September 27, 1999 5:00 AM PDT

Growing wine rivals pour it on

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A battle is fermenting between the two leading online wine retailers.

The two companies--Wine.com and WineShopper.com--have adopted distinctly different strategies. Wine.com, formerly Virtual Vineyard, is trying to connect vineyards directly to consumers.

WineShopper.com, with the support of Wine and Spirits Wholesalers Association, is continuing to work through the traditional three-tier system for delivering wines to consumers, which involves the wineries, wholesalers, and retailers.

Most analysts agree that this market, bogged down with regulator issues, will take some time to flower. But Wine.com and WineShopper are clearly at the front of the pack so far.

"The folks that are getting the money today will be the leaders in this sector once the market arrives," said Ken Cassar, an analyst at Jupiter Communications. "There isn't an big national brand out there right now that--if they decided to--could step in and own the industry."

Wine.com is accelerating its move into this market with a new service, The Winery Shops@Wine.com, which will offer consumers existing and previously unavailable wines from California and international wineries.

Kendall-Jackson's Artisans & Estates Winery and Niebaum-Coppola will be the first wineries to open their virtual doors on the site, with Wine.com providing the e-commerce, distribution, and customer service. Wine.com chief executive Bill Newlands said additional wineries will come on board over the next two months.

"Maintaining the middleman does the consumer no good and the wineries no good in the Internet space," Newlands said.

Still, victory is no guarantee for Wine.com. Unlike most Internet retailers that try to seize dominant positions with "first-mover" advantage and heavy marketing, federal and state regulations controlling the shipping of alcohol across state lines is likely to dictate which will be the Amazon of wine retailing.

As a result, even venture capitalists have been slow to enter this market. Most analysts have even been hesitant to forecast the size of this sector because of the risk that sudden adverse regulations would kill the business before it can see daylight.

WineShopper, however, notes that because they use the traditional three-tier system, it is able to offer vintages from small and unknown wineries as well as national labels carried by wholesalers.

"The beauty of our site is that we are able to fulfill orders on a national basis," WineShopper spokeswoman Suzanne Gannon said. "We are not restricted to states where direct shipping is allowed because with the [three-tier system[ everything we ship passes the existing laws of the states."

Newlands said Wine.com delivers to about 20 states where direct shipping is permissible and in about another 20 states using wholesale and retail partners.

While there several other players in this sector--such as eVineyards.com and Winebins.com, which has yet to launch--WineShopper and Wine.com have received the bulk of venture capital funding by far, making them the ones to watch as this nascent market unfolds.

WineShopper has taken in $46 million in financing, led by venture capital powerhouse Kleiner Perkins Caufield & Byers. Virtual Vineyard, which this month acquired Wine.com and assumed its brand name, has VC backing of about $50 million, led by New Millennium Partners and GE Equity.

Still, industry experts say this is a market that will produce riches for a few people but not billionaires.

"The entire wine industry, from the ground up to your lips is only about a $18 billion industry," said Lewis Perdue, the editor and publisher of Wine Investment News. He is also the author of The Wrath of Grapes: The Coming Wine Industry Shakeout and How to Take Advantage of it.

"I think some of the VCs are letting their love for wine as a beverage and the romance of the industry override some of the cold, hard calculations on what the actually returns might be," Perdue said.

 

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