Why some online wine clubs succeed as others struggle

Multiple online wine clubs based in the North Coast or with deep Wine Country roots have faced financial trouble in recent months, something also seen in newly released data on direct-to-consumer shipments last year.

But industry analysts say that the challenges may have more to do with their subscriber-growth strategies than with the prospects for virtual clubs.

Naked Wines, a U.K.-based club company with Napa-based U.S. operations, is tightening its belt after acknowledging last summer that it over-estimated how much wine consumers would buy.

Winc, based on the Central Coast but a big buyer of North Coast wine in bulk, filed for bankruptcy in November after running out of options to refinance debt. On Jan. 18, the court approved the sale of club assets for $11 million to Project Crush Acquisition Corp LLC, an entity connected to Los Angeles-based Amass Brands, a beverage and personal care products company run by Winc co-founder Mark Thomas Lynn, according to court and public records.

And while Sonoma-based SommSelect ended up in bankruptcy court reorganization in the second half of last year, its financial statements and analysts following the venture suggest it got there because of a legal battle with a founder, rather than a problem with the business model.

“SommSelect is a financially stable company and was doing fine. Unfortunately, they had a shareholder dispute,” CEO John Fechter said.

At the helm of the company for the past 18 months, Fechter and Ken Young, chief operating and technology officer, are employed under a contract with G2 Management Services to run the company.

SommSelect filed for Chapter 11 reorganization on July 14, 2022, and most notable among its listed debts was a $3.94 million judgment from a 2019 Sonoma County Superior Court case brought by co-founder Brandon Carneiro. The company board fired Carneiro as CEO in 2018. He claimed he wasn’t fired for cause and wasn’t adequately compensated for his 3.94 million shares that other shareholders purchased as part of his exit from the company.

A jury in late 2021 agreed that Carneiro was owed more under his original buy-sell agreement, awarding him $1 per share, up from 23 cents a share in a valuation provided to the company board, according to court documents.

At the beginning of last month, Carneiro reached a settlement in bankruptcy court to reduce the amount owed to $330,000. That became part of the company reorganization plan, confirmed by the court on Dec. 12, 2022. It includes $1.8 million in exit financing from shareholders and G2 Management Services.

Because of $1.62 million in payments on its outstanding debts when the plan was confirmed and other ongoing payments in the plan’s five-year time frame, SommSelect expects to have put over 100% of its disposable income over that period toward paying commitments, according to the document. As a result, the company expects to eke out earnings totaling only $944,000 over all five years.

Yet outside the legal battle, SommSelect has enjoyed strong financial growth over the past three years. For example, its 2021 IRS tax return in the bankruptcy court record showed 2020 earnings of $3.43 million on gross revenue of $10.32 million, up 34.5% and 42.9%, respectively, from 2019.

“They had experienced explosive growth through COVID. Sales were skyrocketing,” Fechter said.

Third-party wine clubs enjoyed a surge of orders in the first weeks and year of the pandemic, a period of heightened consumer purchasing often called “pantry stuffing.”

“You had a whole bunch of people who when COVID hit ran out and started ordering wine online, because they just realized that at that point that it was legal for them to do or even accessible. Because at that point in time, everything became deliverable,” said Dale Stratton, president of Wine Market Council and an adviser on consumer shopping behavior for Napa-based Azur Associates.

The council, an industry consumer research group, had found in previous consumer surveys that one of the barriers for wine club subscriptions was that consumers didn’t know it was legal to get wine shipped to their state.

Since the U.S. Supreme Court’s pivotal 2005 Granholm decision started knocking down state laws that protected in-state wineries from out-of-state competition, currently there are only five states with significant restrictions on wineries’ shipping directly to consumers, according to Sovos ShipCompliant, a national regulatory compliance firm. Mississippi and Utah prohibit it, and it’s severely limited in Arkansas, Delaware and Rhode Island.

But what has separated the club business models after the 2020 surge in direct-to-consumer wine sales has been a rapid slowing of robust decade-long DTC growth in 2021 followed by a reversal last year.

The volume of direct-to-consumer winery shipments nationwide last year fell by 10.3% (876,848 cases) from 2021, according to a new study by Sovos ShipCompliant and Wines Vines Analytics. But revenue only decreased by 1.6% ($66 million) thanks to a 9.7% jump in the average price per bottle.

It was the first decline in both cases and revenue since the compliance firm started tracking DTC sales in 2010.

“The impacts of an inflationary economy, budget tightening by consumers, increased costs for wineries of goods, services and debt, combined with consumers redirecting their consumption patterns, all led to a contraction in the DtC wine shipping channel in 2022,“ said the 38-page 2023 Direct-to-Consumer Wine Shipping report released Jan. 24.

The report, based on 41 million shipments last year, found that the most expensive wines got pricier and enjoyed continued volume sales growth, while lower-priced wines suffered. Wines priced over $100, making up just 8.1% of shipments, had volume growth of 7.8% last year.

Wines under $100 and especially under $50 took hits to the number of cases sold. In the under $30 range, 46.3% of total DTC volume, volume dropped 17.5%. Consumers’ trading up to more expensive wine, a trend from the past two decades called premiumization, doesn’t seem to account for this, according to the study.

“This does not look like a matter of premiumization in the channel, but rather a general pullback in purchases by consumers that tend to purchase lower priced wines, whether a reaction to increased costs of living or retreating from the DtC channel in response to the end of pandemic restrictions and feeling more comfortable spending time in more crowded venues,” the report said.

SommSelect’s wines start at $25 a bottle and range up to $100. The average bottle price from the company’s wine shop and daily offers is $58, according to the company.

Yet as of early January, the number of SommSelect club subscribers was up by double digits from a year before, Fechter said.

The subscription model is attractive for businesses, whether they make wine or software, because it’s dependable revenue. But a problem the model faces is when subscribers bail out, a closely followed metric called churn.

In addition to SommSelect, one of the third-party clubs analysts pointed to as one that’s doing it right financially is Napa-based Wine Access.

Its retention rate was 75% across all its clubs last year, according to A.J. Resnick, chief marketing officer. That’s a churn rate of 25%.

“We can attribute that to the rigor that goes into sourcing the wines for each club and every wine we offer,” Resnick said. “All wines available on Wine Access must be approved by each member of our wine team, including insight from a master of wine, master sommelier, advanced sommelier and international wine judge.”

The company started selling wine online in 2004 and rolled out its first wine club in 2019 after a pilot program the previous year. Since the launch, revenue is up 111%, jumping fourfold in 2020, 267% in 2021 and 94% last year. Average order value was up 3% last year.

Another key challenge for the wine club model is the cost of supplying lower-priced wine to consumers via couriers, according to analysts.

“The shipping cost compared to the bottle price is a big part of that,” Stratton said. “Out of the gate, people used free shipping to get subscribers in. But it’s a very difficult for a wine business to sustain.”

That’s because the actual shipping cost for a case of 12 standard glass bottles filled with wine — roughly 40 pounds — can be well over $50. For lower-priced wine, that can be a substantial proportion of the retail price of the case. So clubs and vintners have fretted over how much, if any, of the shipping cost to pass on to consumers.

Paul Mabray of Napa-based wine information portal Pix noted that clubs Fatcork, SommSelect and Wine Access have kept their churn rates down by not resorting to shipping-cost and other customer-acquisition incentives that have driven cost of goods higher for other clubs.

“Broad-based consumer clubs like Winc and Naked Wines are trying harder to get consumers that may be semi-interested in wine but are cost-conscious,” Mabray said.

Jeff Quackenbush covers wine, construction and real estate. Before coming to the Business Journal in 1999, he wrote for Bay City News Service in San Francisco. Reach him at jquackenbush@busjrnl.com or 707-521-4256.