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San Francisco-based Wine.com, the biggest and oldest of the Internet wine sellers, is about to get bigger. On Aug. 14, it announced that it's merging with rival Wineshopper.com, which had also hoped to become the dominant force in the online wine market as a business-to-business service for distributors and by selling to consumers. One of Wineshopper's main assets is its relationship with Amazon.com, which paid about $30 million for a 40% stake in the company.
However, Wineshopper ran afoul of byzantine state liquor laws dating back to the Prohibition era (see BW Online, 8/22/00, "Wanted: An Oenophile's Bill of Rights"). And its plan to collate liquor wholesalers' inventories online turned out to be far more complex than company executives had expected. At the time of the merger, Wineshopper.com was months behind in getting its Web site operational and was still selling only a limited selection of wines in a handful of states (Wine.com has a 42-state network). Rivals believe that Wineshopper was running low on cash and that its venture capitalists, led by Kleiner Perkins, pushed it to merge with Wine.com.
The new company will be called Wine.com and will be led by that site's top executives, including CEO Bill Newlands. BW Online Contributing Editor Thane Peterson recently checked in with Newlands by phone to talk about the merger. Here are edited excerpts of their conversation:
Q: What is the thinking behind the merger with Wineshopper.com? The two companies were bitter rivals.
A: First of all, our business models were much more similar than either of us realized. Secondly, as we started to look at putting this thing together, it was very clear that we had basically split up many of the important partnerships that were available in the wine space. When we started to look at it as a combined entity, it really was a powerful group of ties and links -- starting with [Wineshopper.com's] Amazon.com relationship, its [deal] with Wine Spectator magazine, its strong ties with [wine] wholesalers. On our side, we have a very strong business already developed, as well as relationships with the Wall Street Journal and others. There just looked to be very strong synergies.
Q: You're coming out on top of the merger...
A: Yes, the chairman will be our chairman. I'll be the CEO. It will be called Wine.com.
Q: So what is Wineshopper.com bringing to the deal? The company has had a terrible time getting its system up.
A: More recently they have, frankly, overcome many of their technology problems and issues. And certainly, the infrastructure they have been developing with the [liquor] wholesaler network will be very useful in the combined companies. The relationship with Amazon.com and the traffic it will drive will be highly advantageous to the combined business.
Q: Amazon invested $30 million in Wineshopper for a 40% stake?
A: We have a policy of not stating ownership numbers. But that's reasonably accurate.
Q: Will Amazon.com be a shareholder in the merged company?
A: Yes, Amazon will continue to be a significant shareholder in the combined companies.
Q: Why didn't Amazon sign on Wine.com as a partner in the first place? Is that because of the venture-capital connection -- the fact that Kleiner Perkins is a backer of both Amazon and Wineshopper?
A: I honestly don't know.
Q: Will you be able to use the backend software system developed by Wineshopper.com?
A: It will be a hybrid. Our plan is to take the best of what they've done and the best of what we've done and maximize the best of both.
Q: Isn't the best of both mainly at Wine.com?
A: Not necessarily. Obviously, there's a lot that we've done that we're very proud of. But they've done a lot more systematic work on the compliance side [i.e., complying with complicated liquor laws that vary from state to state] than we have. We have focused more of our attention on the front [office] rather than the back.
Q: Do you have a feel for when the company might become profitable?
A: Not that we're releasing publicly. Obviously, this is a high-margin category that has very strong profit potential.
Q: Collectively, the two companies have raised about $150 million. Do you have much cash left on hand?
A: We don't release numbers on our cash position, but the company is quite solvent.
Q: Are you still looking at going international?
A: Absolutely. One benefit of the merger is that it will allow us to have additional time, energy, and dollars to put into international development.
Q: Once this merger is put together, how many U.S. states will you be able to sell into?
A: Roughly 45.
Q: Do you think the difficulties of dealing with widely varying state liquor laws contributed to Wineshopper.com's difficulties in getting up and running?
A: I think that's partly true. It takes a lot of time and energy to get a compliance solution for each of the states. I think some of their time delay initially was just dealing with the regulatory requirements. It's like dealing with 50 different countries in some respects.
Q: How big do you expect the market to be? Didn't Salomon Smith Barney recently estimate that U.S. online-wine sales will hit $1.5 billion to $3 billion within four years or so?
A: I believe that's correct.
Q: And you agree with that?
A: Definitely.
Q: And you think you're No. 1 among U.S. online vinters at this point?
A: Absolutely.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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