About 75 percent of the sales at Wine Exchange in Santa Ana, California, don’t come from the brick-and-mortar store, but from the company’s website, Winex.com. After about 20 years of building its online business, the store now has the right balance, according to president and director of purchasing Kyle Meyer. “I don’t see the ratios changing,” he says. “The dynamic of the business now is if you want to remain price-competitive, it’s much more cost effective on the Internet than in-house.”
Two decades after Wine Exchange and a handful of other retailers launched their websites, the market is now full of online merchants competing for business. Some are traditional outlets with a strong Internet component, while others are online-only wine retailers, which lack a physical presence but often hold retail licenses in several states in order to legally ship wines to multiple markets. Add to those businesses the auction houses and direct sales from wineries, and the result is a vibrant mix of retail options for consumers.
It’s difficult to pinpoint just how much wine is sold via e-commerce versus traditional brick-and-mortar venues. Direct shipments from wineries comprise a small but measurable portion of wine shipping totals—somewhere around 3 percent, according to the Wine Institute—but after that the data gets a bit foggy. “We don’t have good numbers on retailers’ portion of total online sales because they don’t use the compliance software that wineries do and they certainly have a lot fewer states to which they can legally ship,” explains Steve Gross, vice president of state relations at the Wine Institute.
The Legal Landscape
According to Market Watch sister publication Wine Spectator, the winery and retailer direct-to-consumer wine shipping landscape has changed significantly since the U.S. Supreme Court’s landmark Granholm decision in 2005. In that case, the court ruled that it was unconstitutional for a state to discriminate between in-state and out-of-state wineries when it comes to who may sell and ship wine directly to a consumer.
Since then, the number of states that permit winery direct-to-consumer shipping has risen from 27 in 2005 to 43 as of February 2015, according to the Wine Institute. Both out-of-district winery and retailer shipping are permitted in Washington, D.C., and South Dakota will permit winery direct shipping beginning in January 2016. However, the number of states permitting out-of-state retailer direct-to-consumer shipping has fallen from 18 states in 2005 to just 14 today. In most markets, retailers are only allowed to ship within their state. The landscape is further muddled by online-only retailers, which typically hold retail licenses in multiple states.
“There is nothing to differentiate those groups,” Gross says of the brick-and-mortar retailers and Web-only players. “Wineries hold a different kind of license, but when you get into the retailers who ship, there’s no way for people to differentiate between a package store that has an online presence and somebody who is operating strictly online. They hold the same kind of license, although there are some exceptions to that.”
State laws also vary. In Tennessee, for example, legislation recently passed to allow retailers in the state to offer wine delivery. Previously, customers who ordered online had to pick up their purchases at the store. The law is comparatively restrictive, however, since Tennessee still prohibits any form of wine shipping.
Josh Hammond, president of Buster’s Liquors—the largest alcoholic beverage retailer in Memphis, Tennessee—says the simple change to allow deliveries is expected to have a big impact on business. Even with the store policy of a $250 minimum order for delivery, Hammond is optimistic. “When we get the delivery program running, our e-commerce sales will quadruple in a year’s time,” he says.
For national retailers, the advent of Web-only retailers and online wine auctions—along with the continuing power of traditional brick-and-mortar stores—means a highly crowded off-premise environment. “There is ever more competition,” notes Brad Feuerbacher, director of operations for the 18-unit Brown Derby Stores Inc. in Springfield, Missouri. “You have to be very aware of the national retail landscape. You have to keep track of flash sites that are using a brand as a loss leader, and you have to stay on top of the pricing of individual items, as well as auction pricing.”
Wine Exchange’s Meyer agrees. “The effects of competition depend on what genre of wine you’re selling and what day you’re selling it,” he says. “The main factors include the price and whether you have something that another retailer doesn’t have. Everybody knows the prices with Wine-searcher.com and other wine sites. It’s a benefit for us because we set up our business plan to run pretty skinny as a company.” That focus on efficiency encouraged the retail outlet to redouble its online commitment. Meyer and Tristen Beamon—both former Wine Exchange employees—purchased the business from previous owner Steve Zanotti earlier this year and closed the original brick-and-mortar location. The partners then renamed Best Wines—the Santa Ana, California, store they launched in 2012—as Wine Exchange.
Clyde Beffa Jr., vice president of the three-unit K&L Wine Merchants in San Francisco, Redwood City and Hollywood, California, says online-only retailers have a different approach than his store. “We aren’t bothered by e-commerce companies because we sell many direct-buy wines that nobody else in the United States has,” Beffa says. “We have a good niche and couldn’t care less about selling readily available wines. Our staff takes pride in their wine knowledge, and our buyers take pride in their relationships with wine property–owners.”
For some, growth in their online businesses sparks subsequent dynamism for brick-and-mortar outlets, rather than the other way around. Wine Chateau in New Jersey is one such company. While the physical stores preceded the company’s website, the latter drove growth of the former, according to president and CEO Saurabh Abrol.
“I started Winechateau.com and focused on the Internet for four or five years to grow that business,” Abrol says. “We were one of only a handful of companies online that could ship wine across the country at the time. The growth of the Internet sector was quite fast for us and with that success we grew our brick-and-mortar business. After a few years, the stores caught up to the Internet in sales. Now we’re growing the whole brand.” Together, the company’s four brick-and-mortar stores and its website generate more than $25 million in annual revenues.
Leading Internet retailers say their strong online presence drives some of the traffic and purchasing in their stores. “We think it’s a must to have a brick-and-mortar location in the wine retail business,” K&L Wine Merchants’ Beffa says. “Most online wine companies fail. Sometimes people want to see and feel the bottles.”
Meyer of Wine Exchange agrees. “It’s not absolutely key to running an Internet business, but the brick-and-mortar component is very important for the customer’s peace of mind,” he explains. “They want to know that their wine is not just in some dingy warehouse and that the people they’re buying from are established merchants.”
Citing his company as one of the core 20 to 30 businesses that play on a national level, Meyer emphasizes consistent quality and longevity. “The key with the brick-and-mortar location is continuing to be one of those merchants that can unequivocally state that we’re the best and we’re not going anywhere,” he says.
Feuerbacher notes that Brown Derby’s online component will “continue to be a significant piece of our business,” but that brick-and-mortar matters. “Our website drives a lot of our in-store business,” he says. “Since we’ve had a brick-and-mortar presence for over 75 years, the website is an online tool that our local customers and national customers can use to stay up to date on everything we have when we get it, whether they’re coming into the store or not.”
Upping Their Games
As websites generate a significant and often growing portion of companies’ overall revenues, retailers are homing in on exactly what consumers want from their online experience. “We’re a fine wine–dedicated site and have been for many years now,” Feuerbacher says. “We make sure we have all of our 6,000 to 8,000 wine SKUs listed and updated accurate pricing, and we push out emails usually twice a week.”
At Wine Exchange, the approach is a bit different. “You’ve got to offer something unique,” Meyer says, noting the company has “pretty much shied away” from larger brands. “They won’t click if they can get the wine locally in New York or Kansas or wherever. It has to be a fun, unique product at a really good price. Maybe the wine is a close-out from somebody, but it’s a really great wine.”
Meyer uses several strategies for selling wines online. “Right now, Winex.com is like a fusion of all these different genres of websites,” he explains. “We’re a premium independent retailer. We also do the occasional last bottle or flash sales that are similar to those of Web retailers like Wines ’Til Sold Out. We work on multiple levels.”
The websites of brick-and-mortar stores often attract a mix of loyal local patrons and people finding the retail outlet through wine search engines. Such is the case at Brown Derby, Feuerbacher says. “We’ve used various different applications to drive traffic from new customers who are looking specifically for a wine that we carry,” he says, noting that some of the sites require a fee.
Wine Exchange does a daily email offer, but much of its effort is concentrated on making sure its name is front and center in general wine searches. “Our pricing is very aggressive, so we always show up first on sites like Snooth or Wine-Searcher,” Meyer says. “Once you’re on the second or third page, then you’re lost.”
The company aims to keep customers on its website with various features. “Once people click through, we anchor them to our website and then they have a great experience,” he says. “We offer a state-of-the-art website and YouTube videos so people can get information and have a good time on the site. We aim to educate them so they’ll buy more wine from us.”
Wayne Chaplin, CEO of Southern Wine & Spirits of America, believes that the off-premise is moving in the right direction, but needs to catch up with retailers of other products. “Beverage alcohol retailers really need to better understand consumers and figure out how to meet their demands,” Chaplin explains. “I think there’s a way within the three-tier system to deliver what customers need when buying online. A lot of it is going to depend on the brick-and-mortar guys figuring out how best to service their customers on a wider scale to meet those demands.”
Chaplin doesn’t necessarily see a national solution, such as an Amazon.com for wine, but he’s hoping for a more streamlined approach for buyers. “Right now, online sales are fragmented,” he says. “It’s just about deciding you want to meet the consumer demand for online shopping. I think many of the larger retailers are really focused on that goal, and in the long term, they’re going to continue to gain market share and consumers.”