Wine: the Web's Final Frontier

There are always barriers to starting a business and eventually demand and technology help overcome those barriers. I could not believe the archaic laws relative to alcohol sales when I first started doing business in the States. Aivars Lode avantce

Wine: the Web's Final Frontier 

Online sales are expected to grab an increasing share of holiday shopping this season. But one product category remains stubbornly resistant to the trend: wine.

While bigger online audiences and efficient shipping operations have enabled categories like pet food and diapers to become viable Web businesses, selling wine over the Internet remains thorny. Chief among the hurdles is a patchwork of U.S. and state regulations governing alcohol sales that makes shipping bottles directly to consumers' doorsteps a mind-boggling proposition.

Rich Bergsund, chief executive of Wine.com Inc., has experienced those vagaries firsthand. The San Francisco-based online wine merchant has been fined by New York state for shipping wine in gift baskets stuffed with food; state law mandates food and alcohol be shipped separately. It has had to build seven separate warehouses to satisfy differing sets of state regulations.

The business, formed in 1998, is on pace to reach $80 million in revenue this year, up from $67 million last year. But it took more than 10 years to turn cash positive, and it took a detour through bankruptcy. At one point, Wine.com was down to a week's worth of cash and had to lay off a third of its workforce.

"Buying wine online makes a lot of sense; there's potentially unlimited inventory," said Mr. Bergsund. "But there are many factors that make it hard to sell wine that way: state regulations, shipping costs, even weather—making sure the wine you ship doesn't spoil in the summer months."

Wine.com pays about $2 million annually for its regulatory compliance, including licenses, legal costs and warehouse management.

Some states, including California and Washington, don't have any annual limits on how much wine can be shipped directly to consumers, but shipping wine directly to customers in Utah and Kentucky is a felony and could land a winery in jail. In certain states, such as Florida, some counties are dry and don't permit wine to be shipped in.

"Each state acts like its own country," says Dini Rao, vice president of products for New York-based Lot18, a flash-sales wine site.

Texas prohibits delivery by mail of beverages with over 16% alcohol, effectively eliminating port and other dessert wines. There are also laws that require a signature from someone at least 21 years old for wine deliveries.

All of this makes online wine sales an outlier in the flourishing e-commerce world. Wine sales shipped directly to consumers in the U.S. totaled roughly $1.35 billion in the 12 months through July, or 4.8% of the $28 billion wine market, according to ShipCompliant, a Boulder, Colo., company that helps wineries comply with shipping rules. Excepting wine clubs and orders made by phone, the market for direct-to-consumer wine-bottle shipments online is typically about a tenth of that, suggesting such deliveries represent less than 1% of total wine sales, the company said.

Meanwhile, online retail sales are forecast to be as much as 12% of total retail sales this year, up from about 3% in 2007, according to the National Retail Federation. Online holiday sales are forecast to jump 12% to as much as $96 billion this year, much faster than the 4.1% rise projected for overall holiday sales.

Many companies have tried—and failed—to crack the online wine market. Wine.com itself had to be relaunched by new owners after going bust in 2001 under the weight of operational costs. It was revived with funding from private-equity firm Baker Capital in 2004.

Even e-commerce giant Amazon.com Inc. AMZN +1.28% has repeatedly stumbled with wine sales. The company lost about $30 million on a 1999 investment in start-up WineShopper, which flopped partly due to the intricacies of interstate wine shipping. A second Amazon effort sputtered in 2009 after its partner, New Vine Logistics, suspended operations amid financial troubles.

Amazon isn't giving up. In September the company met with about 100 California wineries to gauge their interest in listing and selling bottles through a special section on the Amazon.com site later this year.

Amazon plans to shield itself from some of the complexities of online wine sales by passing the shipping burden to the wineries. The program will initially allow consumers in only 13 states to receive wine at their front door, according to winery executives who attended the September workshop. An Amazon spokesman declined to comment.

Violating wine-shipping rules and limits can lead to fines, suspension or, ultimately, termination of a winery's license. Because of laws favoring local distributors, the wineries themselves can't ship directly to consumers in 11 states, including Massachusetts, Pennsylvania and Oklahoma, according to advocacy group Free the Grapes.

Peter Sisson, who founded Wineshopper.com—now operated by Wine.com—said there are still too many obstacles for online wine sales to explode. "Wine is mostly an impulse item, something that you buy on your way to the dinner party," he said. "Since you have to be 21 to receive it, that means you're shipping it to your office and then lugging bottles home, which defeats the purpose."

"We can have customers come to Napa, love our wine, and we have to tell them we're sorry, we can't ship it to your state—we have to turn away a lot of business," said Scott Meadows, general manager of Silenus Vintners in Napa, Calif.

Chang-rae Lee, a novelist and creative writing professor at Princeton University in Princeton, N.J., said he buys seven to eight cases of wine a year online, partly because of the expansive selection compared with the local spirits shop. When he finds a website that won't ship directly to him, he has his wine sent to a friend in New York where he can pick it up later.

"It does seem there's a lot of red tape to get through to buy wine online," said Mr. Lee. "It would be so much nicer if it was just an open country."