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Dotcom Diagnosis

Wine retailing in the UK and dotcoms have one thing in common. Very few people are currently making any money out of either of them. Put the two together and you would have thought this was a business proposition few intelligent operators would touch. Yet despite this gloomy prognosis, the number of dedicated wine e-tailers competing in this embryonic market continued to grow in the last quarter of 2000. Two new players joined the sector, one niche (winesmart.com) and the other mainstream (everywine.com); while, perhaps presaging the shape of things to come, Sainsbury's and Oddbins have just unveiled a "direct-to-consumer" wine joint venture to launch later this month, in which wine e-tailing will play a major part. Whether or not a company solely involved in wine e-tailing can remain viable in the British market in the longer term remains to be seen. There seems to be general agreement, however, that currently there is not enough demand to keep afloat the ten or so companies for whom selling via the Internet is a central plank of their business. Consolidation is expected this year, with the weaker operators going bust, joining forces or linking up with other more traditional wine retailers. Mark Bedini, managing director of madaboutwine (madaboutwine.com) - an e-tailer which evolved out of a mail-order business begun in the mid-90s and went live under its new name (it was previously called amivin.com) at the start of 2000 - believes there is "room for only three companies which are primarily e-tailers in the UK market and this may consolidate to two in the longer term". Bedini is also sceptical about the chances of success for any operation which did not launch well before Christmas 2000. In this extremely competitive sector it would be very hard for any newcomer "to build a brand from nothing", he said. "The only way for a new player to become established would be to buy an existing wine e-tailer." Bedini also believes that companies cannot be built on the Web alone. "No serious business is going to succeed if it's purely Web-based. There's no commercial logic in excluding traditional channels to the consumer; we (madaboutwine) have never espoused that theory. The website and all the technology needed to run it come first, but we always planned to roll out brochure and catalogue sales as well as the online shop, which gives people the content-rich environment to do research before they buy." Bedini does not rule out bricks and mortar in the future either. "We always wanted to have some sort of physical presence, but I can't say what that will be. We're looking at presenting wine in a new way and there's an opportunity there," he said. Madaboutwine's purchase of mail-order wine business World Wines Direct, which was bought from the De Vere group in November, and its trading agreement with Waverley Direct, the mail-order enterprise previously owned by Scottish & Newcastle, show the company's interest in this closely related sector. Bedini, however, said both buys were more about obtaining another 100,000+ appropriate names for mailing purposes. "This was a huge step in growing our database, giving us the ability to mail more potential users the big book of wine'," (madaboutwine's 12-page Christmas catalogue of made-up six- and 12-bottle cases which also included one-, two- and three-bottle gift selections).

Converting leads

Building up a database of potential users is clearly an early goal for businesses based on Internet sales. However, while this process needs to continue, converting these and other first-time buyers - many attracted initially by special offers in newspapers and magazines - into regular loyal users is the next vital stage if these fledgling companies are to survive. This is the problem the company is currently trying to address at Virgin Wines (virginwines.com), which was a relative latecomer to this sector, going live only in mid-June 2000, having started from scratch, albeit with the help of Orgasmic Wines, which it bought out pre-launch to gain some knowledge of the market. The Virgin site was pretty dull and slow to navigate, with little in the way of interesting add-on features when it first started up. But at the launch of phase two in early October 2000, significant improvements were unveiled and the BOGOF ("buy one get one free") case offer it ran between 28 September and 23 October attracted a great deal of media attention to the whole wine e-tailing sector, as well as a lot of first-time buyers. The offer of a free case of wine worth at least 65 at retail to anyone purchasing a single case of recommended wines (possible to buy for less than 40 plus 4.99 delivery) "initially caused a 500% increase in sales volume," according to Virgin Wines marketing director, Chris Mitchell. The problem was, and still is, how to keep such customers loyal. Mitchell sees wine e-tailing as "a saturated market with everyone chasing after the same people". Fickle customers move on to take advantage of the next discount available as each site comes up with a new offer to attract business. For example, during its launch period Wine Planet (wineplanet.co.uk), the UK arm of the leading Australian e-tailer which opened for business here in September 2000, was offering a 20 discount on first purchases from the site which were worth over 60. "The only way to break out of this circle is to offer something that nobody else can," said Mitchell. "While the initial offer can get people buying, nine out of ten go only for the bargains and introductory discounts." There are other unattractive aspects of user buying patterns. The two worst days for online purchasing on the Virgin site are at the weekend. Mitchell partly puts this down to what he calls "computer nausea' - after spending all week in front of a computer, the last thing people want to do is go online at the weekend". While this is not a phenomenon likely to delight the wine e-tailers, more encouragingly Mitchell also believes sales at the weekend are low because many potential customers still have Internet access only at work, something which is likely to change rapidly in the future.

Increasing mail order

To improve business Virgin, like madaboutwine, will be doing more mail-order business this year to acquire further customers. "We'll use mail order to get the message across and then encourage them to switch to the advantages the site offers." But while mail-order business will increase in the short term, Mitchell insists that Virgin "wants to remain 95% a wine e-tailer. We want to keep this part of the business high because it's much cheaper to service your customers over the Internet than by mail order, and you can't operate things like our wine wizard' on paper." Customers using the wine wizard icon are asked to answer a few simple questions online, and at the end of the process a "personal" list of wines is created from Virgin's selection which aims to meet their tastes and suit their pockets. "Ultimately regular, loyal customers will be sent an e-mail offering them a case of wine they know they like, at a price they are willing to pay, and to buy it they will just have to hit a button." Looking ahead, Mitchell views 2001 as a key year for the market and expects half the ten or so specialist e-tailers now operating to go under, or merge with a bigger player before the year-end. "Everyone is looking at everyone else, while there's fierce competition, there will no doubt be phone calls and meetings to discuss the future, but we are secure in ourselves."

Home delivery

Given that selling wine over the Internet has not taken off in the way that was expected only two years ago, the e-tailers' growing interest in the mail-order market is understandable, particularly as it is one sector of the wine business that has grown rapidly over the past decade. Home delivery (including mail-order, telephone and Internet business) is now reckoned to account for at least 10% of total UK off-trade wine sales, which are worth 3.5 billion a year according to AC Nielsen, and forecast to grow by 46% to 5.1 billion in 2004. The home delivery sector itself is expected to double in size over the next five years. The leading UK mail-order business, Direct Wines, which claims to be the world's largest home delivery merchant (its trading arms include Laithwaites [formerly Bordeaux Direct], The Sunday Times Wine Club and the British Airways Wine Club), had a turnover above 150 million in the calendar year 2000, according to Tony Laithwaite, the man who started the company back in 1969. "Sales are up 30% through the autumn 2000, this increase alone represents the size of the total business five years ago," he said. When e-commerce was all the rage a couple of years ago, Wine Direct, fearing that the new wine e-tailers would eat into its business, developed websites for both Bordeaux Direct and the Sunday Times Wine Club, which were launched respectively in November 1999 and January 2000. Laithwaite was originally "very enthusiastic about the whole e-commerce thing. I thought it would quickly account for 50% of our business," he said. In reality things were very different. As dotcoms generally fell out of favour on the stock market, so investment in this sector slumped. The complete reshaping of the Bordeaux Direct site last autumn (timed to coincide with a change in name to Laithwaites) turned into what Laithwaite describes as "a technological nightmare. I kept looking for the site and not finding it. We got it badly wrong, the people putting it together couldn't deliver, although it's working now OK. We're going to do the Sunday Times site next, although I'm wondering why we're bothering." A potential e-tail boom pre-Christmas 2000 was not realised, but Laithwaite explained: "Sales have stayed roughly at the same level since the summer. Fortunately we kept the old Bordeaux Direct site running, as we will until March 2001, and a large chunk of sales still came from there. It's not so sophisticated but it worked, we won't switch the Sunday Times until its new site is fully operational." It's not a surprise to hear Laithwaite declare he is "not entirely happy with e-commerce. I think to a certain extent the whole business world has been ripped off. The technology side is such an unknown quantity. We found it surprisingly difficult to get it right. I don't think the technology generally is good enough yet; they sell stuff which isn't ready, it's a notorious business for that." Despite the setbacks, selling wine through the Internet brings in 6% of Wine Direct's total sales, said Laithwaite, which with overall business set to top the 160 million mark this financial year means close on 10 million. "Six per cent is still pretty good, it's replaced fax orders largely," he said. "Some of it is incremental, we use it to recruit; about a third of what we get on the websites is new business." Having been over-optimistic about e-commerce in the past, Laithwaite is cautious about making further predictions. "I don't think there are many people out there who weren't ordering wine, who suddenly do now because they can via the Web. I doubt if there has been much switching from shops either." He also believes that people have reacted recently against spending so much time on their computers. "In the future e-tailing is just going to be part of the general mix." Laithwaite notes one side effect of the predicted boom in wine e-tailing, and that is the shake-up of the courier and delivery business. "There were a lot of delivery companies set up in expectation of an e-commerce boom, there was even one just for wine deliveries in London, a good company with proper backing." However, having secured Wine Direct's London business (and Laithwaite said that is about a third of total sales) this company went to others hoping to get a similar amount of work. The fact that they could not secure anyone else's wine deliveries gives an idea of how little there was going on, he said. The predicted e-tail wine sales boom just did not happen. In fact, due to its failure to win more business, the company shut down and pulled the plug on Wine Direct in the middle of the pre-Christmas rush, leaving a logistical nightmare. Apparently White Arrow saved the day, having earlier in the year helped the company through the fuel crisis as a result of thoughtfully stockpiling volumes of diesel. Most customers received their orders within 21 days, even though some wine had to be reclaimed from the failed company's warehouse first. Laithwaite said it was the "cleanest Christmas we've ever had in terms of complaints about non- or incorrect delivery". He asserted that: "Some of the new boys got it really wrong." Laithwaite is not unduly concerned about the move into mail order by the likes of Virgin and madaboutwine. "I am a lot less worried than I was this time last year, now I know what we are competing against. It's not true that it's cheaper to get sales via e-commerce. It's a myth, like the paperless office. You still need people to communicate back with customers sending e-mail messages and unlike the post, they can arrive around the clock."

Customer care

"Looking after customers is what mail order is all about. A lot of direct mail is badly done because it involves only one sale. Wine is different because people want to keep re-ordering; a lot of our customers have been with us since the beginning. In mail order you can look after your good customers: if they reveal a liking for Sauvignon Blanc say, when you get something good you can offer it to them. Customer loyalty is the whole key." With about half a million regular customers, defined by Laithwaite as "those that order at least twice a year, or when we mail them", Wine Direct must be doing something right. "Our customers spend on average about 300 a year, they are serious wine drinkers." The crash in e-commerce shares and the resulting lack of investment funds to trumpet the launch of wine e-tailing in Britain has had a major impact on the approach to the UK market taken by Wine Planet (wineplanet.co.uk), which launched its website last autumn. "When we made the decision to start up in the UK in early 1999, the e-commerce market was buoyant and all the major players were talking about listing (on the stock market) before the year end," said Rob Walters, Wine Planet founder. "By the time of our launch the position had changed radically and it was clear that e-tailers were not going to be able to run the kind of aggressive PR and marketing campaigns that drove the growth in e-commerce in the USA and Australia. "There are two main approaches to wine e-tailing. You can either produce what's really just a sophisticated style of catalogue, or alternatively use the Internet to its full extent, incorporating video, personalisation, quality journalism and interactive technologies into the shopping experience. This latter approach, which we took, is much more exciting for the consumer and much more expensive. But now the opportunity to follow this route has largely evaporated," said Walters. "It is unlikely Wine Planet would have evolved in the traditional business environment. In the then buoyant e-commerce climate we were allowed to invest money to turn customer excitement and loyalty into growth, market share and longer-term profit. A traditional environment would have demanded a profitable return in the shorter term. "In the UK we have been far more careful. We haven't gone out and aggressively advertised and this has impacted on the growth we've experienced. I think this reflects the general wine e-commerce experience in the UK," continued Walters. "Most of the significant players started trading when the e-commerce market was turning', so access to funds was immediately curtailed. I think it's also fair to say the market is both smaller and growing more slowly that most people envisaged it would do. "Before the market turned, e-commerce investors were far more concerned with first-mover advantage and growth. Profitability was something to worry about later. This worked in growing the market, as players were able to invest aggressively in acquiring customers. But those days have gone, it's much tougher now because you are operating in a traditional investment environment with a radically different channel," said Walters. "It's a big thing to change people's buying behaviour entirely with limited marketing spend and, considering the embryonic nature of the UK e-commerce market it won't allow for as many major players as was originally thought, especially in the short term. It will also be a far longer road than most analysts originally predicted," he added. Lack of finance to fund growth will lead to consolidation in the industry, with the more traditional retailers actively interested in working with e-commerce companies. "It's too early to assess what form this co-operation will take. Everyone is talking to everyone else right now, so who knows what deals will be struck. Unlike in Australia, the big UK supermarkets have been pro-active in examining this channel and are very active in it." As to the company's intentions in the UK market, Walters said that: "Thanks to raising finance at the height of the e-commerce boom, Wine Planet is in a far more stable position than most of the UK players. Also we are able to leverage off our Australian infrastructure - website, development, content, management. That means we are able to sustain the UK operation at a far lower cost than if we were a UK-only player. We made the appropriate cutbacks to the London operation before Christmas to allow us to grow the business in a sustainable way and head towards profitability as soon as possible." Asked if this meant that Wine Planet would be in the UK in the long term, Walters replied: "As a publicly quoted company those are decisions for our board and shareholders. We are still committed to the UK and there are a lot of good reasons to stay. But it presents us with a different set of challenges, we have to move to profitability, not just chase growth." Like most, if not all of the other major players, Wine Planet is entertaining the possibility of some sort of partnership after being approached by a number of parties, said Walters (see news story). "As our costs are relatively low, we don't have to find a deal tomorrow, but we are always open to talk. It feels like we are all at a public dance, no-one is quite sure who will leave the room together and no-one is sure who will be left without a partner."

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