Some big money and some powerful industry insiders have joined forces to build an Amazon.com-type (AMZN) - Get Report Web start-up, which could do for existing wine e-tailers Geerlings & Wade (GEER) and Virtual Vineyards what Amazon has done for small independent bookstores: ease them off the deck and into the circling sharks.
San Francisco-based company
announced a $35 million new e-commerce venture the week before last, dropping a lot of names in its news release, including that of venture capital powerhouse
Kleiner Perkins Caufield & Byers
. The venture aims to offer thousands of wines directly to consumers in every state -- in a totally legal manner.
Naxon CEO Peter Sisson was coy about whether the company already had its funding, but he insisted that his effort was on track to open its e-doors "certainly within the next 12 months, hopefully by the end of this year."
While Sisson would not comment, venture capital sources say he and Kleiner Perkins are pressing hard to strike a
-type deal with Amazon.com -- something that would greatly accelerate Naxon's time to market.
According to Sisson, Naxon plans to create a wine-location system, a nationwide database from wholesalers of all wines currently available in the U.S. Retailers would license the database to look up and obtain wines for their customers. Sisson also said the database would be the heart of its yet-to-be-named Amazon-like Web wine megastore. That name, if Naxon's recent
Web site name registrations are any indication -- will be
Let's call it winezoo.com for now. So, after taking an order for a selection from among its tens of thousands of wines, winezoo.com plans to ship via a legally vetted system that would utilize the existing three-tier system and its 50 different implementations from state to state.
What does this do to Geerlings & Wade, the Boy Scout of direct wine sales, which has its own direct-to-home shipping operation? It puts at risk the entire investment in bricks-and-mortar warehouses and retail stores that GEER has fought so hard to build.
It's not that Naxon's system -- however elegant in theory -- is completely free of the same patchwork of state regulation that has hobbled GEER since its 1994 IPO. In some states, the obstacles are a charge of $25 and up for every label approved for sale in that state. Some states have franchise laws that, among other restrictions, make a winery sign a near-lifetime agreement with a single wholesaler that makes it illegal for a winery to sell through anyone else.
Other states require both wholesalers and retailers to take physical possession of the wine for sale and/or legal ownership, while others have completely different but equally wacky requirements of their own.
Making sense of this viper's pit of jumbled state regulation would be almost hopelessly daunting even for the Kleiner Perkins magicians, were it not for Naxon's very powerful and very politically connected strategic partner,
The Wine & Spirits Wholesalers of America
. The WSWA's members, according to their PR handouts, "distribute more than 90% of all wine and spirits sold at wholesale in the United States." As D&D pointed out
last weekend, WSWA and its members have led the fight against direct shipping and for preservation of the existing three-tier system. And building the Naxon venture's database removes the WSWA's critics' most potent argument for dismantling the entire Prohibition-era producer-wholesaler-retailer system: that the consumer can't access a sufficiently broad selection of wines under the current setup.
Too Bad They Weren't First
But Naxon will not be launched into a marketplace devoid of competition. Not only does Geerlings & Wade have merit badges for 26 states (accounting, it says, for 81% of U.S. wine consumption), but Chicago-area
claims it also has a legal distribution pipeline from wineries to consumers in 22 states, also using the existing three-tier system.
Naxon is talking about doing, we've been doing for 10 years," says Lionstone President Nick Lucca. Lionstone handles shipping and regulatory compliance (including taxes) for a number of very high-profile direct wine marketers, including Virtual Vineyards. But without big venture capital bucks and the WSWA's data, Lionstone has remained a small operation.
Lucca could choose to combat the Naxon threat by licensing the WSWA/Naxon database, but the resulting licensing fees might put it at a competitive disadvantage. And Lionstone would still have to face the fact that, in some states with franchise regulations, many wineries would already be locked into wholesaler relationships obtained through Naxon that would exclude Lionstone and any other potential competitor.
Of course, the jury is out on whether consumers will be big winners even if Naxon succeeds. While changes in state laws to allow direct shipping would provide the widest selection at the lowest prices, the irresistible political power of wholesalers makes that a remote possibility.
Both Naxon's Sisson and Lionstone's Lucca say their systems were designed to turn wholesalers and retailers into legally approved clearing agents. The advantage is that because neither outfit will be forced to inventory, store and ship the wine itself, it should help to drive down the average markup of 25% to 40% that is assessed after the wine leaves the vineyard's cellars.
But it remains to be seen how far the participating state wholesalers and retailers will cut their own profits in order to give Naxon and Lionstone a profitable margin of their own. In fact, the whole arrangement could end up costing consumers substantially more for the same wine than it would in a competitive system.
A Definite Loser
Nevertheless, this creates big uncertainties for GEER and its shareholders. On one hand, GEER's established base of several hundred thousand current and previous customers could give it a huge leg up if it decides to license the Naxon system and begin offering a wider variety of wines to those customers. But even if GEER chooses to develop its existing proprietary system into a Naxon competitor, doing that in a cost-effective manner would require cheap access to the wine data that WSWA is giving Naxon for free. Further, beefing up the Geerlings & Wade system to handle this would require substantial capital expenditures from a very conservative management that has been reluctant to dip back into the red for such improvements.
Clearly GEER is swimming in shark-infested waters, where the interest in biting off a share of the $200 million to $400 million direct-shipping market makes those waters more and more crowded by the day. Whatever the course, the direct-shipping market -- and GEER's prospects -- will certainly look very different a year from now.
Lewis Perdue is editor and publisher of
Wine Investment News. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at