valley, then you have probably heard the word "disruption" used as a way to describe how startups are shaking up old industries.

In my opinion, the word "disruption" is an over-used term and often strays from its origins in Clayton Christenson's classic book The Innovator's Dilemma.  Regardless, it is hard to argue that disruption is not playing out everywhere we look...

Source: http://www.slideshare.net/CMTelecom/m-co-london26march

Source: http://www.slideshare.net/CMTelecom/m-co-london26march

It is hard to believe how much these tech startups have completely transformed traditional industries such as transportation, media, retail and hospitality.  

Why is this talk of disruption important to the wine industry?  

For starters, there are very few industries I've encountered that operate with such archaic practices -- from the extensive use of paper (amazed at how many in this business still use fax machines) to the reliance of manual processes to track and report on all manner of operations to the dependency on paper checks as the most common form of payment.

The ‘old school’ way of doing business in the wine industry is ripe for disruption on many levels.

When you have a large industry like wine ($38 billion a year business just in the U.S.) and combine it with a myriad of intermediaries that exist between the product and end consumer plus all the inefficiencies that exist, then it is a matter of when not if the industry will see disruption.

Source: BrandKnew - How Disruption created (and buried) some of the world’s biggest brands and concepts?

Source: BrandKnew - How Disruption created (and buried) some of the world’s biggest brands and concepts?

Why has the wine industry not been disrupted yet?

Two primary areas where you often see disruption are on the product itself and on the supply chain (how the product is delivered to the end consumer).

Unlike digital services, it is easy to see why the product of wine cannot be easily disrupted, and on the supply chain, the wine (and alcohol) industry is unique with the complexities of the U.S. "three tier system" which places certain constraints on innovation.  

That said, we're seeing the beginnings of some innovation in the supply chain through a few well funded venture-backed startups like Naked Wines (bringing producers closer to consumers) and Sevenfifty.com (creating transparency in wholesale markets). Both startups have addressed friction points related to broken trust and complex intermediaries. 

What is next for disruption in the wine industry?

There is no doubt we will see continued innovation with more "mobile-first" offerings that will enhance consumer experiences for the discovery, purchase and social aspects of wine. 

We will continue to see a strong trend towards direct-to-consumer offerings, shifting more of the $38 billion of annual sales in the U.S. towards the DTC model.

I believe we will also see more innovation at the point of sale through use of internet-of-things (IoT) and in-store beacon technologies. We will be introduced to new wine "chatbots" built natively into messaging platforms and interactive wine tools that use artificial-intelligence to help consumers make the best purchasing decisions.

However, all of these technologies, while good and interesting, are generally incremental in nature.

Of all the new technologies, I believe blockchain has the most potential to be a transformative catalyst and help re-invent how we do business in this industry.

Blockchain for Wine

Much has been written about blockchain's disruptive potential in the financial services industry, but it also has enormous potential to transform the supply chain for wine.  

It pains me to think about how much capital and energy is consumed tracking wine inventory from producer to consumer, not to mention the headaches involved with payment disputes, customs issues and logistical challenges.  

Blockchain has the potential to create a completely transparent and secure network for tracing every parcel from source to destination, and embedding intelligence into the supply chain process.

Imagine as a wine producer, the ability to track every shipment through the distribution channel and retail network to know with 100% confidence where the wine is at any given point?

Imagine as a wine distributor or retailer, the ability to create "smart contracts" such that as certain promotions and sales occur, discounts or sample credits are automatically calculated and applied to the correct accounts? 

Imagine as a wine consumer, the ability to trace the provenance all the way back to the producer and feel 100% confident the wine is authentic and as advertised?

Those are just a few of the possible use cases with blockchain, and can all be done more efficiently and effectively compared to any other existing technology.

I expect it will be some time before widespread adoption of blockchain occurs in the industry, but those early adopters will have the benefit of defining how the disruption will occur rather than being part of the disrupted.