What Business Model Will Emerge as the Winner in Direct-to-Consumer Wine Sales?
This article was originally published on Wines & Dimes on June 19. 2017.
There is no doubt that direct-to-consumer (DtC) is the growth engine of the wine industry.
While overall wine sales in the U.S. generally hover around 2–3% annually, DtC wine sales are up double digits and now represent approximately $2.5 billion in annual sales.
With new states like Pennsylvania and Oklahoma easing restrictions to allow DtC shipments, and with a proliferation of web and mobile based services offering wine delivered to your door, it is easy to see how the growth trends will continue.
The question, therefore, is what business model will emerge as the winner in DtC wine sales?
There are multiple variations of the DtC business model, but when you break them down there are basically 3 differentiating models:
1. No Commitment Required (NCR) — as the name would suggest, buyers simply take advantage of the deal and/or inventory available at the time of purchase, with no obligation to make any future purchases. This is much like the traditional e-commerce model pioneered by wine.com in the original dot-com era and now include variations ranging from flash sites such as Lot18, Garagiste, WineAccess, Last Bottle and SommSelect, to more ingenious options like Underground Cellar, WineBid and Vinfolio. Note: I have excluded Amazon and eBay from this category even though both have tried (multiple times) to get into wine.
2. Commitment Wine Clubs (CWC) — unlike the NCR model, the commitment clubs are based on a subscription model. The terms of the subscription may vary from monthly to quarterly or even annual shipments, but the basic premise is to generate recurring revenues, much like Blue Apron does with meal kits. Some examples include Winc, Tasting Room (now part of Lot18), Uncorked, Bright Cellars as well as wine clubs sponsored by media outlets such as Wall Street Journal and NY Times.
3. Membership Wine Clubs (MWC) — unlike the CWC model, there are generally no automatic shipments of wine, however members pay a fee (typically annually or monthly) with the membership proceeds used to subsidize wine purchases and/or shipping costs. This is much like a Costco membership or Amazon Prime account. Some examples include Splash Wines, Naked Wines and Plonk.
“Despite the variety of options across these three business models, we have yet to see a real winner emerge.”
Yes, there are some thriving businesses listed above, but nothing that even compares to the consumer direct brands from other industries.
“Where is the Warby Parker, Dollar Shave Club, Chewy, Bonobos, Casper or Everlane of the wine industry?”
Surely in a $38B annual industry, there will be at least one dominant brand to emerge in the direct-to-consumer wine business.
There are several unique qualities of wine that make it hard to conquer in the direct-to-consumer world: wine is heavy, temperature sensative and expensive to ship, it is a consumable and therefore does not lend itself well to returns, and is mired in antiquated regulations.
That said, all of those problems are solvable. Companies like Casper and Wayfair ship heavy goods, Blue Apron ships perishable consumable foods every day, and a variety of third party services like ShipCompliant make navigating the regulations easier than ever.
So back to the question of what business model will emerge as the winner, in the end, it may not be the model that defines the winner, but rather the characteristics that have made other DtC businesses successful. The winner(s) will likely incorporate the following:
- Free shipping — this has become almost the ante to be a top DtC player and many of the wine companies listed above already offer free shipping (typically with a minimum purchase).
- No haggle returns — you obviously can’t return an opened bottle of wine, so this means when a customer complains, the winners will give the customer a credit, no questions asked.
- Loyalty programs — the goal is to create lifetime value (LTV) and the winners will utilize innovative loyalty programs to maximize repeat purchases and minimize subscription churn.
- Improving quality of wine sourcing — the mistake that others have made is starting off by offering name brand wines at low prices, only to shift to lower quality private label brands over time — consumers will notice and churn will follow. Winners will constantly up the quality levels through scale.
All the other features like personalized tasting algorithms, large wine content libraries, online cellar tracking features, etc. are all “nice to have” but not what will truly define the winner.
Given the DtC growth trend in wine, and the good examples of DtC brands to follow in other industries, we will see one or two household names emerge in the wine category… it is just a matter of time.
That said, the companies that focus less on the business model and more on delivering superior quality wine with exceptional service — the hallmark of all the great DtC brands — will emerge as winners.