Wine Shopper

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Crack Case

The Systems Consulting Club, IIM Calcutta
presents

Crack – the Case study competition

Copyright © 2011 by SYSCON

Page 1

Crack Case

Does Wine Retailing Have a Future on the Internet?
In the early days of the Web, wine retailing looked like it could be very successful Internet business. Annual wine sales today in the United States run about $17 billion and worldwide about $100 billion. Some analysts have predicted that Internet sales could reach five-to-ten per cent of that market by 2005. In January 1995, a master sommelier named Peter Granoff partnered with computer expert Robert Olson to launch Virtual Vineyards, the first company to sell wine over website. Their goal was to give wine shoppers direct access to limited-production wines that are often available through most wine retail superstores. They focused on boutique wines for those who really cared about wines rather than marketing to occasional or new wine drinkers. They offered wines from the finest wineries, and screened them for quality. Their strategy was to expand slowly, working with wholesalers and retailers to enable them to sell wines eventually in many states. Virtual Vineyards provided additional value by offering information to educate buyers about each label for sale as well as Granoff’s testing chart and personal guarantee of each wine quality. The company obtained $20 million in funding. However, Virtual Vineyards had no licenses to make sales legally, so it paid high handling fees to wholesalers and retailers who acted as its fulfilment agents. The company had trouble aggregating orders in a meaningful way and had big empty trucks shipping orders all over the country. It also became embroiled in legal court battles because of its lack of licenses in some states. These high operating costs were passed on to consumers, and the company never attracted enough customers to become profitable. Virtual Vineyards initially looked like such a promising business that it inspired other competitors, including WineShopper, Wine.com, and eVineyard. Every new site serving the US had to address the 70year old and very convoluted three-tiered liquor and wine distribution system. When the 21st amendment ended Prohibition in the US in 1933, control over production, distribution, and sale of alcoholic beverages was left to the individual states. They independently developed or followed a three-tiered system for wine. The first tier is suppliers to each state (the producers and importers). Suppliers can only sell to the second tier, wholesalers, which in turn can only distribute to retailers, the third tier. Retailers, including bars, restaurants, hotels and liquor stores, are the only ones who legally can sell to the public. The system differs between each state, sometimes dramatically. Today 13 states prohibit direct interstate shipping of wine even to its own citizens who are outside their home state. The remaining states regulate importing and require permits. Some states allow wine sales in grocery stores, while others allow sales only in state-operated stores or in private liquor stores. Some prevent sales on certain holidays. Some states limit the amount an individual can purchase within any month or year. Several now prohibit sales via the Internet. Thus, each of the fifty states has its own laws and regulations governing the production, sale, distribution and delivery of wine as well as for tax collection from all three tiers. To control this, every state requires every company to have a state license for each of the three levels that company operates in. These intricate and arcane sets of laws were developed for bricks-and-mortar sales, not for the Internet.

Copyright © 2011 by SYSCON

Page 2

Crack Case

Those selling wines on the Internet have two choices-either work through bricks-and-mortar companies, paying all three levels a fee for each sale, a costly alternative, or develop their own computer systems to obtain...
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