RIP Amazon Wine, Long Live DTC
Amazon Wine’s announcement that it is winding down operations and getting out of the DTC business is the biggest opportunity wineries will see in the Direct-to-Consumer space in the next decade. Think about it, an 800-pound gorilla has just left to play with the other gorillas in the zoo (Walmart, Kroger, Costco), leaving a giant $120M vacuum — and the question is: what are wineries going to do about it?
Let’s Make Some Assumptions:
Amazon Wine represented ~ 4–5% of the total DTC Market
How did I get there? Let’s start with the number of SKUs. Each SKU on Amazon comes with a ranking.
Here you can see the “#5621”. It’s Amazon’s ranking system and algorithm — the higher the rank the more likely you are to be seen. This is just the “red” varietal category ranking, so I’m safely assuming that 10K SKUs would be a decent place to start.
“Price per transaction” is an assumption based on the average bottle price sold Direct to Consumer. I have this set to about $30 a transaction, taking into account bundles and kits, as opposed to an average bottle price for DTC , which is significantly higher on average.
Ok, so across nearly 10K individual SKUs in all wine categories, we can assume that Amazon Wine annual revenue was between $72M — $120M, capturing around 3–5% of the total DTC market. And as a marketing agent, Amazon took a nice bite out of the revenue at a tune of 15%. Again, not too bad of a business.
Let’s see this in terms of shipments as well while we’re at it. There were 5.02M 9L cases sold through the DTC channel in 2016. With an average of $20 a bottle we simply divide revenue by average case cost. So, we settle right around 300K cases shipped through the Amazon Wine platform. I’d say we’re in the ballpark.
Why does any of it matter? What did Amazon prove and how does it affect wineries? Amazon proved that an online marketplace for wine does exist beyond the cellar door / wine club, and that there is a growing segment of consumers that feels very comfortable purchasing wine online. Obviously this is small potatoes to the nearly $26B in wholesale revenue numbers, but accounts for nearly 6% of a marketplace that has been growing on average 11% year-on-year for the past 6 years!
Amazon did wineries a solid here — they proved that a sustainable marketplace existed for online wine sales even without significant merchandising or marketing of the wine marketplace and with far less selection and attention that other categories recieved. They proved that if you make it simple, easy, familiar and convenient for consumers to explore the virtual wine aisle, purchase will follow. And the best part — unlike much of the traditional retail channels, Amazon is open 24 hours a day 7 days a week plus holidays — you can’t beat that.
The significance of Amazon proving a marketplace, then exiting, is monumental. Imagine if Uber simply left the ride-sharing market altogether. Lyft would celebrate. Thanks to Uber’s exit, they now command 70% more of a $100B marketplace. A little exaggerated, but you get the point. It’s not like the behavior of people who shopped at Amazon Wine suddenly stopped. Life has just become a little more difficult for the average consumer because the giant aggregator has left and now it is up to wineries to pick up where they left off. In fact, if wineries DO NOT pick up where Amazon left off, those incremental sales, marketing value, exposure and discovery that wineries have enjoyed is gone. Poof. Who is going to fill the vacuum?
The Head Start
How does someone win the 100m against Usain Bolt? With a 6 second head start.
“…lawyers filed a complaint in a federal court, arguing that an Illinois prohibition on retailer-to-consumer direct shipping is unconstitutional.”
On Sept 1, 2017, a lawsuit was filed challenging the standing law preventing retailers from selling retailer-to-consumer. According to the article in Wine Spectator, it may take up to 2 years before this sees a ruling at the Supreme Court. And if the ruling is favorable, the floodgates would be wide open for Amazon, Costco, Kroger, Total Wine, BevMo and all the independent retailers that sell wine to go retailer-to-consumer. In this scenario wineries of all sizes would suffer. Private label, exclusives and value wine would flood the market; luxury wine would become commoditized; and the Wine Club would be the last haven for true luxury wine. The retailers will own the consumer relationship and thus they would “own” suppliers. The wine world is going to look a lot different then. West Coast retailers would have competitive price advantages for West Coast and new world wines, while East Coast retailers would be advantage for European wines.
The reality is that any ruling on Lebamoff v. Rauner is still with the courts and there is a window of opportunity gifted to wineries with the exit of Amazon from the DTC wine space. Wineries were just given a 6 second head start.
During this window of advantage, the best hedge is going to be wineries need to invest in digital acumen, e-commerce resources, innovative DTC strategies, and ominchannel customer experiences that can compete on a different playing field than price and convenience.
“DTC sales opportunities have never been brighter for wineries but unless they invest in people, technology and processes, they will be limited to cellar door traffic in the future.”
— Paul Mabray— Founder of WineDirect/VinTank and Wine Futurist
More than simply capturing incremental revenue for a business, this investment becomes a proxy for a firm’s embrace of, and preparedness for, the future. A future in which retailers like Amazon CAN be a marketing agent AND sell through their brick and mortar stores. A winery adept at selling online, being responsive and owning the consumer relationship is a very powerful position to be in.
What is interesting to noodle when speculating about future eventualities is the role that large enterprise players will have. They house the most brands, command the largest share of the market and have the deepest pockets. I’m looking at you Trinchero, Treasury, Constellation, and Gallo.
There is a relatively short period to do something remarkable in the ecommerce space and if anyone can do it, it’s you. The market is ripe for the taking. Amazon, in its approach was clumsy no doubt about it. From the awkward “brand” pages, to search functionality, to how they presented wines in the cart, to how they on-boarded suppliers. There was plenty of room for improvement. To top it off, they quickly painted themselves as a virtual free-for-all. Cheap wine quickly? Look no further! Expensive wine for a steep discount? We got it!
Yet, what they did get right was purchase convenience, an unreal focus on the end consumer and their path to purchase. Amazon knew very little about the wine market and space at first, but quickly got up to speed and started capitalizing on what drove consumer purchase behavior for wine; and they were good at it. Yet, as adept as they were, they could never be as good or as focused as wineries can be — because Amazon’s strength is based in a world in which price is the primary differentiator. What they lacked in the wine space was authenticity, a human touch, and a connection that wineries and luxury brands have in spades.
With Amazon Wine now out of the DTC space (for now..) this is the time to act. Just because Apple failed at streaming music, does not mean that people don’t listen to music online. What it means is that we get smarter, we evolve and out of the ether comes new models (simpler perhaps?), More integration, and, dare I say it, collaboration.
As always, in the wine, the way forward is together. RIP Amazon Wine, Long Live DTC.