Ferment: Opinion from Tincknell & Tincknell

10.11.01: A binary moment in time; Is dot-com wine dead?
by Paul Tincknell, November 2001

A reoccurring question this Clarkesian year of 2001 asked by clients and wine industry acquaintances alike has been:

"Is ecommerce dead?"

The cratering of Wine.com and WineShopper.com, the relatively modest performance of other wine dot-coms to-date, and the collapse of the NASDAQ and business-to-consumer ecommerce ventures throughout 2000 and 2001 certainly give warrant to such a question. However, Tincknell & Tincknell's answer has staunchly been and is:

"NO!"

Of course our answer can be dismissed as self-serving because part of our business is building web sites and counseling wineries in internet marketing. However, there is one undisputable fact that supports our position that ecommerce is alive and holds potential: online sales are growing (see table).

Yes, that's right. All throughout 2001 online sales have been growing in both B2C (business-to-consumer) and B2B (business-to-business) segments. Combine that with bullish statements from tech-knowledgeable persons such as Andy Grove's (Chairman, Intel) comment that the rest of the world is just beginning to be wired with the internet, and Bill Gates' comment (Chairman, Microsoft) that information technology's capabilities are in its earliest stages, and you can see that the 2001 dot-com die-off was something other than just ecommerce being a bad business idea.

So why did so many ecommerce dot-coms fail? Well, I am not an economist or a Wall Street wunderkind, but as a marketing consultant I think there are some obvious reasons. Most blatant to me is the marketing angle so many B2C ecommerce businesses took. Their marketing budgets were oriented towards a multi-trillion dollar consumer sales economy (in the US alone) when in reality the online consumer market was (and is) only a few billion dollars. Marketing your online store like it has Wal-Mart's target audience when really the whole online buying population was only a few million is bound to destroy your profitability quickly. Throughout the latter 90s there just wasn't that many people on the internet shopping. In comparison to those shopping offline, there still isn't today in 2001, but it is growing. However, Pets.com, Webvan, Wine.com, WineShopper.com, et al were spending enormous amounts of money marketing as if the internet was equal to our offline multi-trillion dollar economy.

Also, there was the myth that number-of-eyeballs would soon lead to an equal number of sales. Unfortunately, window shopping is a lot easier online than it is offline. Internet buyers often compare prices from several different vendors. Quite frequently that comparison shopping results in the purchase happening offline - something early success measurement metrics didn't take into account. But the majority of web surfers in the 90s were just surfing. The fixation on dragging the most number of visitors to a web site failed because - just like offline retail - if you aren't reaching interested, qualified customers you are just spending money entertaining the masses. Or not.

Wine.com is an interesting study for the wine industry, because I believe it illustrates the potential of online wine sales and the failure of the 20th century emerchants. Virtual Vineyards, the precursor to Wine.com, was a pioneer in ecommerce - any ecommerce - and it quickly seized the attention and imagination of the wine industry. Their existence as Virtual Vineyards illustrated a successful and profitable ecommerce model that contrasted sharply to their latter Wine.com phase. Virtual Vineyards marketed itself well to those interested in wine, rather than trying to reach either occasional or new wine drinkers. Most importantly - and I cannot stress this enough - it offered added value to online wine consumers in that it sourced wines from the finest wineries and screened them for quality. Peter Granoff's, one of the founders of Virtual Vineyards, tasting chart and personal guarantee that all wines were tasted by himself (or other qualified persons later on) gave the consumer a reference point for quality that is vital in wine sales. Last, Virtual Vineyards showed that the internet could sell unique, unknown wines in quantity by providing added value and good customer service - without using reviews or scores from the nation's wine media.

The fact that Virtual Vineyards ultimately raised the ire of the nation's wine wholesalers suggests that the online wine merchant was a credible threat to offline fine wine sales. Virtual Vineyards had to modify their business model to stave off litigation but, in doing so, I believe they developed an inevitable business model for the wine industry that still lies in the future. Virtual Vineyards in essence became an online wholesale retailer that was better at marketing fine wines efficiently than the offline wholesalers wielding platoons of street sales representatives (see my Ferment opinion "The Roads Ahead: Wine Business in the 21st Century").

WineShopper.com, on the other hand, did not have a viable business model. Their early goal was to offer online any wine available in the market. They were going to build an online database that listed all wines available from the nation's wholesalers catalogs. Their goal was to be able to sell to anyone anywhere any wine available. Utilizing the existing three-tier (3-T) wine distribution system with the wholesalers' collective blessing, a person would be able to order a wine that would be delivered to their doorstep from a local retailer (within the buyer's state).

Even a cursory knowledge of wine distribution will quickly point out the logistical flaws of this business model. Not all wines available in New York are available in Fargo, North Dakota. The different licensing and distribution laws makes it a compliance nightmare for wineries to sell nationally in all 50 states - only the biggest can afford the time and effort to do so.

From a marketing perspective there was a lot more wrong with the WineShopper.com model than the logistics of its operations. First, where does the company make its margin? If it is asking wineries to sell to distributors, and distributors to sell to retailers, and retailers to ship or deliver the wine to consumers - just as the current 3-T system works now - where does WineShopper.com make its money? None of the current 3-T participants want to take less of a markup; it is already spread out over three or more players. WineShopper.com can't really add to markup of the bottle price because it is also asking most of the buyers to pay for shipping. Plus, why would someone buy online if it is more expensive than offline - before shipping costs are added in?

Which leads to the other marketing flaw: not all wines need to be sold online. Because of the shipping costs and delay in receiving goods, most people who shop online for wine are looking for wines that are NOT available in their market. It makes no sense to have Kendall-Jackson, Gallo, Beringer, etc., available unless you are offering their top-line, hard-to-find wines. A database of all wines available was overkill; there was (and is) no need of such among online consumers.

By having every wine available what value was WineShopper.com bringing to the consumer? Unlike a wine shop or Virtual Vineyards, there was no quality filter or recommendation process in place for the consumer. The proposed WineShopper.com was the online equivalent of a supermarket with shelftalkers and no sales assistants.

Indeed, WineShopper.com was setting itself up for massive customer dissatisfaction. Online buyers would be looking for the Caymus Special Selection's or the Screaming Eagle's of the world and, if found, would probably not be able to buy them. Those kind of small wineries can't afford the time and effort to be licensed and available in all 50 states, nor do they have the production to merit national distribution. The continuing unavailability of rare, sought-after wines defeated the only selling point WineShopper.com was promoting to the wine industry: universal, legal availability.

Virtual Vineyards' morphing into Wine.com was in response to the WineShopper.com threat, whereupon it immediately adopted its worst features. Wine.com carried everything and marketed itself like the online market of wine buyers was several billion strong rather than just a couple of million. Internally, number-of-eyeballs rather than visits-converted-to-purchases was the more important statistic. The final straw was the shotgun marriage of the money-losing WineShopper.com entity and the financially bleeding Wine.com. WineShopper.com needed Wine.com - because the former wasn't even open for business yet - but Wine.com did not need WineShopper.com. They were already selling millions of dollars in wine. They needed the marketing savvy of their founder Peter Granoff and some sound business sense. Alas.

Wine.com's failure wasn't because selling wine online doesn't work. Virtual Vineyards/Wine.com literally sold millions of dollars of fine wine. It failed because it was poorly run at the end of its existence.

It remains to be seen whether eVineyard/Wine.com will remain last-standing of the initial online wine sales gold rush. Their slow-but-steady-growth business model has kept them alive, but like the Wine.com and WineShopper.com of old, they doggedly offer the most common of wines along with the under-promoted, lesser known wines. Just slapping on the old Wine.com tasting profile chart doesn't give a consumer the sense that anyone is home. It takes a branding campaign that puts real faces or genuine effort into the offered services to truly impress customers.

Ecommerce works when it offers a compelling reason for its existence. People online are looking for services or products that are not easily found around them. In online wine sales that means:

• People like cutting out the intermediaries, e.g., they want to buy directly from a winery.
• Visitors can find more information about what they are interested in online than can be found offline, and/or get information without any embarrassment; no one likes feeling stupid in front of the wine store geek babbling wine stats.
• Offering online buyers a guarantee of quality, e.g., a transparent system for screening quality or providing recommendations.
• Building a community of like-minded individuals, be they consumers, wine experts offering advice, or winemakers discussing their craft and wines.
• The personal touch, e.g., providing real customer service that cares about the customer.
• A web site that is fun and interesting to visit.

Amazon.com works as a good online ecommerce experience due to much of the above. Whether they will be profitable remains to be seen; their aggressive expansion has been their Achilles' heel. The demise of Wine.com/WineShopper.com is an opportunity for small wine emerchants and wineries to create successful online sales strategies.

In consumer retail sales - which accounts for two-thirds of our multi-trillion dollar economy - there are no changes in how things work. Technology created a new sales and marketing channel - the internet - for the consumer retail sector as well as new business models for the other one-third of our US economy. Information technologies are impacting how businesses operate (think of Dell) but budgets, sales, and marketing still work the same way they always have. The new digital economy works on the same consumer principles as the old economy. People didn't change - the technology did.

Building a compelling, enticing web site and supporting it with targeted, properly budgeted marketing will result in a successful online ecommerce venture. Just like building a compelling, enticing store or restaurant and marketing it to those likely to be interested in your business will result in success. Duh.

The failures of the past two years have little to do with the viability of selling online. Tincknell & Tincknell join the other tech luminaries in remaining bullish about ecommerce and the internet. If you examine both the pluses and minuses over the last two years with clear thinking the inevitability of ecommerce becomes apparent. Technology is marching on, becoming easier and more ubiquitous, and is increasing personal and business productivity. Its impact on our society and commerce in general has yet to be truly felt.

Get on board and join the future.

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