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Lot18 and the Art of New Market Models

The funny thing about business models is that when start-up businesses position around new market dynamics they do one of two things:  They paint the exact picture of their business for casual observers (and competitors) in Manet-style realism or they don’t, leaving the mind’s eye to make Monet-style impressionistic leaps.

Perhaps this is why Philip James’ new venture, Lot18, is being lumped into the “Flash wine site” category when it appears to be much more significant (even if impressionistic).

When I covered so-called “Flash” wine sites last July, Lot18 hadn’t yet launched and my opinion then (as it remains today), was to urge caution with many of these sites because most don’t appear to be businesses with a vision that can grow into full-fledged ongoing concerns with an impetus bigger than capitalizing on the short-term oversupply of luxury-priced wine as a retail operation.  The word “Flash” has been equated to, “Flash in the pan” meaning that these sites will be here today and gone tomorrow.  Many others have opined similarly, including a recent run of punditry from the New York Times, Wines & Vines and Palate Press.

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While each of these articles touch on the obvious vagaries of the model with a winery-slanted spin about whether the online wine sales sites are predatory vultures, there’s a much bigger view to look at – a market dynamic that I think Lot18 sees as an ownable market space where other sites (and writers) see an ecommerce retail operation.  And, it has virtually nothing to do with being predatory.  Instead, it’s about creating a solution for a problem that has existed for ages.

Instead of viewing Lot18 like another in a long list of ecommerce sellers responding to the here and now, I think James sees a much bigger business model that can bypass the three-tier and capitalize on the age-old problem of winery inventory management vintage by vintage, a problem that has typically been handled very quietly in the three-tier, a system that is closed off to the majority of the boutique wine market.

It’s a subtle change in perspective, but rather significant.  It’s the difference between selling a few wines that can sell at $60, but not $80 as a one-off deal based on the current economy and creating an entire mechanism for inventory management that has bedeviled the boutique wine market.

As one small Mendocino vintner without a distributor infrastructure said to me, “I’m ready to release my ’09 Chardonnay, but I need to move 70 cases of the ’08 first.”

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Yeah, him and about 5,000 of his winery brethren, too.  Likely, that’ll be the case next year and the year after, as well.

By common analogy, I think Lot 18 sees a wide and deep market-altering Amazon.com-style opportunity where others see Fatbrain.com, a little known ecommerce bookstore for technical books circa 1999.

Sure, I groaned when I read a recent article on Lot18 at Business Insider.  There, James was quoted as saying, “No matter how fast we hire, we have more openings than we can actually fill.”  In total, the short piece smacked of hubris.  But, James also said something really insightful when he noted, “(Wine) is a $30 billion niche.  It’s bigger than music, it’s bigger than Hollywood, and it’s bigger than DVD’s and cinema.  I guess you can call that a ‘niche.’”  That was on April 26th. 

On April 29th James wrote a blog post at his personal site discussing in very obtuse terms the arrows that companies take in the back when they have, “First Mover Advantage.”  He noted, “There’s a first mover advantage to what we do, and we’re happy to be leading the way. It’s not cheap going first, and that is the flip side, but by leading and paying to pave the way we do get to define a portion of the landscape.”

An alleged “Flash” wine sales site that launched in November having “First Mover Advantage?”  What the …?

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On May 2nd Lot 18 announced a $10 million dollar round of series B financing, adjoining a $1 million dollar sales month in March and April.

Clearly, there’s more here than meets the eye.

Despite having worked at three venture capital-backed companies, I don’t profess to know much about the VC game.  However, I do know that in this day and age, VC guys aren’t throwing $10 million into the 40th wine-related “Flash” site and the 196th social commerce business plan they’ve seen in the last 12 months unless there is a vision for something that the rest of us can’t yet discern.

What precisely Lot18’s VC’s see is between Lot18’s business plan and the banker’s in wingtips, but what I think they see can best be typified by a quote from Jeff Stai, owner of Twisted Oak winery in the Sierra Foothills who was quoted in Palate Press regarding a sale at another flash wine, “… We sold 683 three-packs, which is roughly three pallets of wine. I’ll sell three pallets of wine all day at near-FOB!” 

FOB is a wine industry term for the winery sale price to a distributor.

What Stai didn’t say, but he could have was, “If I can close out a vintage and maintain a margin that I’m happy with and not have to deal with the incredibly inflexible, non-partnership oriented three-tier, who greedily eat my discounts instead of passing them to the customer,  I would love to.”

So, if we go back to quotes from James about how big of a market wine is and you consider that closeout discounting to this point has only occurred in the three-tier system, you can start to see the seeds of a business model emerge that’s much bigger and will surely outlast the “Flash” sales sites that operate like retailers in a short-term bubble. 

There currently isn’t a vintage closeout or inventory liquidation mechanism in the wine business outside of the closed off three-tier system.  Every other consumer packaged good vertical has a closeout function typically handled by brokers.

Ding, ding.  This is why Lot18 is nationally hiring, “Wine Procurement Specialists” – these are the equivalent of brokers who facilitate the sale of goods that need to be closed out.

It sounds so simple, but really the business perspective difference in between being a small-time “Flash” operator and building the infrastructure that Lot18 is putting in place is significant in vision.

So, are these sites “predatory vultures” perilously taking advantage of wineries in short-term time of need, as has been alleged?  It’s all in your vision of the business model – a model that I suspect is more Manet than Monet for those who look for the fine detail.

Photo credit:  Demetrios Vlachos

Philip James on the funding



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Posted in, Wine: A Business Doing Pleasure. Permalink | Comments (18) |


Comments

On 05/06, Robert Dwyer wrote:

Great piece Jeff. You highlighted two very impactful quotes from Philip James and Jeff Stai.

The statement about the size of the wine market makes it even more mind boggling how behind the curve wine e-commerce is compared to other consumer goods due to interstate shipping laws. It’s great that there’s been progress on a state-by-state level in recent years, but there’s still fragmentation and confusion. It says a lot if Amazon can’t figure it out profitably.

My hope? That HR 1161 blows up in the face of its supporters and paves the way for a discussion on consistent alcohol shipment regulations at the federal level that allow access to all states. A complicated long shot I realize but hey I can dream right?

Jeff Stai’s point should make us all realize that we’re not “taking advantage” of wineries by buying wines from deal sites. This talk about “predatory” flash sale sites puzzles me. Let’s give wineries some credit for being smart business people. They know what they’re doing and like Jeff says - he’s happy to sell 3 palates of wine directly to consumers at the same price as he’d sell through the 3-tier system.

Wine distributors provide valuable services. Seriously! I’m glad to be able to pick up nice bottles of wine locally at fair prices. But if I want to supplement my collection with a few special bottles here and there it drives me bonkers when it’s a hassle because of antiquated direct shipping laws.

Finally, regarding Lot18 specifically…their site is absolutely gorgeous and is as good as I’ve seen in terms of quick clarity. I can quickly tell whether they can ship to my state, and it’s always easy to figure out how much shipping will cost. That seems to be a difficult thing for almost every wine site on the Internet.

Cheers and Free the Grapes!

On 05/06, Julie Brosterman wrote:

I’m always interested in ‘First Movers’ - especially in the wine space and have been watching this one closely. I’m assuming that the new model will be to offer this flash product to all of the publishers that currently have the snooth reviews like epicurious.com.

Flash sites rely on good emailing lists and becoming a trusted source in any business. I personally get 2 messages from Lot 18 daily and repeated requests to make money from referring friends.

Recent studies have shown that emails get stale at a rate of about 25% a quarter so I predict that Lot 18 will move into the food/gourmet goodies arena and other wine related accessories flash space even more quickly than previously anticipated - especially since the recent statement that Gilt Groupe in moving into the space as well with Ruth Reichl at the helm.

It will be interesting to see if others with even bigger followings realize the opportunity and join the race to the top.

Julie
.(JavaScript must be enabled to view this email address)

On 05/06, Rob McMillan wrote:

Without commenting specifically on Lot18, we belive there are two models in flash sites: 1) those that focus on the sourcing looking for cheap wine to sell at discount, 2) those who focus on developing a relationship with the most important asset; the consumer.

More than that, for a flash site to remain as the fine wine business moves into a state of balance, they need to convert consumers to clients.

Having seen decades of supply shifts, I can confidently predict the ability to find 50% off discounts wine will disappear domestically. And while importing foreign wine is a secondary sourcing opportunity, the weak dollar is not helping that equation.

All that said, the perfect company to fill this space will major on the client and minor on the sourcing to provide value. In an era where digital marketing of wine is cutting edge, few wineries actually have that discipline nailed down. Some third party marketing agent will figure this need out and will get a first mover advantage.

Rob McMillan
Silicon Valley Bank

On 05/07, .(JavaScript must be enabled to view this email address) wrote:

How is this a “new” model, when companies like WTSO have been in the business for 5 years? 

While it is impressive that Lot18 has gotten to the 1mm per month plateau very quickly, they have done it by putting together a very large organization, offering lucrative coupons, taking small fees from wineries, and almost certainly losing hundreds of thousands per month.

Only time will tell if they can find a path to profitability or will collapse under their own weight.

On 05/08, Jeff wrote:

Rob,

Do you have a macro sense for winery inventory before and after recession?  For example, 90% of a vintage was sold then versus 72% today.  Even anecdotal information would be interesting.

James - I’m not sure exactly how WTSO operates, details are scant on them, but doubtful they have a national infrastructure or plans to build one for Procurement Specialists, the equivalent of CPG brokers.

On 05/08, Eric Bolen wrote:

I love the debate about this channel.  I am partners is a business that specializes in procurement for this channel and we service numerous sites.  The article misses one of the main points on the longevity of this channel.  The survivors are going to offer more than just discounts.  The companies that are going to make it need to offer strong branding opportunities for the wineries and deliver more than just a discount to the consumer.  Wineries need to leverage this channel to get their stories told.  Stai did that very well with wine.woot.  My one concern with Lot 18 is, where is the wineries story?  They offer tasting notes, but I would like to see them help sell not just the wine, but the winery.  Wine Acces is one channel that does a great job of telling the wineries story.  Wine.woot allows the winery to interact with the potential buyers.  Wine Spies tells a good story on their offers.  Sites need deliver more than just a sales platform to continue to procure wine long term.

On 05/08, .(JavaScript must be enabled to view this email address) wrote:

Jeff,

This highlights the problem with covering private companies.  While it is clear that WTSO has a significant sales lead over its competitors, it is hard to guage whether they are 50% larger, 100%, etc… 

Lot 18 having numerous procurement specialists certainly could give them an advantage (although again, we don’t know what WTSO has) they still need to:

1. Sell the wines they find
2. Survive long enough to find profitability

100 people is a lot of overhead, and unless they raise their fees and/or stop the coupons, their breakeven sales number is many times their current claimed sales.

On 05/08, Jeff wrote:

Eric - thanks for the comment.  I think the jury is still out on whether the winery story needs to be told.  Research about wine purchase decision at retail calls it a very random process.  DTC sales, while more highly involved, still point to the fickleness of the average wine consumer who can be incented based on a score and a discount.  It will be interesting to watch.

James - point taken on the run rate.  Lot 18’s growth has been explosive and they’ll have to maintain that same curve of growth to achieve profitability.  A Business Insider article on the VC funding paraphrases co-founder Kevin Fortuna calling for profitability in 12 months, “Fortuna says he expects Lot18 to be profitable one year from now. Then again, at the rate Lot18 is growing (50,000+ new users per month), profitability could come much sooner than that.”

Read more: http://www.businessinsider.com/lot18-closes-10-million-series-b-round-from-nea-ventures2011-5#ixzz1LmE87uYz

On 05/08, David Honig wrote:

The real underlying long-term question for all these sites, and for on-line wine sales in general, seems to me to be a bit deeper- ‘what are the long-term effects of on-line discounted wine prices?’

Every day I get a dozen or more offers to buy discounted wine on-line. My natural tendency, without even looking at the wine, is to smirk at discounts of a mere 20-30%. Why would I pay $20 for a $25 dollar wine, when the next offer is $25 for a $40 wine, and the one that follows is $30 for a $60 dollar wine.

Is the $20 offer the best wine in the bunch? Was the $60 grossly over-priced? With all the offers pouring in, who has the time to check all that out? First, you have to get my attention, and that won’t happen unless (a) I’m already familiar with the wine, or (b) the discount is a real eye-opener.

My point is really pretty simple. The barrage of on-line discounts threatens to create a 40-50% threshold for consumers’ attention.  If that happens (and I posit that it is already happening) the sites will only serve a purpose in a down economy with people unloading inventory at cost. That is not a viable long-term model.

Wine stores have a different dynamic. People walk into wine stores to buy a bottle. They will still be able to sell at retail. On-line does not offer instant gratification. It has to offer either wine you can’t get otherwise (and Congress could put an end to that any minute now) or wine at an attractive discount. If “attractive discount” is defined by WTSO, Lot 18 will burn through all the venture capital and have nothing left at the end.

On 05/10, Dan wrote:

State shipping laws are absolutely ridiculous. The limitations of getting a good product to the consumer must drive these vineyards insane. It also seems the internet has been helping and hindering sales, whether it be the blitz of social media that gets people involved with events, new releases, seasonals, etc., or the blitz of deals for lesser wines that leads to some of the great wineries getting left in the dust. I hope the good guys survive.

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On 04/13, Croatia wrote:

A Business Insider article on the VC funding paraphrases co-founder Kevin Fortuna calling for profitability in 12 months.

On 08/27, .(JavaScript must be enabled to view this email address) wrote:

The wine market is huge, just think about the refined people that choose a certain type of wine, depending on the meat they order in a restaurant. I was also interested in this business, I had even checked for a loan referral program to get myself started, but after documenting myself about the matter, I decided I need four more years to learn about this delicate market.

On 08/27, .(JavaScript must be enabled to view this email address) wrote:

Dan, state shipping laws are usually really stupid, if you come to think of it, its existence doesn’t make sense - paying for something you own just because you take it to another country. My friend has a corporate video production San Francisco business and he also has to pay for something that will be paid for, once it gets to that other country. How’s that logical?

On 08/27, .(JavaScript must be enabled to view this email address) wrote:

Dan and Kumara, did you know that Constantin Brincusi’s work of art - The Magic Bird, to be precise - wasn’t allowed in USA, because the customs official didn’t want to recognize it as art? It’s too bad he didn’t send his CV along, or perhaps some water resistant business cards, that would have assured them it wasn’t a fraud.

On 11/02, Business foreign exchange wrote:

We have also observed this case. Thanks a lot for this great article.


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