May 5 2011
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.
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.”
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 …?
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