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Amazon's Exit From Wine Business Shouldn't Hurt Wineries' Online Sales

The much-anticipated entrance of Amazon.com into the wine industry has come to an end before it ever got off the ground. The prospect of Amazon’s wine site sent a wave of excitement throughout the industry as small and medium sized domestic brands with limited distribution saw an opportunity to get exposure through Amazon’s enormous book of active customers. For foreign brands, the opportunity seemed even more attractive since imported brands don’t have the same rights to ship wine directly to consumers as U.S.-produced brands do. The Amazon program, in theory, would have provided access to a broad selection of wines from all regions of the world in a reliable, cost-effective approach to consumers in many states across the country.

Because of the large number of brands (6,000+ wineries in the United States alone) and labels that exist in the world, the wine industry seemed ripe for an aggregator like Amazon to come in and help consumers discover and purchase wines that they otherwise couldn’t find in their local wine shops and restaurants. Parallel success stories are easy to find in industries such as books, electronics and music. Sites like Amazon and the Apple iTunes Store are great platforms for exposing the “long tail” of industries that have large selections.

But, distributing wine is not the same as distributing books. Since the ratification of the 21st amendment in 1933, each state has the power to regulate the flow of alcohol within their borders. This system has led to a hodgepodge of antiquated laws that are very different from state-to-state. Much of the existing legislation that regulates the sale and distribution of alcohol was written at a time when lawmakers had no vision for today’s technology that allows for automated payments, electronic title and funds transfers, real-time compliance checks, and online age verification. Because of the conflict between available technology and written law, alcohol regulators are often put in a tough position when the time comes to establish administrative policy and to enforce their statutes. Recently, both the California and Virginia Alcoholic Beverage Control (ABC) departments issued industry advisories in attempts to clarify their statutes and policies. Both advisories make it very difficult for a third-party marketing company, like Amazon, to participate in the sale of alcoholic beverages without actually holding the appropriate licenses to sell and distribute alcohol.

Nevertheless, the challenges that third-party marketers (often referred to as “marketing agents”) face are quite different than the challenges that domestic producing wineries face when marketing, selling and distributing their own products. With the help of technology solutions, wineries can easily deal with the complex legislative rules that come hand in hand with selling and shipping their wines directly to consumers.

There is no doubt that third party marketers can add real value to wineries by exposing them to new customers and providing new sales channels. But, wineries are becoming better and better every year at marketing and selling their own products as well as finding new ways to effectively connect to their current and potential customer base. Additionally, when selling and shipping their own product directly to consumers, wineries gain a significantly larger margin on each sale compared to going through distribution systems.

As the 2009 holiday season (a time when most wineries make a significant share of their sales for the year) approaches, many will be nervous and disappointed to see Amazon exit the wine industry. At the same time, wineries should be excited about taking advantage of the brand building that they have done and finding innovative ways to connect to customers and sell their fabulous products. Furthermore, 2009 was a banner year for wine shipping legislation as three states (Kansas, Tennessee, and Maine) opened up their borders to direct shipment where shipping had previously been prohibited, bringing the total of available “offsite” (states that allow Internet, mail, phone, fax and club orders) states to 37. Although these are not among the top wine consuming states in the country, every consumer counts in this sluggish economy. Free the Grapes! hailed 2009 as the “best vintage since 2005” in terms of direct shipping legislation, and there is no reason to believe that this trend will not continue right into 2010.

6 Comments

  1. I'd agree with the poster upthread–if Amazon couldn't pull it off, no one can. It's a pity, but it might keep a great vintage special, eh?

  2. Tom's comments here (and his complete commentary on fermentation.typepad.com) say it better than I can.

    Frankly, Jeff, Eric and Steve miss the point. The Amazon distribution channel would have been a first step toward exponential growth in wine consumption. The fact that it's demise won't reduce wine sales is trivial.

    If more people have easy access to a broader selection of any product, more people will buy that product. In a country where only 15% drink wine — and most of them at less than $10 a bottle — access and selection are the keys to industry growth. If the 3-tier distributor monopoly is broken, prices will fall. Hundreds of small family wineries in Sonoma County are shut out of the distributor channel, which denies millions of Americans access to their hand-crafted products, which certainly affects price.

    An Amazon channel would have, over time, forced state & federal governments' hands because it would have created a public cry against the distributor monopoly. Without the public being able to experience what some portion of monopoly-free distribution gives them, it's hard for them to see how the monopoly system robs them.

  3. Myth #1 "The vast majority of Americans don't have legal access to the majority of wines"

    Myth #2 "The Amazon distribution channel would have been a first step toward exponential growth in wine consumption."

  4. Jeff, the issue is not about direct shipping. Rather it's about marketing, and online marketing has been hurt. As you note there are plenty of technological tools, and permits, available for winery direct shipping. However you must have customers to ship to in order to participate in the space. What Amazon offered (and what the large brick and mortar retailers have) was access to customers on a real time and convenient basis. The only way to tap that customer base (whether it's Amazon, HSN, The NY Times or whatever) is to pay advertising and/or marketing fees. [to be continued in another comment, teh program made me break it up]

  5. [continued] What the ABC did in the trade practice advisory that killed Amazon was to effectively prohibit paying marketing commissions, which are a staple of every other product being sold in the US marketplace. As long as the artifical (and in my view unecessary and leglislatively unauthorized) distinctions between marketing commissions (not permitted) and advertising (permitted) are being enforced by the regulators (at the behest of your good friends the wholesalers BTW) the small winery will stagnate and the consumer will be denied knowledge about, and access to, small winery products from around the US and around the world. Moreoever, the retailers themselves are being harmed because if they want to provide exposure to wines that they think are worthy they cannot unless they stock up on inventory that can only be used in a limited geographic market. The only similar historical era that compares is the 1890's "Golden Age" of the Trusts when a small cabal of very wealthy men controlled US commerce. One only hopes that the situation changes when the US consumer finally wakes up and realizes that it paying a monopoly premium for a small subset of wine products.

  6. Our winery, St. James Winery (MO) hasn't really been hurt with Amazon pulling out their wine sales. We've had our site up for quite sometime and it can be seen almost everywhere on Missouri Wine sites and is gaining quite some recognition and awards as well. If the wine is good, it will sell itself IMO. I'm even drinking a glass right now of Friendship School Red wine. Delish.

    http://www.stjameswinery.com/shop/wine/semi-dry/f

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