Wine Shopper Essay Example for Free

Wine Shopper Essay 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 their own licenses and maintain full compliance with all state laws and regulations. Such a system must support laws governing alcohol supplying, sales, distribution, and delivery in each state, linking and fully integrating the producers, wholesalers, and retailers-a very complicated requirement. Moreover, to develop one’s own system today, a company must use computers to maintain adequate legal and tax records for every tier in every state in which it operates. Other non-computer problems faced by Web-based wine sales include age verification. The purchaser or delivery recipient has to be age 21 or older, which means that someone of age has to be home to receive any delivery. Large numbers of consumers might use Wine sites to learn about and experiment with new wines, and if they like any, locate less expensive ways to purchase them. Given the legal complexities of wine retailing, orders could easily take weeks to be processed and delivered. One company that opted to build its own system to obtain its own licenses and control its own sales was WineShopper. com, founded in 1997 by Peter Sisson. He raised $46 million in venture capital from several investors including Amazon. com. He also had the support of Wine Spirits Wholesalers of America, a trade organization, and so he decided to sell exclusively from listings in the wholesalers’ databases. The wholesalers set the price. These wholesalers are not necessarily cheaper than specialty shops, but they claim they can deliver any bottle from anywhere in the world. The company’s goals were to sell any wine available to anyone, offering customers satisfaction and convenience. Sisson said he would be making products accessible in areas where they are not currently available, listing all wines available from all US wholesalers’ catalogues. (Over 250 wholesalers from 47 states, plus 550 wine producers, had already agreed to work with WineShopper). He decided to provide information and independent expertise on wine from such sources as Wine Spectator, Food Wine, and The Connoisseurs’ Guide to California Wine. He wanted his site to become the first destination for consumers seeking wine information on product. His plan included a distribution network that followed the three-tier system, and it would have its computer environment support the complex needs of the state laws and regulations. The WineShopper. com website was designed to look the same to customers from any location in the US while maintaining a separate computer backend system for each state where it executed a transaction. To support the unique legal requirements of each state, WineShopper used a massive database mapping mechanism that was capable of handling and codifying all of the laws in such a way that it could be mapped to a nine digit zip code based on shipping address. The laws are very complex and go way beyond just the state level. Even country and city laws within states can come into play, notes Dennis Riley, WineShopper’s director of information systems. The whole WineShopper system ran on Sun hardware and partially on Sun software, and it even included wide use of Sun’s Java programming language. Copyright  © 2011 by SYSCON Page 3 Crack Case WineShopper. com used a three-tiered IT infrastructure consisting of a front end of Web Servers, a middle layer of application servers, and backend database servers. The Web Servers directed order transactions placed by users over the Internet to the application servers running various applications, including an e-commerce storefront application cluster and an enterprise resource planning (ERP) application cluster. These application servers communicated with database servers. The ERP application cluster sent the order to the warehouse for fulfilment. To store all the data for so many different business rules and state regulations, WineShopper used Oracle databases and almost 1 terabyte of storage. The company maintained a separate database for the current inventory within each state as well as files for the prices in each state. The system was load balanced to maximize response time for WineShopper’s customers. The company had redundant backup systems to prevent any service interruption. The system was also designed for easy expansion when needed. â€Å"One of our biggest expenditures has been in multimillion –dollar technical development of compliance engines,† explained Suzanne Gannon, the director of public relations and corporate communications for WineShopper. The company was geographically distributed, with the production environment and main data center in Sunnyvale, California, the development and integration environment in San Francisco, and the warehouse in Napa, California, in the heart of California’s wine country. In addition to the challenge of handling unique state laws, the WineShopper.com system has trouble dealing with the legacy systems for inventory and products in distribution used by its wholesalers. The various wine wholesalers use different systems with different SKUs (stock-keeping unit identification numbers for items) so that there was no uniform costing structure that could be used by WineShopper and its distributors. WineShopper tried to develop a coding system to eliminate data inconsistencies and provide a single standard view of data concerning products in distribution Sun claimed that this convoluted three-tiered system was the most complicated Web site it had ever seen. WineShopper. com experienced many delays in going live and in expanding because of software problems, although it finally went live in California in April 2000 and in New York in July. By midAugust the site was also operating for Colorado, Florida, Illinois, Missouri, and Wisconsin, and it had achieved regulatory approval in over 30 states. Its goal was to have a system running in the states that reached 70% of the US market by the December holiday season. However the company took long to go live, blaming its problem on software. It was spending so much money that in August 2000 it merged with Wine. com. Wine. com has been founded in 1995. It targeted knowledgeable wine drinkers who had both money and good credit records. It kept itself small, selling high-end wines, and focusing on the convenience of delivering wines rather than on offering the lowest price. However, it changed its target over time because of the growing competition from WineShopper with its high spending. Wine. com felt pushed to spend a lot of money and hire a large staff. In September 1999, with no money left, Virtual Vineyards purchased Wine. com’s name and domain name and changed it to Wine. com. The new Wine.com emphasized customer satisfaction and reliable delivery. By early 2000, this company had received another $92 million in investments. Copyright  © 2011 by SYSCON Page 4 Crack Case In early 2000, WineShopper and Wine. com were in stiff competition, spending a lot of money. In August 2000, they decided to end the competition and reduce the expenditures by merging. â€Å"We have very complementary strengths and assets and realized we could focus our resources on growing the wine market instead of fighting each other,† explained Sisson. â€Å"The new company used the Wine. com name and Web address. The two companies continued separate operations until the end of 2000, giving them time to merge their computer systems and concentrate on developing their Wine. com name. They estimated they were offering about 2000 wines, domestic and foreign, including both well-known and boutique wines as well as about 1000 old and rare wines. The company closed a key office in Fermont, California, and consolidated operations in Napa. The new website contained a great deal of wine information, including editorials, ratings and tasting notes from Wine Spectator. The new Wine. com was now considered the dominant force in the Internet wine business. In January 2001, Wine. com laid off 75 of its 310 employees, claiming the cuts reduced staff redundancy because of the merger. At that time, according to Granoff, sales were up 300 % in 2000, and they were selling in 40 states. In 1998, eVineyard was established with only $20 million of private equity. Its strategy was different; buy wine only when a customer ordered it, giving eVineyard only a virtual inventory. It ordered its goods from wholesalers, shipping them to customers either from its Portland, Oregon office or from small logistics centres established in states that required a physical location. Its strategy also included expanding one state at a time, obtaining retail licenses in each state. This process was often very slow; for example it took 10 months in New York. In some states such as New Jersey, the company could only obtain a license by purchasing an existing one. It was only able to sell the wines that its regional distributors handled. According to Brett Lauter, eVineyard’s chief marketing officer, the company served 77% of the premium wine drinking market when it was only operating in 27 states. In 2000, he estimated the company grew 1000% from its previous year and was selling now between $5million and $10 million annually. Lauter estimated that his competitor Wine. com was probably spending over $2million each month to stay in business. â€Å"It takes a lot of wine sales to make up for that burn rate,† he observed. In April 2001, Wine. com official announced the company might file for bankruptcy protection, and it announced a layoff of 160 of the remaining 235 employees, including Granoff and Sisson. eVineyard purchased Wine. com for $9 million, taking only its domain name and customer list. It did not assume any Wine. com’s $17 million debt, and it did not retain any of Wine. com’s 85 remaining employees. This left eVineyard (now called Wine. com) as the only major company in the Web-based wine retail business. Several industry analysts noted that while the others believed they could change the whole wine distribution system, eVineyard (now Wine. com) kept its cost low. â€Å"We didn’t spend money like drunken sailors,† said Michael Osborn, the founder and president of eVineyard. †We’re a retailer. Fundamental business principles apply. † Wine.com had over 400 employees, while we have 60 employees. They raised Copyright  © 2011 by SYSCON Page 5 Crack Case $200 million in venture capital, while we raised $35 million†. eVineyard also retained its own distribution system. Today, the whole wine market has changed, and Web-based wine merchants or entrepreneurs are facing other problems. Most of the money invested in wine Web sites was lost in the 2000-2002 stock market crash, and new dot-com investments will be difficult to find. Moreover, a number of Sonoma and Napa wineries are selling their own wines through their own internet sites. New e-commerce technology make selling wine on the Web more profitable than selling through traditional wholesaler-distribution channel. An online shopping cart appropriate for wine retailing, which used to cost $50000 to set up, now costs only about $1000. What will the future hold for Internet wine retailers? The Case questions you need to necessarily answer: ? Do you think WineShopper. coms business model was a difficult model to work with, and why? What management, organization, and technology issues contributed to this companys failure How important to eVineyards success to-date were the timing, management and strategy? How important was the role of technology? In your opinion, why was eVineyard the eventual winner in the race for online wine sales? ? Considering the factors that contributed to the success and failures of online wine retailing in the US, do you think wine retailing can succeed on Internet in current Indian scenario? Note: Please make reasonable assumptions wherever necessary. No clarifications will be provided. State any assumptions you make in the Case solution.