Wine Online: It Doesn't Have to Be This Bitter and have overreached and executed poorly, lessons other cybervintners would be wise to avoid

By Thane Peterson

Erle Martin, president of California's Niebaum Coppola winery, tells a story about some wine executives who last year took a tour of the fancy new operations of, an Internet startup wine merchant. On their way out after the visit, one exec turned to the other and said: "Great stuff. Within two years, we're going to be able to buy it for pennies on the dollar. There's no way that company's going to make it."

If anything, the exec was overly optimistic about's prospects. By late last summer, the company was running out of money. So last August, and, another San Francisco Web wine seller, announced their merger in a marriage arranged by venture capitalists. Under the name, they soldiered on until early April. At that point, with the company deep in trouble, bankers pulled the plug on a $15 million loan, and laid off two-thirds of its 245 employees.

REORGANIZATION TIME. isn't commenting, but sources say the company is likely to be pared down to a selection of just 500 wines, from more than 2,000 a few weeks ago. Operations Vice-President Katie Schumacher, who previously was vice-president for international logistics at overnight delivery service DHL, could take over the CEO job from Bill Newlands,'s current chief, according to some former employees. The plan is to reorganize, cut costs further, and try to raise an additional $8 million.

If the money can be found, the company will be relaunched at the Web address using's software, sources say. But this is an odd plan, because that software has been problematic. More than a year after its launch, WineShopper is still able to sell in only 22 states, about half as many as The companies had combined sales of about $30 million last year, with less than $1 million of that coming from, one former employee says.

Says ousted founder Peter Granoff: "I hope my career path never crosses theirs again"

In any case, the founders of both companies are now out of the picture. Peter Sisson, the driving force behind, was forced out, former employees say. According to an interview Sisson gave to Knight Ridder in early April, he's close to broke and looking for a job. He has had to put 160 acres of property he owns in wine country up for sale to cover margin calls on his battered stock portfolio.

Meanwhile, Peter Granoff,'s affable main wine expert and the founder of its precursor company, also got the boot. He expressed the bitterness of many longtime employees in a prepared statement: "[There are] a cluster of individuals both inside and outside who must bear clearly disproportionate responsibility for the current state of affairs," he wrote. "I hope my career path never crosses theirs again. This company, and all those who embraced its original vision, deserved better."


  All told, the two companies burned through at least $142 million and maybe as much as $180 million, former insiders and competitors say. Their backers included, which in 1999 put $30 million into for just under a 50% stake, and such top venture capitalists as Kleiner Perkins Caufield & Byers, New Millennium Partners, and ThomasLee.Putnam Internet Partners. These investors, and just about everyone else involved, appear to have lost all their equity in the company. "For the size of the revenues [ was] generating, they had far too many people and spent far too much money," says Larry Gerhard, CEO of, a Portland (Ore.) rival.

In hindsight, you have to wonder what these people were drinking. In some ways, this is a typical dot-com crash: the result of overoptimism about the Web, questionable planning, and too much cash being frittered away far too fast. But it didn't have to happen. Selling wine over the Net is still a good idea that could easily support a profitable business. In my view,'s business plan, based on virtually no knowledge of the wine industry, was probably doomed from the start. At the very least, it would have required several years to properly implement -- time the company was never going to get in an industry moving at Internet speed. had a more practical idea. It's just that under current laws, the size of the wine cybermarket is unlikely ever to justify the $96 million or more that raised. Not long ago, Salomon Brothers was estimating that U.S. wine sales online would top $1.5 billion annually within a few years. Achieving 10% of that figure would look pretty good at this point. probably should have been shooting to top, say, $50 million in sales by 2004, not an exorbitant figure.


  What's clear now is that establishing a national wine-distribution network is complicated and very expensive. The U.S. liquor-distribution system was set up after the repeal of Prohibition to ensure that no unsavory characters (think Al Capone) could take control of it. The distribution of alcoholic beverages was turned over to the states, and interstate sales were prohibited unless the states involved decide to allow it. A three-tiered system developed where the producer sells to a state-licensed wholesaler, who sells to a state-licensed retailer, who is the only one allowed to sell directly to the consumer.

To complicate matters, some states, including Texas, allow local communities to choose whether to be wet or dry, so it can be legal to ship to one town but a felony to ship to the town down the road. A handful of states make interstate shipment of alcoholic beverages virtually impossible.'s strategy centered on a nationwide database of wine inventories

The upshot is that an online wine merchant can set up shop in, say, California and easily ship to 18 other states -- the ones that in one way or another allow outside shipments of wine to cross their borders. After that, adding states, including such major markets as New York and Florida, becomes a huge headache. It involves getting state liquor licenses and cutting deals with local wholesalers, as well as designing software that accommodates the laws of each state and local community.'s Sisson, a former analyst at Montgomery Securities who in early 1999 put together a business plan in three months while working full-time, came up with an ingenious scheme for dealing with all this. He wanted to create a nationwide database of wine inventories for the powerful Wine & Spirit Wholesalers Association of America that would pinpoint every bottle of wine in inventory everywhere in the country. In return, would get exclusive rights to use the system for online wine sales.


 The plan was clever because it got the wholesalers, who have vigorously opposed the direct sale of alcoholic beverages, on's side. To Sisson's surprise, venture capitalists quickly anted up $46 million to back the company, most of it coming from Kleiner Perkins and (which in turn is backed by Kleiner Perkins).

But his plan had some flaws. "Their system was very complicated and very arcane," says Vic Motto, a wine consultant in St. Helena, Calif. Under the best of circumstances, computerizing the nation's wine inventory would have been enormously difficult. There are more than 20,000 shop-keeping units to track. Perhaps the biggest problem is that liquor wholesalers aren't exactly cutting-edge users of technology. "We were trying to weave into computer systems that were ancient," recalls one former insider. Some wholesalers barely relied on computers at all.

The WineShopper database, which was supposed to be up and running for the 1999 Christmas selling season, repeatedly had to be delayed. "The WineShopper model was never viable," says the CEO of a competitor.

FASTER START., on the other hand, had a pretty good chance of succeeding -- if it hadn't gotten overly ambitious. Granoff and a partner had already formed a company called Virtual Vineyards in 1995. In 1999, armed with huge quantities of VC cash, they changed the name to, revamped the site, and bam -- they were off. The plan was to sell directly to consumers in the 19 states where that's allowed and through an existing network of liquor wholesalers in most other areas. The company quickly was operating in more than 40 states.

The trouble was, was also spending lavishly. Remember the heady days when having an alpha URL was thought to be the key to Internet success? Virtual Vineyards paid some $3 million in stock and cash to nab the tag. It was believed to be the most expensive URL purchase ever at the time. (The Napa entrepreneur who sold its URL is now tooling around in a red Ferrari.) The company also staffed up rapidly. It sent off a dozen wine merchants on frenzied shopping trips to buy up loads of wine from small producers in Europe and elsewhere. Inventory costs soared.

WineShopper's and's sites never melded, making it hard to cut overlap

Meanwhile, the company was spending enormous sums on marketing to lure new customers -- something that became increasingly difficult last year as the economy showed signs of slowing and skepticism about e-commerce rose. "It looks like fell into the same trap as some other dot-coms," says Lesley Berglund, CEO of rival "The big concern for all of us in this business is customer-acquisition costs. And in this environment, acquiring new customers is extremely expensive."

Merging and provided little improvement. The venture capitalists apparently figured neither of the companies had a chance of making it on their own. But the two companies were largely incompatible. Insiders say their staffs continued to squabble after the merger. While's marketing was based on Granoff's notion that it's fatuous to rate wines according to elaborate numerical systems, WineShopper had cut a $1 million deal with Wine Spectator magazine to use its 1-to-100-point rating system.


  Worst of all, management failed to slash costs. The two outfits' Web sites never melded. That made it hard to eliminate staff duplication. Each company had an expensive warehouse in the same building complex near the Napa airport, and it took months to integrate the two. The companies spent millions on negotiating partnerships in Europe and Asia, while their basic business in the U.S. was coming under increasing pressure. WineShopper's expensive deals with Wine Spectator, Amazon, and America Online were kept in place, even though WineShopper was generating little business. By early February, "behind the scenes they were selling off [wine] inventory at 50 cents on the dollar or less" to raise cash, says a former employee.

Where does all this leave the online wine business? I hope will survive. It is, or was, an excellent site. However, as of Apr. 16, it had already pared its product offerings by about one-third, to 1,425. Alas, the less variety the site offers, the less appealing it will be to consumers. Meanwhile,'s entire marketing pitch is still based on promoting the wine picks of Granoff, senior wine merchant Jeff Prather, and other wine experts who are no longer with the company. It's painful to see their smiling faces posted on the site when you know they're out looking for new jobs.

Other wine cybermerchants take pains to note they've tried to avoid the mistakes that hobbled is a cyber cooperative that controls costs by serving as a portal for the Web sites of small California wineries. It mainly sells high-end wines, where margins are strong.


  Another competitor,, has expanded far more slowly than, says CEO Gerhard. eVinyard has only 43 employees and sells into 27 states so far, with liquor licenses and distribution centers in Massachusetts, New York, New Jersey, Florida, Virginia, Ohio, North Carolina, and Texas. Gerhard says the company still has $3 million of the $21 million it originally raised -- plenty, he claims, to last until the fourth quarter, when eVineyard expects to turn a profit.

Let's hope so. Cybervintners will probably never succeed as Wal-Mart-style mass merchandisers, at least not unless the U.S. distribution system for alcoholic beverages is revamped. But they can give many of us access to fine wines we otherwise wouldn't be able to find on store shelves. If the backers of and WineShopper had made that their goal, they probably wouldn't be in such a pickle today.

Peterson is a contributing editor at BusinessWeek Online. Follow his weekly Moveable Feast column, only on BW Online

Edited by Douglas Harbrecht

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