Wide world of online wine

While small online wine retailers struggle to survive, the big names surge ahead with new ideas to keep their web customers satisfied.

NOT LONG before penning this piece, one of the UK’s most promising online wine retailers went into voluntary receivership. Called Slurp, the business was one db had profiled just over 12 months ago – a little more than a year before the operation was declared bankrupt. Back then, CEO of the company Jeremy Howard had said his office was a “sea of smiles” such was the growth in web-based wine retailing.

He was also busy adding portals for northern Europe and France, claiming web-based wine retailing was the future. Indeed, he expressed surprise at Majestic’s decision to continue opening new stores, because, he said, there was no evidence to suggest bricks and mortar wine businesses would grow. Whether or not he was right about high street retailing, today it’s clear his own operation wasn’t profitable.

But is this a reflection of failings within Slurp or wider problems in online wine retailing in the UK as a whole? Well, latest CapGemini figures would suggest web-based wine sales aren’t on the slide. In fact, a report in April this year shows online sales of alcohol outpacing the total web-based retail market – beers, wines and spirits were up 19% year on year in April, compared to 16% for all sectors.

Part of the growth in drinks sales can be attributed to a period of warm weather – they were only rising by 3% for the first quarter of the year, but a 12% forecast for overall e-retail growth for 2013 is a sign there’s confidence in the longer term. Indeed, Tina Spooner, chief information officer at IMRG – the UK’s industry association for online retail – has said, “We expect UK.com to continue to dominate the retail picture as the recovery gathers greater momentum.”

STIFF COMPETITION
In which case, what went wrong at Slurp? According to Greg Shaw, commercial manager at SH Jones, the company which bought the Slurp brand in the UK, the online retailer was struggling to trade profitably in the UK due to high overheads and low online retailing margins. It was also suffering from intense rivalry, mainly from long-established retail brands which are moving aggressively into the online arena.

Indeed, the former Slurp CEO said to db back in early 2012 that building an online wine business in Britain was like “doing all your training at base camp at Everest”, such was the strength of web-based competition. As a consequence, he also stated, “if you can make it here you can make it anywhere”.

But Slurp isn’t the only online operator to go under. Countless small web-based wine start-ups have come, then quietly gone over the last five years, each one promising to offer something different but failing to make enough of a mark, or profit, to keep trading. In Richard Halstead’s view, who heads up researcher Wine Intelligence, and who once worked for online retailer Virgin Wines, the businesses performing well on the web today are those with a legacy in mail order retailing, such as Direct Wines, or those with a strong off-line presence, like the supermarkets, above all Tesco.

Tom Chamberlin, MD of Slurp Asia

To focus on the latter, which sells one in four bottles of wine consumed in the UK, Tesco is both the UK’s largest offline and biggest online wine retailer, accounting for 50% of web-based wine sales in the UK, according to wine buyer Nick Juby.

Although he won’t reveal the exact amount of wine Tesco sells online, he does admit that online sales account for 10% of Tesco’s total wine business by value, and considering Tesco sells around £2 billion worth of wine each year, that would make its online business at least £200m. However, this sum seems rather less than 50% of the total online wine market, which is estimated to be between £600m to £1.3bn in the UK (or somewhere between 8m and 18m cases).

Nevertheless, Tesco’s online presence is impressive, with wine sold via the web either on Tesco.com alongside groceries, or through its Wine by the Case specialist wine website. And the supermarket is beginning to innovate online. Not only does the retailer list a range of 1400 wines on Wine by the Case, including a “fine wine” selection of over 300 labels, but it is also working on building its online “wine community” with a new “co-buy” option.

This is a form of co-operative wine buying in which a group of shoppers all opt to purchase the same product, and in the process, bring down the price. Juby explains, “It’s about getting customers together and it has been very exciting… and in the past few months several thousand have joined the co-buy community.” It has also allowed Tesco to sell “decent quantities” of products which wouldn’t necessarily move off the shelves quite so hastily in the supermarket’s stores.

Similar to flash sales on other websites, each “co-buy” only lasts a few hours and comprises a limited number of cases. If the entire quantity is sold, then each person who has signed up for the offer gets the wine at the best possible price. This means there’s the incentive for existing co-buy shoppers to encourage others to join the group – further helped by the offer of a free case for the person who signs up the most new users, who tend to be “slightly younger and a bit more affluent” than the average Tesco customer, according to Juby.

In other words, a potentially long-term and profitable shopper to draw in. Interestingly, wine is the first product to be sold this way at Tesco, and Juby admits that the product is being used as something of a guinea pig. “If it continues to work well for wine, we will try it for other products,” he says. Continuing, he comments, “We are trying to sell wine in a different way, while encouraging customers to trade up and try different types of wines.”

Laithwaites is now selling over half its wines via its website, and The Wine Society almost 60%

SMART APPLICATION
But it’s also a way of selling what Tesco customers want, as users can send an email request with wines they would like to see sold on the co-buy site, which is hosted by buyapowa.com. “Customers can choose the styles they want to see,” explains Juby. But don’t expect to be surprised by their demands. “The best selling wine by a mile is New Zealand Sauvignon Blanc,” he says, along with, in reds, Rioja. Tesco is also embracing the full benefits of the web with its Tesco Discover app.

Indeed, as reported last month on thedrinksbusiness.com, Tesco shoppers will soon be able to watch video content on any wine in store by pointing their smartphone at the bottle. In a move to avoid placing QR (quick recognition) codes on all wine labels, the retailer is embracing visual recognition technology which will allow customers to find out more about products in-store using their mobile phones.

Already, those who have The internet as a means of buying wine does, it appears, particularly appeal to those with a strong interest in wine. As a result, online wine retailing “is siphoning off more engaged consumers” according to Halstead at Wine Intelligence. This also explains a further aspect to wine sales online – there tends to be a higher average price of sales compared to an offline equivalent.

For example, Majestic, which (like Tesco) says that 10% of its total sales by value come through the internet, records an average bottle price for online sales that’s £1 higher than from its stores. “Because the internet is attracting people who are more interested in the product they are willing to spend more on what they want,” explains Halstead.

So, the big UK wine retailers are seeing more demand for wine online, and they are achieving higher average prices, while drawing in more wine enthusiasts. Growth for them is also helped by options such as “click and collect”, allowing shoppers to order wine on the web, and then pick it up in-store at a time that suits. But the other area of online wine growth comes from the mail order merchants.

With a customer base already used to receiving wine deliveries, usually by the case, the likes of Laithwaites is now selling over half its wines via its website, and The Wine Society almost 60%.

WEB SATISFACTION

A shift among such shoppers to order wine online, rather than over the phone,is occurring as people become more comfortable with the buying medium, but also because it offers the chance for shoppers to freely search and browse the offers without the pressure of a salesman at the end of the line. Furthermore, there’s no risk of incorrectly pronouncing more obscure wine terms when it comes to requesting a particular product – which can be a potential source of embarrassment.

Certainly, The Wine Society is developing its digital presence, and the mutual mail-order merchant’s chief executive, Robin McMillan tells dbthat he is working on “a large digital project”, which he says “will shape what we do in the future”. The Wine Society now sells more wine through its website than any other medium and McMillan records that “digital is the fastest growing part of the business in terms of orders”.

While the company unveiled a revamped website on 2 April this year, it is now considering adding various functions, such as allowing Wine Society members to rate the wines online using a star system, as well as introducing a section for new members on the website. “We are looking at how to hand-hold our new members in the first few months because we have a massive range,” says Tim Sykes, head of buying at The Wine Society, explaining the thinking behind possibly adding a special area with recommendations.

But with the supermarket stores accounting for over three-quarters of all off-trade UK wine sales, it is the performance of the big four retailers that really dictates the pace – online wine sales are in growth, but represent less than 20% of the market. “80% of all wine is sold through supermarkets in the UK,” says Halstead, “and because they have such a big in-store base of customers they won’t lose.” Nevertheless, he believes change is afoot. “We are on the edge of something quite interesting,” he says.

“Tax has pushed wine out of the super cheap so it isn’t possible to buy it in mechanisms like 3 for £10. Half price promotions are also under threat because of the OFT [Office of Fair Trading]. So wine is having to move into the realm of what is a relatively expensive product in a supermarket context with a limited set of levers with which to sell it. So there is a realisation that wine has got to do a better job to sell itself at the point of sale.”

This will require retail strategies focused on added value, and hence Halstead suggests supermarkets look to merchandising techniques employed in the travel retail environment where the focus is on creating a luxury feel. For the brand owner, it also means increasing the investment in encouraging loyalty and raising awareness for your product – rather than relying on discounting to move volumes.

For example, Paul Schaafsma, UK general manager for Accolade Wines records, “There are fewer half-price deals, it is more commonly 20-25% off – or a different mechanic – and you need to make sure your portfolio is capable of that… those focused on half-price drivers will struggle, and you need to make sure you will sell off-promotion.”

As Halstead mentions above, one aspect encouraging a move away from deep discounting wine brands in UK supermarkets is new regulations from the Office of Fair Trading, and in November last year Aldi, Co-Op, Lidl, Marks & Spencer, Morrisons, Sainsbury’s, Tesco and Waitrose all agreed to adopt a new code of practice set out by the regulator.

These include the avoidance of any artificial price inflation to make a later discount look more attractive, as well as ensuring that any promotions run for the same or less time than the product was sold at its full price.

DOWN MARKET

As a result of supermarket’s adoption of these retailing regulations, Schaafsma says the amount of wine sold on promotion in the UK off-trade has fallen by 6% in the last 12 months to July this year, quoting Nielsen figures. He also notes that 54% of the wine sold through retailers in the UK over the last year was purchased on discount, a much lower level than seen in the market over recent history, and partly as a result of this, the total off-trade wine market is down 2.9% in volume.

“The UK wine aisles are under pressure… there are plenty of other goods that could expand into wine’s space and deliver a higher margin,” sums up Halstead. And it is this fact that no doubt explains why supermarkets are so keen to develop web-based wine sales. They can increase the area in store for profitable products while retaining their high-spend wine customers online.

Furthermore, with the web, the major multiples can offer a wide range for the entire UK, as well as offer short term deals on exclusive parcels to a “community” of shoppers, who, in turn, benefit from having a heavy, fragile product delivered either to their local store, or direct to where they live.

This doesn’t however, make the online opportunity easy to exploit for the webbased start-up such as Slurp, which must recruit shoppers from existing and wellknown grocers, or, in the case of mailorder merchants, attract consumers with a high-level of loyalty to their longstanding wine suppliers.

Indeed, of the UK’s online-only wine retailing start-ups of the last five years, just Naked Wines appears to have really made a lasting mark, although the rebranded Gondola Wines, now called yourfavouritewines.com, continues to trade, backed by the deep pockets of British entrepeneur Peter Jones.

Feature findings

• While total UK off-trade wine sales are declining by 3%, online wine sales are growing by 19%.
• The UK online wine market is extremely competitive and dominated by major multiples and large mail order wine merchants.
• Web-based wine retail is attracting increasing numbers of wine drinkers and above all more knowledgeable consumers.
• The average price of a bottle of wine sold online tends to be higher than in shops.
• Estimates vary widely about the size of the UK online wine market, with figures ranging from £600m- £1.3bn, or 8m-18m cases.
• The UK supermarket wine aisle is under threat as the cost of wine rises and promotional techniques come under government scrutiny.