What does Amazon's latest action mean for the wine market?

Friday, 27. October 2017 - 13:15

Okay, maybe I was wrong. For quite a while now, I have been confidently predicting that Amazon would use its market reach, advanced technology and intimate knowledge of customers’ tastes to take over a large chunk of wine retailing. 

This week, however, brought news that the internet giant is to close Amazon Wine at the end of the year. Cue shouts of “I told you so” from all of those who believe that old fashioned specialist wine retailers will ultimately beat the corporates, and “good riddance” from anyone who likes to see large, tax-avoiding companies stumble. 

But nothing is quite as simple as it seems. Amazon is not stopping selling wine; it will go on retailing lots of it – through its other brands: Amazon Fresh, Prime Now and Whole Foods Markets. It is Amazon’s ownership of this last company - acquired for a heady $13.7bn in August - that appears to have obliged Jeff Bezos its CEO to chuck his five-year-old, dedicated wine division overboard.

The problem Amazon seems to have come up against is a set of Prohibition-era federal rules known as ‘tied-house laws’ that are intended to protect retailers from undue pressure from alcohol producers. Federal tied-house laws prevent breweries, distilleries and wineries from ‘inducing’ any kind of outlet – both on- and off-premise – to sell their products if this leads to the ‘exclusion’ of alternatives on offer from competitors.

In California, however, the rules are significantly tighter. Businesses in the richest and most wine-focused state of the Union, may not “directly or indirectly… furnish, give or lend” outlets “any money or other thing of value”.

To understand how tightly this can be applied, in 2014, as the Sacramento Bee reported a winery called Revolution Wines almost incurred the suspension of its liquor license for 10 days, simply for retweeting the following tweet from the Sacramento Convention & Visitors Bureau: “Two days till @SaveMart Grape Escape in Downtown #Sacramento! Get tickets and info here: http://bit.ly/U7XFVq.” 

The Grape Escape was a very popular annual wine tasting event. With sponsorship from local retailer SaveMart, it attracted some 400 wineries and 5,500 visitors. As its organiser, the Bureau was entirely within its rights in going online to tell people about it. As a winery, supplying SaveMart, however, Revolution Wines fell foul of the rules by including a reference to the retailer. 

The following year, California’s Department of Alcoholic Beverage Control warned wineries planning to exhibit that, by donating their wine to an event bearing a retailer’s name, they risked breaking the law. All but four pulled out and the event was cancelled, a month before it was due to open.

To understand the relevance of this story to AmazonWine, it is necessary to understand how that business operated. It was not technically a wine retailer in its own right; it was a ‘marketing platform’ that accepted payment – from wineries including Donald Trump’s – in return for marketing them on its website. Like other products on Amazon’s Marketplace, responsibility for delivery lay with the producer. As the insightful US blogger and consultant Tom Wark pointed out in a September blog post, when AmazonWine was launched, its parent company did not even hold any alcohol retail licenses. 

Now, with Whole Foods, it has 400 stores, and a booming business that sells far more wines than AmazonWine. As CNBC reported on 24 October, a number of leading analysts are currently advising investors to buy Amazon shares. Lloyd Walmsley of Deutsche Bank wrote in a note to clients that "we expect Amazon to leverage the Whole Foods Market brand [to]… to drive efficiency in the logistics efforts, fulfilling orders outside of the Whole Foods Market store footprint." In other words, Amazon would exploit Whole Foods to build online food and wine sales by users of its Prime business.

Tom Wark predicts that Amazon will use its Whole Foods alcohol licenses to build its own national version of the successful online business Wine.Com, selling wines sourced through local wholesalers via the traditional three-tier system. 

What Amazon will no longer do for the moment at least, is help wineries to sell their wine directly to consumers in the US. I think that role will be taken by Google and Facebook and quite possibly Microsoft through their various digital ‘assistants’. Crucially, none of these businesses would be hampered by tied-house rules.

But, make no mistake. Whole Foods and Amazon Prime will benefit from the same advanced technology and intimate knowledge of their customers’ tastes that I mentioned at the beginning of this post. I still firmly believe that Mr Bezos will take over a large chunk of wine retailing, but as Tom Wark says, maybe we should “Think “Amazon WholeWine”.
Robert Joseph