Online Wine E-Tailers Are Ripe for Growth

SAN MATEO (08/17/2000) - The online retail wine industry is still in its infancy, with several digital exchanges now stepping into the ring to establish dominance as the standard marketplace. But the e-business transformation for this industry has come with its own unique challenges and difficulties, mainly in the form of old legislation.

Although the current business-to-consumer wine market is relatively modest -- at less than US$100 million per year, according to Salomon Smith Barney Inc. analyst Mark Swartzberg -- the online market is expected to total between $1.4 billion and $2.9 billion by 2005, or 5 percent to 10 percent of the total retail wine market. Generally, consumers like the online experience of shopping for wine because almost all sites have searchable wine databases where they can research and, if so inclined, purchase a bottle that wouldn't normally be available to them at a local market.

But selling wine online is a tricky endeavor, and this is one of the many instances in which the Internet and e-commerce are driving government agencies to catch up and restructure policy accordingly.

"This is not one nation under God," says Suzanne Gannon, director of corporate communications at WineShopper.com, in San Francisco. "It's 50 nations under God, and each has its own set of shipping laws."

For example, Gannon says that an online shopper on WineShopper.com is presented with different screens and ordering forms depending on which state he or she is in. Because a county within a state may have its own special laws, the site must account for this to prevent an illegal shipment.

After Prohibition was repealed by the 21st Amendment in 1933, the federal government stepped aside and gave full power to the states to develop their own laws concerning the direct sales of alcohol to residents. Presently, 31 states do not allow direct orders to be shipped to persons within the state. To sell wine within those states, a retailer must gain a license to sell wine and establish a physical plant within the state.

Wine sales present unique problems for online marketplaces because almost all states mandate a three-tier distribution system. Under the system, wine manufacturers or vineyards (tier 1) must register with each state, then sell their products in that state only to state-licensed distributors (tier 2), who can then sell only to in-state retailers (tier 3).

Each of the emerging online exchanges has addressed the mandated three-tier system and its many middlemen with unique business models. Each model has pros and cons, and its potential success could hinge on decisions that will be handed down from courts and state and federal legislatures. For example, a proposed bill in the Senate, if passed, would give states greater authority to collect alcohol taxes, enforce restrictions, and empower state attorneys general to use federal courts to prosecute out-of-state alcohol merchants.

"The Internet is not a special medium of commerce that is exempt from alcoholic beverage shipping laws," says David Dickerson, vice president of the Wine and Spirits Wholesalers of America (WSWA), in Washington.

Although their business models differ, wine.com, another online wine e-tailer, and WineShopper.com generally operate as "buyer's agents." Under this arrangement, both e-tailers process orders online and facilitate the movement of wine through all three tiers. One advantage of this model is low overhead and inventory costs because they use outside distribution channels, Swartzberg says.

Companies that employ this model also have an easier time entering the market because they don't have to undertake the expensive and time-consuming process of obtaining a license to sell within a state. They also forgo the process of setting up a physical plant in the states where they sell, because most states are not "reciprocal" and do not allow direct shipments to consumers from outside states. It should be noted that although "reciprocal" states -- and there are currently 13 -- allow for direct shipping from other reciprocal states, each state has its own regulations on the quantity of wine shipped and the manner in which it is received.

Although the "buyer's agent" model allows companies to enter the market faster and easier, it has disadvantages. A major drawback is that because these companies rely on the three-tier system to fulfill purchases, they have less input in the buyer interaction, which determines buyer satisfaction. Another con is that these exchanges need the retailers and distributors on their side, and retailers and distributors in all industries are hesitant to commit to an exchange at this stage.

Two newer players to the online wine industry, Drinks.com and eVineyard.com, have addressed the state shipping regulations by obtaining licenses to retail wine in certain states. Brett Lauter, chief marketing officer at eVineyard.com, thinks that this model affords online wine merchants two distinct advantages: having more input in fulfillment and relying less on retailers. Conversely, this model generates hostility from retailers, who may view online "newbies" as direct competitors.

However, both companies feel they have helped themselves by obtaining licenses.

"Clearly, there is considerable effort expended in establishing a retail presence within each state," says Thomas Lebamoff, CTO of Drinks.com, based in Lake Bluff, Ill. "By taking this approach, though, we forge a level of respect with and for governmental bodies that sets the foundation for a longer-term relationship. In this industry, relationships are crucial to a company's success."

When online wine exchanges first sprang up in 1997, WSWA's Dickerson says it was like the Wild West. As legislators and regulators catch up with e-business, illegal shipments and shipments to minors have decreased. But the future of online wine exchanges depends on governmental regulations of the industry.

"Traditionally, the wine industry has been forced to operate within a small box, with relationships between sectors narrowly defined by a Byzantine regulatory backdrop," says Peter Granoff, founder and chief wine merchant of wine.com, based in Napa, Calif. "Like water finding cracks in a dam, the Internet and e-commerce have a natural tendency to resist such constraints."

Online wine sellers attempt to establish dominanceThese companies have addressed complicated state shipping laws by implementing unique solutions.eVineyard.com (www.evineyard.com): As a newer entry to the field, this licensed retailer serves 25 states and has logistics centers in seven states.

Drinks.com (www.drinks.com): Stepping up as competitor in online wine retailing, Drinks.com has established distribution channels and it also deals in beer and liquors.wine.com (www.wine.com): The oldest wine e-tailer, founded in 1996 by Peter Granoff, wine.com includes impressive food and wine commentary on its site.

WineShopper.com (www.wineshopper.com): A newer player looking to break into the market, this site has the advantage of exclusive agreements with popular wine publications to provide on-site content.

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