News Column

Amazon Back in the Wine Biz

Oct. 28, 2012

Cathy Bussewitz, The Press Democrat, Santa Rosa, Calif.

Oct. 28--Online retail giant Amazon.com is making yet another attempt to capitalize on the complicated market for online wine sales, a closely-watched initiative that could open a new distribution channel for wineries.

If it succeeds this time after two previous failures, Amazon could bring exposure to boutique wineries that are too small to land a deal with major distributors. And wineries that opt to play could find an alternate route to consumers, bypassing the traditional three-tier distribution system that dates back to Prohibition.

The online wine shop is expected to debut in the first week of November, said North Coast winery executives familiar with the launch.

"The additional distribution is fantastic," said David Freed, chairman of the Silverado Group. "Being able to just get into all the states where it's legal would be wonderful."

Amazon's muscle as an online retailer could bring new consumers to the industry while leveling the playing field for smaller wineries, who typically have less access to distributors than larger wineries, industry executives said.

The Seattle company's websites attracted more than 103 million unique visitors in August, making it the sixth-most visited online property that month, according to measurement firm ComScore. Last year, Amazon reported $48 billion in net sales and employed 56,200 people in full-time and part-time roles, according to company filings.

"The only reason that you would even think about this is because it's Amazon, and they are this incredible powerhouse," said Jim Caudill, director of public relations and hospitality at Hess Collection in Napa. "They know what makes consumers tick, so you can't ignore that. But the wine business is not quite as simple as some other business."

Wineries will pay Amazon for the exposure. Several wineries working with Amazon said the wineries would be responsible for handling fulfillment of the orders -- including warehousing, shipping and compliance with the complex thicket of state alcohol distribution rules. One said Amazon also offered a second option where it would complete the fulfillment process for the wineries.

"You'll check out, just like you would to buy a book," said Marlow Daniel, director of public relations and communications at Francis Ford Coppola Winery, which is participating in the Amazon wine launch. "You'll pay Amazon on the Amazon site. And on the back end, it will shoot it over to us to where we do fulfillment and compliance ... and we'll send it."

Amazon is charging wineries a 15 percent referral fee, a cooperative fee of $49 for every $350 in sales, and a subscription fee of $39.99 a month, according to a document obtained by The Press Democrat. The cooperative fee and subscription fee will be waived until Jan. 31, 2013.

Whether the costs of selling wine through Amazon are cheaper than the three-tier distribution system depends on a variety of factors, said Paul Tincknell, a Healdsburg wine marketing consultant who prepared a pricing analysis of the Amazon program for his clients.

"It's very heavily dependent on the price point of your wines and how much you can sell per month," Tincknell said. "If you're paying $40 a month and selling a $4.99 bottle of wine, it's going to be a bigger percentage of your margins than if you're selling a $49.99 bottle of wine."

Even so, he believed the cost would be worthwhile because a winery could reach millions of potential new customers.

"We're pretty enthusiastic about the program," Tincknell said. "We don't think that the fee structure is too high for many of the wineries than they're probably working with."

At this point, the wineries will not enjoy the discounts Amazon has negotiated with shippers, Tincknell said. Consumers will pay a shipping price of $9.99 for up to six bottles and $19.96 for a case of 12 bottles, according to two people who have been briefed on the program. Wineries will make up the difference between actual shipping costs.

Amazon executives did not return repeated telephone calls seeking comment over several weeks.

Amazon's sales typically peak in its fourth quarter, as shoppers buy and ship holiday gifts. That timing wasn't lost on winery executives.

"Having worked at Amazon years ago, I thought ... that is a recipe for success. We have to be there," said Stacy Bennett, vice president of digital marketing at J Vineyards and Winery. "There are so many eyeballs on Amazon.com, so in the online world, where the traffic goes, the money flows. This is just the reality of where the customer is."

The challenges Amazon will face are considerable.

Any retailer getting into the business of shipping wine to consumers must deal with a complicated structure of rules that date back to the Prohibition era. Some states, like Utah or Mississippi, don't allow wineries to ship directly to consumers at all. Others, like New Hampshire, have limits on how many bottles can be sent to a household each year. In some states the rules even vary from one county to the next.

"It's a whole lot easier to send a gun to another state than it is to send a bottle of wine," said Robert Larsen, public relations director at Rodney Strong Vineyards. "It's mind-boggling ... The forces stacked up against direct shipping are formidable."

To navigate the tricky maze, many wineries use the software system ShipCompliant, which comes with a database of 10,000 rules wineries must follow to comply with federal and state laws. ShipCompliant, used by Coppola and other wineries, is likely to be part of the Amazon deal, Daniel said.

"It's literally madness," said Jeff Carroll, vice president of compliance at ShipCompliant. "If wineries are shipping to more than five states, it becomes almost impossible to make sure their shipments are compliant without using an automated tool."

Carroll declined to comment on whether ShipCompliant was going to be part of the Amazon launch. ShipCompliant counts roughly 1,800 wineries as clients, which resulted in about 4 million shipments last year, Carroll said.

The company started in 2005, not long after the U.S. Supreme Court struck down laws in two states that prohibited wineries from shipping directly to consumers. That paved the way for many states to revisit laws that, in many cases, require alcohol producers to ship products through a three-tier system that regulates the operations of producers, licensed wholesalers and retailers.

Since then, a growing number of wineries and retailers have started selling wine on their own websites. But their sites lack the traffic that Amazon draws.

"The wine industry is so driven by the distributor," Bennett said. "I think something like Amazon will help the smaller, and even the larger, wineries get to the consumer without having to go through the distributor."

"It's very hard to get through that bottleneck of the wholesale trade for these smaller wineries," said Chris Spear, vice president of TradePulse, a Novato firm that tracks beverage sales data. "It they (Amazon) start selling wine below $35 (a bottle) in any volume, there would be a lot more screaming from the wholesale trade."

Amazon's first foray into the wine business was in 2000. Teaming up with venture capital firm Kleiner Perkins Caufield & Byers, Amazon was an investor in Wineshopper.com, an Internet retailer that aimed to dominate online wine sales. Launching one state at the time, the company planned to meet with every state regulatory agency to ensure it complied with the myriad rules of shipping to consumers, said Sara Mann, attorney with Hinman & Carmichael in San Francisco, who was general counsel at Wineshopper.com.

"It was very tough to even explain it to a lot of regulators, because the Internet was still very young at that point," she said. "The whole thing went over a lot of the regulators' heads."

At its height the company employed about 100 people in San Francisco, but fell victim to the dot-com crash and declared bankruptcy in 2001.

"It built up really fast and just went out with a bang," Mann said.

New Vine Logistics arose out of that company in 2001, Mann said, using the same warehouse and working with many of the same employees, and Amazon planned to launch with that company.

But New Vine's investors pulled out in June 2009, the same month the California Alcoholic Beverage Control agency issued an advisory that essentially made it illegal for third-party retailers operating websites to make money off the sale of alcohol without a license. At the time, Amazon had been planning to offer a platform for licensed wineries to sell their wine, but not to hold the licenses, Mann explained.

"The ABC with the advisory was saying that was as good as a sale, and everyone who was doing it had to get a license," Mann said. "It really took the wind out of the sails of the program."

That changed about a year ago, when the ABC released another advisory stating that a third party, such as a website, could be involved in the sale of alcohol as long as the winery, or license holder, controlled and was ultimately responsible for the transaction.

"It was really significant in giving a green light to these third-party providers, as long as they follow the guidelines," Mann said.

Wine shoppers can already find wine using Amazon's website, but Amazon's role is similar to a search engine, directing buyers to external websites where they can complete the transaction. In the new model, buyers will make the purchase without leaving Amazon.com.

Participating wineries like Coppola will handle the compliance and shipping involved with each sale, even though the sales transaction will take place on the Amazon website.

"They've shifted all that burden onto the winery," said Tom Wark, owner of Wark Communications, a wine industry PR firm. "The winery is controlling the transaction. Amazon is somewhere in the middle."

Wineries are weighing whether they are prepared to handle the compliance and shipping responsibilities, and whether their product offerings are the right mix. Moving inventory through a massive mainstream retailer can chip away at a wine brand's sense of exclusivity.

Like other wineries, Hess produces a number of small-lot wines that aren't available for purchase outside the tasting room and wine club, offering a sense of exclusivity that customers appreciate.

"They know they're getting something special and unique," Caudill said.

Even so, Hess produces about 650,000 cases of wine per year. The winery was contacted by an executive at WineDirect, a shipping and compliance firm based in Napa that's working closely with Amazon on the new venture, Caudill said. The winery plans to meet with Amazon soon to learn about the opportunity.

"One of the questions for us is, do we even have the product mix to participate?" he asked. "We want to know everything that they're offering. ... There's an awful lot to be intrigued by."

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(c)2012 The Press Democrat (Santa Rosa, Calif.)

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