Australia's Online Wine Industry Full of Potential

The emerging online wine industry in Australia is well positioned for growth. Last year, Australia produced over 740 million liters of wine, 195 million liters of which we sent overseas. Curiously, wine is one market where there the influence of US online category killers has been minimal. Although a few players such as wine.com (formerly Virtual Vineyards) and wineshopper.com (funded by Kleiner Perkins Caufield & Byers) have emerged, their growth prospects have been largely hindered by strict US state shipping laws, which prohibit shipments of alcohol between states.

The Australian online market potential is significant. Offline, the retail wine industry in Australia is estimated to be worth AUD$3 billion per annum, with an estimated growth rate of between 6 and 8 percent. High industry fragmentation makes wine a classic case study for e-commerce transformation. The largest player in the offline market is Coles Myer, who through Liquorland holds 13 percent of the market, followed by Woolworths/Safeway at 9 percent, and some 64 percent comprised of small retailers (WDR). Some of the reasons for fragmentation lie in the fact that offline retail outlets are typically expensive to establish, with high levels of stock inventory, slow turnover and thin margins. Typical gross margins in the wine retailing industry vary between 15 and 35 percent. Importantly, however, for new Internet start-ups, trends in direct retailing through wine clubs and wineries (which constitute 10 percent of the total market) indicate the potential for selling online.

By moving online, wine retailers are able gain sizeable scale economies through improved fulfilment and higher volumes, in addition to gaining leverage from the potential to create dynamic communities of interest around wine making, drinking, and investment. The two key players in the local market are Wine Planet and WinePros both of which have slightly different business models.

The Wine Planet business model is based on revenues from online sales from its wine and food portal (63 percent), offline sales to the company’s traditional corporate market (23 percent), and sales from its retail outlet (10 percent). Wine Planet announced yesterday that it has achieved its first $1 million month in the lead-up to the holiday season, recording $1 million worth of online sales for the 20-day period ending Dec. 15. Last quarter, Wine Planet’s online sales (Internet only) for the quarter rose 97 percent on the previous quarter reaching $1.41 million. The value of online advertising in the September quarter generated $0.098 million, on track for $0.5 million per annum (WDR).

Winepros, on the other hand, appears to be positioned as primarily a content and community play. Wine celebrities Len Evans and James Halliday are both substantial shareholders, as is Coles Myer (which owns 10 percent), which will be providing fulfillment on referred e-commerce sales. The Winepros’ strategy is to create a vertical portal related to wine, and earn revenues from advertising and a share in the e-commerce transactions referred to approved retail fulfillment partners. Content is being sourced from wine commentators, HarperCollins, and Langton’s auction houses.

As the market shakes up locally, there will be greater convergence between the two business models of online retailer and online community. Amazon.com is a good example of how there is likely to be a natural limit to retail margin gains from selling physical products like wine through the Internet, given rising customer acquisition costs and complexities of warehousing and distribution. Both Wine Planet and Winepros appear to be moving toward building online communities rather than merely effective aggregations of shoppers.

So, can a wine retailer become a media network? Newscorp’s recent moves in the health field are an example of how a basic proposition such as selling pharmaceuticals through the web (PlanetRX) can be extended by adding TV and publishing media assets, and investments in B2B communities such as Healtheon and WebMD. Media based strategies tend to be effective in categories, such as wine, where community interaction are important in the purchasing or consumption decision. Which at the end of the day, adds up to more than just shipping a mixed dozen.