When you’re stuck with a lemon, you make lemonade, but what do you do with sour grapes? Make wine, of course. When a merger between two Web-based wine sellers collapsed, it fermented the birth of a third-party logistics provider that helps direct marketers handle the tricky business of shipping wine, beer, and liquor directly to consumers.
Oakland, CA-based New Vine Logistics — and its back-end infrastructure — is all that remains of Wine.com, itself the result of an Internet merger of Wine.com and Wineshopper.com in November 2000. The Internet bubble burst shortly thereafter, and New Vine Logistics opened for business in June 2001 as a third-party distributor of alcohol, complete with a state-of-the-art, 90,000-sq.-ft. distribution center with automated pick and pack operations located in American Canyon, better known as Napa Valley.
New Vine Logistics has already inked distribution deals with marketers such as The Wine Club and eBay, which tested the wine market during the holidays. According to New Vine CEO Kathleen Schumacher, the company offers a “turnkey solution,” which involves marketing and merchandising plans as well as sourcing the alcohol. New Vine also stores the vintages in its facilities.
Schumacher credits New Vine’s competitive advantages to the warehouse management system put together by Santa Ana, CA-based systems integrator Q4 Logistics and Grand Rapids, MI-based warehouse management system supplier Provia Software. New Vine spent about $10 million configuring the facility (which includes racking) and about $20 million to modify the systems to make them compliant. “The systems are the selling point,” Schumacher says, because they offer “the ability to fulfill legal requirements, execute orders accurately, and allow billing of our customers on a per-transaction basis.” New Vine has the capacity to ship 20,000 orders a day.
The premium wine market is a huge business, worth an estimated $17 billion, according to Wine and Spirits Wholesalers of America, a Washington, DC-based trade organization. It estimates the total market for shipping wine directly to consumers at $1 billion-plus annually. Of course, the wine industry is highly fragmented — there are 18,000 wine producers worldwide and about 700 in Northern California alone.
Without stores or much of a physical presence in any state, online marketers that want to sell wine, such as San Jose, CA-based eBay, are more dependent on firms like New Vine. “New Vine Logistics expands our offerings in the food and beverage categories on eBay and makes it possible for our customers to purchase premium wine from the comfort and convenience of their homes,” says Bob Hebeler, eBay’s vice president of vertical development and community.
Sobering reality
Despite the potential of the business, shipping wine across state lines is fraught with legal and regulatory hurdles. In fact, New Vine — through a wide network of wholesalers and retailers — can ship into only 35 states, an area that, according to Schumacher, covers about 85% of the country. The remaining states, about ten or so located in the Southeast, are what she calls “pick-up states” in which shoppers must travel to the retail store to pick up the wine. “That doesn’t make it very attractive for consumers.”
Many states have reciprocal agreements with other states that regulate the sale of alcohol from state to state. But in several states, shipping alcoholic beverages between states is legal only if done through authorized wholesalers and retailers designated by the receiving state.
“If you’re a winery or wine retailer, you can’t ignore the reciprocity laws,” says David Pearce, president of Canton, MA-based Geerlings & Wade, a cataloger/retailer of wine and wine accessories. “Reciprocity means that if you hold a winery or a retail license in any states, you can ship directly to the consumer in those states. But there are limitations, such as what quantities you can send, and those limitations vary by state.” Geerlings & Wade has retail operations, which double as warehouses, in 16 states.
Here’s how it works: If a company does not have a retail or winery presence in a state, as is the case with eBay in California, it must abide by the three-tier system of distribution. In the three-tier system, an alcohol warehouse or winery, such as New Vine, must sell to a wholesaler, who sells to a retailer, who sells to consumers. In March 2000, the U.S. Congress passed the Twenty-First Amendment Enforcement Act, which gives each state the right to control alcohol shipped in that state. The act reinforces state laws on the books since 1920s Prohibition.
New Vine must also contend with delivery and control-of-product issues. For example, if a customer from Connecticut orders wine during an off-peak period, New Vine ships the wine on a half-empty truck to a wholesaler, who then ships the wine to the (local) Connecticut-based retailer. The retailer then hands it off to UPS, which finally delivers it to the customer. “It can be an expensive way to distribute product,” Pearce says.
Each middleman, of course, takes a bite out of the marketer’s profit. “The three-tier system sets a high barrier to entry,” Pearce says. “It takes establishing a nationwide network of relationships.” Furthermore, the system increases shipping time, so it may take a week to two weeks for a customer to receive a shipment.
By the Book
RECIPROCAL/DIRECT STATES
Products to be shipped directly to consumer from warehouse: AK, IA, ID, MO, NM, WV
MODIFIED THREE-TIER STATES
Products to be shipped directly to consumer from warehouse, but in accordance with the destination states’ licensing, reporting, and taxation statutory and regulatory restrictions: LA, ND, NE, NH, NV, OR, WY
THREE-TIER STATES
Products to be shipped using participating wholesalers and retailers: AZ, CA, CO, CT, DC, FL, HI, IN, IL, MA, MD, MI, MN, NC, NJ, NY, RI, TX, VA, WA, WI
Source: New Vine Logistics