A new generic selling method

After assessing this new selling method, Vinfolio concluded that it's here to stay (with or without a recession). The combination of a limited time offer and a deep discount motivates consumers to buy before they miss the opportunity.  Flash sales also help fill a need for brand owners/representatives because not only are they a useful means of managing excess inventory levels, they can be an effective way to obtain new customers who buy again at full price after trying the wine (if executed properly).

Introducing Vinfolio's fine wine-focused flash sales

As Vinfolio's focus is on fine wine, we've decided to introduce a program (see today's press release) for high-end and boutique wineries, importers, and distributors which requires that the wine offered have a list price of $60 or more with a minimum professional score of 90.  We've also designed our flash sales to deliver long-term customer acquisition benefits and to leverage our full online marketing skillset (one of our key strengths).  So regardless of whether a wine's list price is $60 or $260, our program delivers value for the high-end or boutique winery, importer, or distributor.  If you are a member of the trade and would like to learn more, email flashsale@vinfolio.com.

Wine collectors should pay attention

For wine collectors willing to try new wines, the lower price points offered in flash sales reduce your risk of trial and stretch your wine budget farther.  However, don't expect to be able to buy large quantities at discount prices or see the same wine offered repeatedly.  For example, we permit flash sale partners to impose bottle limits of as little as one bottle for higher priced wine.  You should also expect the producer to be given your name and email address as a form of quid pro quo for being offered a great deal (this is the norm for all wine flash sale providers).  While you may opt out later, part of the reason these programs exist is to help wineries build their own direct-to-consumer channel.

Bottom line: Wine flash sales are here to stay.  If you interested in fine wines which appeal to more serious collectors and enthusiasts, then sign up on on our home page for Vinfolio's wine offers (which include flash sales).

1. The item is substantially more valuable than the cost to fake it.
2. The identification of fakes is difficult or inherently subjective.

Unfortunately, fine wine easily satisfies both conditions. E.g. counterfeiters can refill empty authentic bottles or digitally print almost any label at low cost.  Identification of fake wine is more of an art form using various clues instead of based on an objective assessment.

Authenticating fine wine - What matters

What ultimately matters is the wine itself - not the label, bottle, or capsule. Anti-fraud technologies which successfully authenticate the contents of the bottle such as Prooftag (see my prior post from 2007) are all that's needed.  If the security seal isn't broken, then the bottle has to be authentic. Other methods like adding DNA markers or invisible ink to labels, or engraving bottles, only help authenticate the bottles not the contents.

Step 1: Producers must enable objective authentication

Deploying a security seal like Prooftag's solution is a fundamental requirement to eliminating fake wine as it introduces an objective test which may be relied upon with 100% certainty.  I'm not sure what the current cost of using a Prooftag solution is but I have seen a range of 30 cents to $1.50 per bottle in other articles (no doubt driven by the volume of tags).  As a consumer, I would rather see a security tag on the bottle than buy fancy packaging like overweight, over-sized bottles if producers need to find a means of paying for it.

Step 2: Permit anyone to validate authenticity of bottles

Just as with identifying counterfeit currency, the only way to spot wine fakes is to cast a wide net by educating and empowering members of the trade and consumers on how to validate bottles.  If the anti-counterfeiting technology is "non-forgeable" (as Prooftag claims), then disseminating information publicly is safe and does not "train" criminals in how to counterfeit the wine.

Without an objective test (as with older vintages pre-dating use of anti-counterfeiting measures), however, sharing information on how to identify authentic wines may be tantamount to publishing how to make a fake successfully.  This is exactly why Step 1 should be adopted ASAP by any producer interested in preserving their brand's integrity and resale value in secondary markets.

Overt vs. covert systems

A September 2009 feature story in Wines & Vines titled New Ways to Fight Counterfeiters opens with the question of "Overt or covert?"  Covert systems seem pointless - almost akin to creating laws without enforcing them.  The only reason a system is covert is because of the fear (or reality) that a dedicated criminal could copy it.

Open systems like Prooftag's can be even more effective by providing members of the wine trade with access to automated "readers" to verify authentic bottles in an efficient manner.  These readers should be provided at no charge to qualified fine wine retailers and auction houses willing to use them to help choke off any trading in fake wine.

Wine anti-counterfeiting standard needed

Various winery and producer trade organizations should endorse a common standard of anti-counterfeiting technology.  If the industry adopts a multiplicity of approaches, enforcement will become near impossible as trade members would not only need to support all technologies but know which one was used by which producer and starting with what vintage. It's unworkable.

Bottom line: Stamping out wine counterfeiting starts with producers taking preventive measures.  Assessing fakes without an objective capability to determine them is just educated guesswork at best.  Consumers are exposed to financial loss, fine wine retailers and auction houses may get unfairly blamed or accused of complicity, and producers' reputations are at risk when consumers drink poor quality fakes and think it's the real thing.

Other recommended reading:

1. Vinography post: Do we have Ebay to thank for all that counterfeit wine?
2. Dr. Vino post: High stakes and alleged fakes - Koch sues Kurniawan.  In particular, read Koch's legal complaint which goes into some interesting details (especially first 5-6 pages).
3. Jancis Robinson's robust series of articles in her fake wine category on her information-rich site
4. Billionaire's Vinegar.  Quite entertaining and superbly researched.

"I am pleased to tell you that we have just reached agreement with the Mainland Customs to provide customs facilitation measures for wine exported from Hong Kong to the Mainland. We are also discussing with their food safety department, the Administration of Supervision, Inspection and Quarantine, to see if we can introduce even further measures."

At a later session, another government official said they expected to announce more details in "the next 1-2 weeks."

What it means

Currently, mainland China has roughly a 50% duty on imported wine plus inspection/sampling laws which permit bottles to be "tested" (and destroyed in the process).  If this announcement signals a potential removal of those barriers for wine flowing through Hong Kong (but not from elsewhere), it will help Hong Kong further its ambition (already well on its way to being realized) to become the wine trading hub for Asia.  For wine collectors, even higher demand for fine wine from China (if essentially duties are removed via passing through Hong Kong) translates into continued upward price pressure on fine wine prices globally.

P.S. For the full text of John Tsang's speech, click here.

Wineries have an alternative: Vinfolio's Marketplace

The Vinfolio Marketplace has quickly become the world's largest online fine wine marketplace.  There are about 44,000 unique wines currently listed for sale out of over 270,000 wines owned by users of Vinfolio's VinCellar free online cellar management application, and by the users of our partner for the Marketplace, CellarTracker.  While the initial focus of the Marketplace was aggregating supply owned by individual wine collectors, it is equally applicable to the trade.

Wineries may be interesting in reading a prior post of mine called Vinfolio Marketplace "Highly recommended for Wineries and Importers from June. VinTank, the digital think tank of the wine industry, profiles why the Marketplace matters to wineries.  The key benefits are:

• Complete anonymity - This is different from Amazon but it provides more flexibility for a winery to sell items at other than list price if it so desires.
• Increased revenues - The winery controls the price of sale at all times and may vary it up or down from transaction to transaction.
• Flexible inventory management - Sell allocated or library wines at secondary market premiums and/or reduce oversupply at discounts.
• Access to new customers - U.S. and international buyers, especially in Asia, through our Hong Kong operation.
• Cost effective - Fees of 15% of sales or $6/bottle minimum (whichever is greater).

It's 100% legal

This question is often raised, and is likely to come up again given Amazon's regulatory difficulties.  See our Marketplace FAQ - 3rd question under General: "Is the Marketplace legal?

Intrigued?  Email us

If you're in the trade, email trade@vinfolio.com and we'll forward a complete information package for your evaluation

Consider the following:

• Virtually all major auction houses have gone from zero Hong Kong auctions (as of March 2008) to having a high percentage of their global sales being achieved in Hong Kong since then (when the import duty was cut to zero).  In total, by the end of this month, there will have been 19 wine auctions held in Hong Kong since the duty cut.
• Almost all of the wine sold in Hong Kong is coming from the U.S. and Europe and would have otherwise been sold in those locations (with lower Asian buyer participation).
• Last week, I was in the UK and met with several major fine wine players who told me from 40%-60% (!) of their total sales is now generated from Asia.
• We're launching our own Hong Kong ecommerce site next month (see earlier post) and I just received an email today that Acker Merrill just launched their first Hong Kong Internet-only auction (both in HK$).
• The Hong Kong International Wine & Spirits Fair is coming up November 4-6, and the exhibitor list is more than double that of last year's event.
• Chateau Margaux is making its first ever visit to Asia next month for a wine dinner anyone can attend for about US$550.  There are more producers than you might think who are at a very early stage of developing their brands in Asia.
• According to a story in yesterday's Wall Street Journal titled China's Taste for Luxury, "robust Asian demand almost entirely offset falling sales [elsewhere] of brandy, champagne, jewelry and watches."
• Three days ago, the WSJ's Wealth Report blog had a post titled Only China Can Save Luxury Sales in which it mentions that Bain & Co. estimates luxury-goods sales in mainland China will jump 12% this year whereas the U.S. will be down 16%, Japan will be down 10%, and Europe will be down 8%.
• The same Wealth Report blog had an interesting post on October 13 titled Chinese are the New Kings of Bling.  The post notes that China is the world's second largest luxury goods market (after Japan) per a Goldman Sachs report.

Bottom line: The Chinese wine collector is already making an impact on global fine wine prices and I fully expect that they will capture an increasing share of the high end of the fine wine market, driving up prices for others in the process.  The good news is that savvy collectors have plenty of alternatives to the most well known producers.  Or, you can read these "tea leaves" and conclude fine wine is an interesting investment class to pursue, even if only for financing your drinking.

Vinfolio Hong Kong ecommerce site launching in November 2009

Our immediate next step in Hong Kong is to convert our Vinfolio Hong Kong web site (www.vinfolio.hk) into an ecommerce site (see image - click it to enlarge). Here's what you can expect:

• Access to virtually all 2,000+ items listed in our online U.S. store plus Hong Kong site exclusives.
• Pricing in HK$ for pick-up/delivery in Hong Kong (within 1-2 weeks in most cases)
• Separate email offers of items from the HK online store(email HKoffers@vinfolio.hk to request to be added)

In short, Vinfolio Hong Kong will essentially become a local wine store to Hong Kong/Macau residents.  No overseas shipping need be arranged and no minimum purchase quantity will apply.  We will list all available items in a new "Vinfolio Hong Kong" listing on Winesearcher, WinePrices.com, and Global Wine Stocks.

Of course, our U.S. online wine store will continue to be available to Hong Kong customers if they prefer and the Vinfolio Marketplace will continue to be there exclusively.  Just keep in mind that those prices are in U.S. dollars for pick-up/delivery in San Francisco so onward shipping costs to Hong Kong are extra (whereas this is already included in HK site pricing).  U.S. purchases come with six months free storage in one of our climate-controlled facilities. Initially, we will not ship to other countries from Hong Kong so customers in other Asian countries will need to continue to order from the U.S. site or make their own arrangements from Hong Kong

Hong Kong wine storage facility targeted for 2nd Quarter 2010

We remain committed to opening a world-class wine storage facility in Hong Kong.  The tough economy and higher-than-expected capital expenditure requirements caused us to defer our original plans to open a Hong Kong wine storage facility in the Fall of 2008.  We've recently decided to pursue an approach in Hong Kong that we followed with our 20,000 sq. ft. Napa Valley facility that we opened in October 2008.  In that case, we simply became a tenant of a facility developed for wine-related businesses that required a climate-controlled environment.

The problem, however, is that these ready-to-occupy facilities simply don't exist in Hong Kong (at least, I'm not aware of them).  There are "air-conditioned" facilities and cold storage facilities but none designed for a constant 55 degree (F) (or 12-13 degree C) temperature and humidity-controlled environment.

Therefore, we've set out to find a financial/real estate partner (corporate or individual) to finance the development of a world-class, Hong Kong-based, wine storage facility that Vinfolio could lease and operate as a tenant.  We're willing to completely manage the design process as we essentially already completed one in 2008 before we put the project on hold.  Any interested parties should contact Anthony Mak, Managing Director, in our Hong Kong office at (852) 3748-3833 or anthony@vinfolio.hk and he would be glad to provide a more detailed description of what we're seeking in a partner on this project.

Hong Kong International Wine Fair November 4-6

Vinfolio Hong Kong will have a booth the International Wine Fair next month.  Please stop by and meet our Hong Kong team in person.  I will also be in Hong Kong from Nov. 3-6 as will our Vice President of Marketing, Jay Moore.

Parameters of Test #1

1. Fedex overnight priority service (delivery by 10:30 am local time).
   
2. 12 bottles shipped in Styro shipper from our San Francisco warehouse (SF high was 68 F that day) to a "hot weather" destination city which experienced to a temperature range the next day from 77-102 F.
3. Bottle temperature probe placed in a bottle in a corner of the box.
4. Ambient temperature measurement device place inside the Styro to measure air temperature inside the box.
5. The package was routed through Memphis (Memphis temperatures were 74/92 on the departure date and 75/90 on the delivery date).

Maximum wine temperature reached of 69 F

A few observations on the chart below (click the chart to enlarge it):

• While our warehouse is at 55 F, we deliberately allowed the bottle temperature to float upwards to 61 F before handoff to Fedex to simulate the high end of the range of any home cellar.
• Note that Fedex pick-up time is approximately 4:30 pm PST.  Therefore, the maximum time before delivery is about 18 hours when overnight priority is used.
• Despite significant variation in air temperature inside the box as it moved through Fedex's system, the bottle temperature rose at a steady pace without reaching the highs of the ambient air.
• Even with a high temperature forecast for the destination city, the ambient temperature in the box stayed well below actual highs for the day (and generally below the low for the day).
• At 10:30 am, the wine had only reached 69 degrees, or 8 degrees above the starting temperature.

Additional useful information

• The thermal mass of 12 cooled bottles inside the Styro seems to buffer against air temperature fluctuations.
• We ran other tests with higher and lower starting temperatures.  The impact on the final temperature was insignificant (a few degrees).

More tests to come

We plan to run the following tests:

• 6 bottles shipped overnight to a 90+ degree destination (to test impact of fewer bottles on maximum temperature reached)
• 6 and 12 bottles shipped with 2-day service to a 80-90 F degree destination (consistent with our Marketplace inbound shipping rule)

Bottom line: Shipping overnight priority in Styro (at least with 12 bottles at cellar temperature) protects your wine in even the most extreme heat. 

Selective pain for producers

Before I dive in, it's worth noting that the difference of opinion about the future of CA high-end wine sales noted in the article is directly related to the uncertainty about the future state of the economy.  History shows that there's always a rebound and most market-watchers are confident this time is no different. But if one steps back from the macro-level picture, the future recovery will not be felt equally by individual California wine producers.

Top cult brands ($250+/bottle) will recover

The top, established cult brands will be fine. WinePrices.com's California 100 Index of the most frequently traded California wines at global wine auctions is up 7.1% year-to-date through June (new stats incorporating the September start of the Fall auction season will be calculated by mid-October).  The index's value is still down about 22% year-on-year to June 2009 but it's climbing back.  It's worth noting that the 100 wines in the index include 20 different producers although 5-6 dominate half the list.

Fate of those selling above $100/bottle will vary

How many readers know a wealthy individual who started a winery in the past five years to produce a high-end California cab?  I know plenty but I also suspect there will be a lot fewer such people going forward and that many of the "less committed" among them will throw in the towel.  That's good for the rest of the players as one of the problems in this $100-$250/bottle category is too many producers, all with a "story," well-known winemaker, expensive packaging (heavy bottles, wooden boxes), and a high price tag. It used to be that new producers earned their stripes (and price increases into the $100+ range) through delivering consistent year-to-year quality at fair price points instead of skipping to the head of the line by opening the cash spigot to create a high-priced trophy wine in record time.

Wine collectors who buy these $100-$250 wines will open up their wallets again as the economy enables them to (as some part of many purchases in this price range is the status it signals to others) but there will be less blind faith in speculating just to have the latest wine your friend doesn't.  Anyone paying this price also expects quality every time so inconsistent producers in this price range will have nowhere to hide.

Feast or Famine at $50-$100

This zone is "drinking territory" for many wine collectors but also where wine collectors have far more choices on where they spend money.  I suspect there will be many "feast or famine" circumstances where those producers with strong longer-term customers will be fine and others with shorter track records will be scrambling to sell their productions absent some strong reviews that provide some confidence of a sound purchase.

Bottom line: Wine collectors of California wine are in for a period of relative price stability as the opportunity for producers to raise prices (as many did year after year given abundant demand) is not likely to return for several more years.  But I believe spending on high-end California wines will return with the domestic economy and forward-thinking California producers (even modest sized ones) will begin cultivating foreign consumers more aggressively (especially in Asia).

The site provides a variety of ratings including a composite restaurant rating from multiple online guides, a most popular list, Yelp ratings, and perhaps most importantly for readers of this blog, the "Wine-Friendly Rating."  The wine-friendly rating formula covers the basic wine policy and its restrictions (if any), corkage fee levels (over $20 is the worst category), the number of wines offered by the glass (50+ is highest score), and whether the restaurant's wine list is online and if it's at least 50 wines.

• Champagne producers collectively agreed to pick 32% fewer grapes and reduce bottles produced by 44% this year in attempt to prop up Champagne prices in the wake of falling demand.
• An industry source estimates there are more than 1.2 billion bottles sitting in warehouses.
• Annual sales peaked at 339 million bottles in 2007 and might be 260 million this year so 1.2 billion bottles is a 4-5 year supply.  In other words, this "problem" was already building prior to the recession.

Supply and demand constraints

The fundamental law of supply and demand is at work.  Normally, lower demand with constant supply would lead to lower prices but there seems to be a collective view by the producers that this is unacceptable (something that we see with California high-end wineries too). In the face of limited levers to boost short-term demand and a reluctance to let prices fall, the only solution left was to cut production (as they have done).

What if prices were allowed to fall?

Let's consider the advantages of allowing prices to float downwards to a new equilibrium:

• Demand would rise, helping erase the oversupply situation.  When the economy recovers, a smaller supply overhang will enable prices to bounce back sooner.
  
• Champagne would avoid losing market share to other sparkling wines and still wine substitutes that may be hard to recover later.
• The Champagne category could use more price-competitive offerings to grow base consumption and attract new consumers amongst people who might otherwise not drink Champagne.  "Habits" or preferences once formed tend to persist so there's the potential for a long-term gain in consumption from cultivating greater consumption with lower prices.

What's your view?

If you were a Champagne producer, would you vote to cut supply or allow prices to fall?  I know every consumer and wine collector would choose the latter.

UPDATE: On September 12, the WSJ magazine published a story on the plight of the Champagne industry called Bubbles Take a Bath.  It's worth a read.

This brings the total equity capital investment in Vinfolio to approximately $14 million.  The first $9.5 million came from a combination of initial funds I provided and two rounds of outside investment from individuals.  So while this is a Series A round, it is not a typical one given the amount of prior investment.

The good news for wine collectors and enthusiasts is that the additional financial resources enable us to continue our ambitious development plans on multiple fronts.  We're all looking forward to focusing our full energies on the business once again.

Speaking of Marketplace, just today we released a range of new features which will be described in a series of blog posts on the Vinfolio Blog soon.