The Demise of Amazon Wine

It appears to be official that Amazon isn't going to be adding wine to the long list of things you can buy from them.

There will be lots of speculation as to why, but it all boils down to this: they couldn't figure out a way to make it work as a business.  In other words, profitable or not, there wasn't enough return in it for Amazon, relative to other choices for deploying their resources.  Given that Amazon makes its living optimizing the supply/delivery chain, this is not good news for others who think it's just a matter of a warehouse and some software to keep track of all the details.

I think Amazon probably started out by looking at doing it themselves.  At some point, they realized that a significant investment (and startup risk) was associated with that course of action.

So, they looked for someone who appeared to have a working system.  By all accounts, New Vine Logistics (NVL) was the team to beat, so they started talking to them about a partnership.

It's useful to remember that NVL already had the "sunk cost" advantage when they acquired the shipping technology of the original wine.com.  It's hard to imagine anyone building an equivalent operation cheaper.

But, it's pretty clear in hindsight that NVL wasn't making money on their existing clients, leading to the sudden closing of their doors and subsequent sale to Inertia Beverage Group.  When Amazon Wine seemed about to open for business in late 2008, I suspect that the impending launch showed Amazon that their chosen partner didn't really have the resources to scale up.  Chicken and egg?  Perhaps.  NVL needed a commitment from Amazon to get additional capital, and Amazon needed to see that NVL could handle the business before giving them a commitment.  We won't know until someone writes a book.

This is all speculation on my part, but Amazon is pretty smart, and as smart as they are, they couldn't see how to make it work, even without re-inventing the wheel and partnering with (arguably) the people with the best chance of making it work.

Tom Wark's analysis seems spot on:  the current state-based patchwork of wine regulations is a major impediment to anyone trying to centralize fulfillment.  While some are optimistic that this won't hurt wineries, it certainly doesn't improve the situation for them either.

I am not optimistic about the likelihood of change, either.  State governments want to make sure they get tax revenues from wine sales.  Middlemen have existing businesses to protect.  It seems unlikely to me that the Federal government would take action (Granholm v. Heald addressed the relevant Federal issue: states have to be consistent about the rules for in-state and out-of-state wineries).  Certainly, they have other fish to fry in the short-to-mid term.

I hope that we'll hear more from Amazon about the reason for their decision.  I'd love to hear from other people trying to solve the fulfillment problem (Copper Mountain, WTN, etc.) with their thoughts.

Comments

[Lewis Perdue]

Very nice summary. Very!

[Mike Duffy]

Thank you, Lewis. Given your stature, that means a lot to me.

[Jon Bjork]

When I took a tour of NVL last year, they showed us banks and banks of empty pallet racking going up nearly to the roof of their two-story warehouse. They said it was mostly for expansion to accommodate a large client they refused to name.

Their automated systems with quality-control checkpoints were truly state-of-the-art and looked to be somewhat under-utilized when I was there.

I'd therefore doubt that the warehouse-pick-pack operations side of NVL would have had any problem handling Amazon.

I think what really sunk the deal between Amazon and NVL were delays related to Amazon handling interstate compliance (as you mentioned) compounded with a huge drop in business from the winery clients of NVL. If Amazon had their act together earlier, NVL would probably still be viable.

Looking at the case boxes and pallets of wine that were stored for NVL's clients, and knowing most of those were Napa Cabs going for upwards of $50/bottle, they were the first to see shipment quantities drop off in 2008.

[Mark]

Seeing how my company has the challenge of starting as a 3rd party wine club I can definitely see the difficulty involved in shipping as a 3rd party. Best case scenario for us to to ship to around 24 states at launch, which is about 65% of the wine drinking general public. Not bad for us as a 2 person operation, but again not great if you're Amazon and have the logistic difficulties they would inevitably face because of their size.