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The Local Wine Store’s Advantage vs Pure Play Internet Retailers

In previous posts  A Plan to Launch a Long Tail Store Selling Wine Online and  The Long Tail Wine Website I outlined

  • a wine drinker type, called the Experimenter, who wanted to seek out information about wine niches and give them a try
  • wine retailer experts who had all the information the fellow above wanted about particular wine niches that the retailer was passionate about
  • how the new venture would connect the two using the internet to sell the retailers’ wine directly to these wine consumers

I then alluded to all sorts of problems not the least of which was that snooth had just launched and did something similar. So in this post I talk about why I never took my new venture past the test stage.

In essence there are all sorts of advantages a local retailer has compared to a national online retailer.

But the key reason was simply freight cost. Here’s the longer explanation…

There is a huge difference in physical and digital distribution.

Digital distribution requires very cheap internet bandwidth. Physical distribution requires packing and freight. So I disagree with people who talk of the inevitableness of internet taking over the physical retail sector. The obvious cost advantages in distribution are just not there.

Let’s take the wine industry. The winery and national wholesalers deal with pallets, layers and cases of wine. It costs about the same to send one bottle of wine across the States as it does to send one case. In fact if you have to break a case from a pallet and then take a bottle from the case then it arguably costs a large operation even more to sell a single bottle than a case.

Here’s what the Economist magazine said in an eCommerce Special Report (Feb 24, 2000) in a section called Distribution Dilemmas,

Distribution Dilemmas

“… two things soon became clear. One was that shipping costs were (and remain) one of the biggest deterrents for consumers considering online purchases of physical products. The second was that traditional warehouse and distribution centres were not well suited to the business of e-commerce fulfilment: if it is to work properly, it needs newly designed systems.

Both these things have combined to undermine some of the economic advantages of online shopping.

Perhaps this should not have come as a surprise. Physical shoppers, after all, handle their own order fulfilment, by choosing the goods and paying for them at the check-out, as well as their own delivery, by personally taking them home. And they do all this at their own expense, in both time and money. Merely to replicate this system efficiently, down to the individual consumer, is demanding enough; financing it, whether by absorbing the cost or by adding it to the bill, makes iteven harder. It might have been better had e-commerce firms given more attention to this end of their business first.

Ironically, the delivery problems encountered by pure plays were one of the things that led many traditional retailers to assume that they could do better. Ironically because, here as elsewhere, many quickly found that their own distribution systems, geared to moving goods on pallets from warehouses to shops, proved a disadvantage, not a benefit.

Wal-Mart, for example, has the most highly praised distribution systemin the world: even the tyre pressures of its lorries are calibrated so that, when fully laden with pallets, the vehicles will be at exactly the right height for the unloading docks at Wal-Mart stores. But such a system is unable to cope with individual orders that have to be delivered to people’s homes. So Wal-Mart has had to outsource its website distribution to two rivals…”

The Lesson from Online Grocery

A year later the Economist (25 June, 2001) reports on a UK supermarket’s entry into the States using internet retailing in an article called The Lesson from Online Grocery,

“Tesco’s chief executive, Terry Leahy, says that by using his company’s distribution model he expects the American joint venture to be operating profitably by the end of next year. While Tesco’s distribution methods may, with hindsight, be seen as a clever way to enter a small and uncertain new market, dedicated warehouses may ultimately be more efficient. But it depends on the numbers and geography. Tesco officials have said that before it makes commercial sense, a dedicated warehouse needs to receive about 10,000 online grocery orders a week from its delivery area. At present, there are rarely enough people in one area ordering their groceries by computer to justify that. But in time there might be. So, as with many dotcom ideas, the pioneers of online grocery may simply have been way ahead of their time.”

Actually they weren’t. Peapod struggled, Webvan went bankrupt, and Tesco sold out of the above operation in 2006.

I hear mixed results about wine.com‘s profitability. I imagine it faces a similar conundrum. It needs about 10,000 (maybe fewer?) online orders per week from its delivery area to justify a dedicated warehouse (I think they have 10 warehouses across the country?). Wine.com and the national online retailers assume that their most accessible population is the US population less children, teetotalers etc.

In fact its accessible population are those within 15-25 miles from their warehouse based off the online grocery model, not 300 million. Perhaps 1 million if they’re lucky, more likely about 50,000 (2500 to 5,000+ people per square mile) depending on the county.

Santa’s Helpers

So if you’re going to only sell locally, and the population isn’t numerous enough to justify a dedicated warehouse, what do you do? Open up a retail store of course.

The Economist again (May 13th 2004), in an article called Santa’s Helpers,

“Lots of consumers clearly see useful connections between the online and offline worlds. Many of the big retailers with websites, such as Circuit City and Sears, offer the option of picking up the goods in their shops. This may seem old-fashioned, but it is surprisingly popular.

That could be because people can’t or don’t want to wait for a delivery van to show up, or they are in a hurry, or they don’t want to bother with a salesperson, or they know they can return what they buy if it goes wrong, or they just want to save on the delivery charge, especially if it is something heavy.

At Sears, 40% of online sales (excluding garments) are now picked up in store.”

In a previous post I talked about Macy’s CEO saying $1 of online sales drives $5.70 of offline sales. Most consumers want the convenience and information of a website, but don’t want to wait for delivery, and do want the trust of a local store.

So let’s go over the pros and cons of online eCommerce in the wine retail industry.

Advantages of Selling Wine Online

  • You can sell all over the world at any time to of they day.
  • It’s more convenient for time poor consumers who don’t want to drive, find a park, walk to the store, ask for product information, and wait in checkout line.
  • The internet and retailer websites can provide a vast array of content (reviews, ratings, recommendations) as well as advanced sorting and screening and even virtual wine cellars.
  • Sophisticated direct marketing can be conducted using databases and purchase history. This can lead to more repeat custom.
  • For some industries there are lower distribution costs e.g. music, newspapers, DVDs. Sometimes a wholesaler can be avoided like in the case of Dell Computers. With wine in the US this advantage is not as apparent.

Disadvantages of Selling Wine Online

  • Consumers do not have the instant gratification of possessing (and soon drinking) the wine. The mail order industry has been limited to about 3% of total retail sales in the US. Internet only, or pure play retailers, probably face the same issue.
  • Many like the ambience of a fine wine store and find it integral to the shopping experience. Sending single bottles of wine can be very expensive from a order processing, packing and shipping perspective. When a consumer “picks up” they are in effect using packing and shipping themselves at their cost of time and petrol. So retail stores may actually be the most cost effective way to get a wine from the winery on one side of the world to a wine drinker in the middle of New York.
  • Some people enjoy going out to shop. Men often joke about women being addicted to shopping when in fact some of us in a fine wine store can be just as bad. The actual purchase of shoes (or wine) is only one part of the shopping experience where as diversion from the routine of daily life, exploration of trends etc can be more important.
  • Search engine result pages and poor websites can be confusing and frustrating rather than a seamless simple process that they should be.
  • Some consumers still have concerns about using their credit card (which they shouldn’t be) and giving their personal details online (which is perhaps more reasonable).

Credit to that most ardent of internet critics, Bert Rosenbloom of Philadelphia in his Marketing Channels book for some of the above.

In Summary

If you’re selling a digital product such as music or have a low mail and handling cost product then an internet only business could well be very profitable (heck just look at Amazon with books and Apple with music).

If freight and handling are a significant cost then the internet will be a means to pre-sell the product with the actual sale more likely being made in-store rather than online. And I believe this applies to the wine retail industry.

The exception is case lots of wine which have sufficient margin to cover freight costs and lower handling costs – but still suffer many of the disadvantages listed above.

So that’s why I am a strong advocate of local wine retailers selling wine online.

And why I don’t think there is a business case for a long tail national wine online retailer.

What are your thoughts?

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  1. […] 26, 2010 · 0 commentsIf you’ve read my recent posts you’ll know why I’m such a strong advocate of local wine retailers selling wine online. It’s from brutal experience in setting up my own venture to sell wine online.The Local […]

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