It May be Time for Online Wine

A decade after the nascent online wine sales industry seemed to implode, it’s time may have come.

At least, a number of online wine retailers are finding ways to capitalize on some trends that provide the industry more promise than ever before.

“[Online wine] is a huge category and almost all retail verticals will go online in some form or fashion,” says Amish Jani, co-founder and managing director of New York-based firm FirstMark Capital.

Jani is not just an enthusiast of online wine. He’s an investor in one, too. FirstMark has helped pour $13.5 million into New York-based startup Lot18 and led the startup’s $3 million Series A round last fall. The firm also participated in a $10 million round in May that was led by New Enterprise Associates.

The company, among the most buzzed-about new entrants in online wine sales, invites members to purchase fine wines straight from producers via an online private sales club. And though Lot18 doesn’t release any revenue figures, its employee headcount has soared from 6 to 75 since its launch last November. The company now expects to have more than 100 employees by the end of the year.

Lot18 is fueling its growth by connecting customers to small vineyards via its growing, daily email list, says CEO Philip James. He tells VCJ that 300,000 people have already signed up and that the service adds “several thousand” new members each day.

New users are coming, he says, because “unlike a traditional store that will have several thousand products at any one time, we have a small but ever-changing product selection of the day” that teams of curators, who live in Napa and Sonoma counties and in Washington state, who negotiate to bring to Lot18’s customers.

James adds that “unlike a flash sales site, it’s not all about getting discounts. Many times, it’s an access play.” For example, he points to the Williams Selyem Winery in Healdsburg, Calif., whose membership list has a 3-year wait, according to James, but that has sold wine through Lot18.

As another example of how Lot18 provides access to exclusive wine, not deals, Jeff Clavier, founder and managing partner of SoftTech VC (which is not an investor in Lot18), recently tweeted that he bought the 2008 Portalupi Russell Family Pinot Noir through the site. The Russell Family Vineyard is a relatively small operation, offering only 288 cases of the vintage

Jani calls Lot18 “part of a new wave of online companies that provide demand aggregation, in some senses much like multi-line retailers did in the offline world, except these online companies offer consumers exceptional efficiency in discovery, curation, and value.”

The trick, he adds, “was creating a product that actually inspires consumers and gives them an incredible experience.”

Or maybe like a fine wine, the industry just needed time to develop fully.

Even Wine.com reached profitability this year for the first time in its 13-year history. That’s no small thing for CEO Rich Bergsund, who was installed at the head of the company in 2006 by the private equity firm Baker Capital. At the time, Baker had just recapitalized the company with $12 million. Baker put another $5.25 million into Wine.com the following year.

Bergsund joined when the business of selling wine online looked like a fool’s errand. The first iteration of Wine.com, founded in 1994 as Virtual Vineyards, reportedly blew through more than $100 million before eVineyard acquired it for $10 million in 2001. After the acquisition, eVineyard, which had raised roughly 10 times less in venture funding, renamed the combined company Wine.com.

Profit remained elusive until this year. When the San Francisco-based company’s fiscal year ended March 31, it reported revenue of $56 million, up 25% over the previous year. And it’s on track to see as much growth again this year, says Bergsund, partly thanks to initiatives like daily flash sales, which the company began orchestrating last year.

Bergsund says flash sales accounted for nearly $4 million in revenue over the nine-month period ending in March, and says that half of those who’ve joined Wine.com’s 60,000-person email list are new customers.

“It’s a different purchase occasion,” Bergsund says. “It’s not where you go when you want a big assortment or have something specific in mind. What you see is what you get. But there’s a segment of the population who wants to know what that deal is.”

Bergsund also credits the company’s success with doubling its inventory over the last year, adding both wines highly rated by critics and that also sell for $20 or less, and “collectible” wines that improve with age.

That makes sense to Patti Freeman Evans, a research director at Forrester Research, who observes that wine collecting is increasingly en vogue.

“Even with the economic woes that we’ve been impacted by, there are certainly people continuing to build within their houses places to store wine,” Evans says. “It’s just more a part of our culture, and the Internet is a great place to get credible information [about wines] or to get that case of wine you’ve always loved.”

Forrester doesn’t break out wine collecting, but Evans says that that “art and collectibles,” including wine, is expected to be a $2.4 billion market this year.

She also attributes the industry turnaround—if it can be called that—to a 2005 U.S. Supreme Court ruling that made it illegal for state governments to prohibit residents from ordering directly from out-of-state wineries. In ruling that Michigan and New York had enacted protectionist laws that unconstitutionally discriminated against wineries from other states, the court said that the states’ claims of possible lost taxes or shipments to minors didn’t justify the measures they were taking against direct shipping.

Unfortunately, there are still plenty of laws that complicate the shipping of wine between states for reseller and wholesalers, which is why Wine.com operates six warehouses countrywide. Wine.com can’t ship a bottle from California to New York, but it can ship a bottle of California wine to someone in New York from its giant warehouse in Long Island.

Those laws also explain why unlike Wine.com, Lot18 never takes ownership of the wine. Rather, it enables customers to buy the wine using its platform, as it manages the process, including the necessary customer service and marketing in exchange for a per-bottle-sold fee that ranges from wine to wine. Outsourced logistics providers actually pick up the wine and transport it in refrigerated trucks to local UPS hubs.

Either way, the news looks mostly bright for online wine sales, especially since the overall wine industry has grown so substantially. The number of U.S. wineries has ballooned from 300 to roughly 6,500 over the last 30 years, according to Wine Business Monthly. The surge has created many winemaker customers that are looking for ways to cost-effectively manage their short-term oversupply.

This time around, it may be enough. Certainly, the market opportunity still seems huge. Benson Marketing Group, a Napa Valley wine marketing agency, reports that just 10% to 20% of wineries’ business comes from the Web. Meanwhile, according to the Wine Institute, the U.S. wine industry is a $30 billion business.

Bergsund of Wine.com will be playing up the opportunity when he meets with potential investors. He says he’s about to go looking for a fresh round of growth funding in the “$10 million to $15 million range.”

“The growth is still ahead of us,” he says.