The Wine Collector

Since the Vinfolio Marketplace went live last week, there's been some discussion in online boards about its fees and how they compare with primary alternatives (i.e., bricks-and-mortar auction houses and online auction players). The Marketplace differentiates itself on many dimensions, including fees, but this post provides a fee-only-based comparison (OK, I've added some other comments too because "normalizing" fee charging methods requires some explanation).

Comparing  "apples to apples"

All other auction houses require the wine being auctioned to be in their custody prior to the auction.  While not required in the Vinfolio Marketplace, the seller has the option of transferring wine to Vinfolio storage first which is the nearest equivalent of the traditional auction house approach.  Therefore, for a true "apples-to-apples" comparison, the Marketplace seller's commission when sold from storage is the only relevant basis of fee comparison.

Normalizing fee methodologies

Auction houses (whether traditional or online) tend to charge both a buyer's premium and a seller's commission on a transaction. Many sellers tend to ignore the buyer's premium because, after all, it's not charged to them. That logic is fallacious because any rational buyer faced with paying a 20% buyer's premium on his/her bid (or "hammer") price, will lower his/her bid to reflect the extra cost.  Doing so ensures the total out-of-pocket price reflects what he/she believes the bottle to be worth.

The table on the right shows the universe of leading auction houses and their current buyer's premiums based on June 2009 U.S. auctions (note: if an insurance fee percentage is required, it is included).

To normalize different fee methodologies, I used a fixed $100 total price paid for a bottle and calculated the bottom-line net proceeds received by a seller (which is all anyone cares about!) when sold through different types of auction channels.  The final result is a table showing a comparable single metric representing an "equivalent" seller's commission.

Vinfolio Marketplace vs. Traditional Auction Houses

The following chart illustrates that the Vinfolio Marketplace generates greater seller proceeds than using a typical auction house.  Auction houses don't publish their seller's commission fees (why not?).  They tend to be negotiated based on the estimated value of the consignment but the range shown is fairly typical (with Acker Merrill being the exception at 0% but with their 21% buyer's premium, the net proceeds only reach $82.64).  Keep in mind that for larger consignments where the lower-end auction house seller's commission probably applies, the Vinfolio Marketplace's cumulative volume discounts would also, raising the Marketplace's net proceeds to $86.50.

Vinfolio Marketplace vs. WineBid and J.J. Buckley (WineCommune)

The following chart shows why the Vinfolio Marketplace is better than using WineBid or J.J. Buckley (a WineCommune affiliate).  Some additional explanation is needed here:

• Winebid's seller commissions are not published (at least nowhere I could find) but are believed to vary between 12%-19% based on the volume of wine consigned.
• J.J. Buckley is a retailer owned by WineCommune that uses WineCommune to run consignment auctions (WineCommune sellers as of 12/08 must possess alcohol licenses to use it directly, hence the J.J. Buckley "tag team").  There's no buyer's premium and the seller's commission is linked to the bottle value with break points at $250 and $1,000.  In checking WineCommune's site, there were only 3 listings with prices of over $1,000 per bottle (13% fee) and just under 10% of listings with $250 in total value (15% fee; listing measurement includes multiple bottle lots) so most people sell bottles for less than $250 which is a 17% seller's commission.  The 16.8% shown in the chart is an estimated weighted average.

Other material differences exist that you need to know about.  With WineBid and J.J. Buckley, any wine which doesn't sell in a weekly auction has its reserve and/or starting bid lowered each week until it sells (or you can ship it back to yourself any time at your expense).  If you feel like gambling, you can reduce the seller's commission to 10% at J.J. Buckley if you sign up for a weekly auction with a $1 starting bid and no reserve.  As that's an "orange" in this "apples-to-apples" comparison, I didn't include it in the chart above.

Selling fee summary

The table below says it all.  The far right column represents the "expected" fee borne by the seller based on which firm is used.

Bottom line: The Vinfolio Marketplace is the most cost-effective solution for selling your wine, even without considering its many other differentiators. Review the Marketplace overview to learn more.

Yesterday, the Vinfolio Marketplace debuted and today we're scaling up its market impact by announcing a very significant relationship with VinCellar's leading competitor in the online cellar management software space, CellarTracker (see Vinfolio announces partnership with CellarTracker!).

What it means

1. CellarTracker users will be able to sell wine in the Vinfolio Marketplace using CellarTracker as their "front-end" to Vinfolio's "back-end".
2. Together, Vinfolio and CellarTracker have over 135,000 users managing 12+ million bottles of more than 400,000 unique items worth an estimated $2+ billion in retail value.
3. Buyers of fine wine will soon have access to the world's largest wine "store" (by an order of magnitude).
4. CellarTracker will be able to deliver even more value to its loyal user community.
5. To avoid any possible misunderstandings, we're not merging the companies and we'll continue to compete for new users to adopt our respective cellar management platforms.
   

The background story

CellarTracker's Eric LeVine and I first met in late 2006.  While our companies have been competitors for years, I've always believed in the principle of "co-opetition" in which one may compete in some areas but cooperate in others.  Vinfolio's development of the Marketplace enabled us to define an attractive win-win collaboration because any marketplace's success is defined by the ability to create a critical mass of buyers and sellers.  While Vinfolio had its own sizeable constituency, the opportunity to team with CellarTracker and its community of users offered what I considered to be a preemptive market move.  So I asked myself, "Why not go for it?" and broached the partnering idea with Eric in November 2008.

After working out an agreement in December, Eric and Vinfolio's team have been working closely together since January to ensure a seamless integration between CellarTracker and Vinfolio's Marketplace to support a simultaneous launch of bidding in early July.  CellarTracker users will soon be able to start marking wine for sale from their CellarTracker accounts to offer in the Vinfolio Marketplace.

Bottom line: While we will continue to drive the development of VinCellar's own user community, we're very pleased to be working with CellarTracker to create value for our respective users and the broader wine community.  We remain open to other such partnerships in the future but "execution, execution, execution" is our priority for now.

When I started Vinfolio in July 2003, my ultimate objective was to create an online destination where a virtually unlimited selection of fine wine aggregated from privately owned cellars could be bought and sold with the convenience and cost efficiency that only the Internet can enable.  That moment has finally arrived today with the launch of the first phase of the Vinfolio Marketplace (see Vinfolio announces launch of the Vinfolio Marketplace).

The fine wine supply problem

As a "committed" wine collector from the mid-1990s, I was constantly frustrated with the difficulty in obtaining the wine I wanted to buy.  At the time, I didn't realize the problem stemmed from inherent obstacles that retailers faced in accessing adequate supplies of fine wine in the new release (or primary) market.  Those obstacles, along with the capital required to stock inventory, forced wine collectors to buy from a diverse set of retailers (each with finite inventories) to find the wine they desired.  Even today, the wine retail market is still highly fragmented with over 850 U.S. wine retailers offering at least 50 items (over 400 with at least 500 items) but only a dozen or so with more than 5,000 items.

I realized that the path to building a scalable supply channel for fine wine depended on systematically aggregating the contents of privately owned cellars (i.e., the secondary market) -- in effect, applying the "long tail" theory (see chart below).  We sought to do so by creating VinCellar, our online cellar management application which was recently rated the most innovative wine social media network.  A by-product of users finding value in VinCellar was that merely using it brought visibility to who owns what and positioned it to be the platform from which sellers could easily opt to sell part or all of their collections.

Vinfolio's current business already built upon private cellar supply channel

Vinfolio's business has grown dramatically over the years by consistently sourcing over 70% of its supply (by value) from the secondary market (which ironically became our primary supply channel).  Along the way, we've developed numerous proven business processes and systems including a world-class ecommerce site, warehousing in multiple locations, storage, logistics, marketing, customer service and other skills.

The Marketplace represents the next step function in realizing the original Vinfolio vision by further automating business processes to deliver user convenience and business scalability while leveraging unparalleled access to fine wine managed within Vinfolio's VinCellar online cellar management application. The Marketplace selling platform will also be made available to the trade and other strategic partners (stay tuned for another announcement tomorrow!).

Why Marketplace is compelling

Vinfolio's Marketplace starts with the immediate critical mass of buyers and sellers derived from almost 55,000 users already registered with Vinfolio who are managing over $500 million and several million bottles of wine with VinCellar.

Marketplace redefines the online auction model -- it's not merely a replication of the offline bricks-and-mortar approach in an online context.  For example, there's no upfront consignment required, no listing fees, no time constraints, no minimum quantities, and no other preparation needed to start selling immediately other than marking wines for sale in one's VinCellar account.  With Vinfolio as the intermediary, the Marketplace is completely anonymous with all wine clearing through Vinfolio where it is inspected per published inspection guidelines for acceptance or rejection.

As of today, you can start marking wine for sale in preparation for the early July commencement of bidding and earn free Vinfolio storage credits in the process until May 31. 

Bottom line: Learn more about the Vinfolio Marketplace now.

Reuters just published a story titled Wine collectors eye cellars for liquidity in which Vinfolio is prominently featured. In fact, over 70% of the wine we sell (by value) is sourced from private collections because that's where most of it is -- not in the trade channels.  We are, in effect, systematically creating a new supply channel for fine wine by aggregating the "long tail" of supply.

The 20% advantage

Vinfolio recently did an analysis where we examined the retail prices at which we sold wine compared to what those same wines sold for at U.S. auction houses (hammer plus buyer's premium).  The average price advantage we achieved in 2007 YTD is 20% (22% to be exact but we rounded down).  Please review Maximizing sales price on our site for details on the analysis, why this premium exists, and why our retail prices are still competitive for buyers.

Benefit to private sellers of wine

This pricing advantage translates directly into higher net proceeds for the seller (even when the auction house has no seller's commission). 

Payment is also made in a few days (not months) because sellers are paid upfront, before the wine is even sold to consumers.

Why do people still sell at auction?

Mainly because that's the traditional choice (see The limited relevance of wine auctions).  When sellers learn that it's faster, simpler, and more profitable to accomplish their goals via a different method, they pay attention.  For example, we purchased a $600,000 cellar of impeccable provenance this month in direct competition with most of the New York auction houses.

Bottom line: If you're considering selling wine through an auction house, sell your wine to Vinfolio instead.

Periodically, every wine collector needs to stop buying more wine and take stock of what's already in their cellar. Ideally, you're maintaining an accurate inventory as the benefits of doing so are compelling (See "Reasons to update/create your wine cellar inventory").  If not, you may be faced with the exercise James Laube describes in his article "No bottle left behind" (too new to be online yet) in the September 20, 2007 issue of The Wine Spectator.

Most people discover what Laube did in his friend's cellar -- namely that some wine is way past its prime (i.e. dead) or needs to be consumed immediately. But his three categories for classifying what he found -- "keep, toss, and party" -- is missing an important one which is "sell."

If your rate of consumption is not keeping pace with your rate of buying, regularly selling off wine before it goes bad is one way to avoid stockpiling excess wine (see reason #2 in "Common reasons to sell wine").  You might even find that selling helps finance your buying habit.

In an era when check deposits clear in one business day, why does payment for a successful wine auction sale take 30-60 days or longer?  Stories of much longer payment periods (6 months or even a year) are not uncommon.  Read this thread titled “Auction question – float” on the Mark Squires Bulletin Board on eRobertParker.com for some examples.

3 Factors explaining delayed payments

1. Risk of buyer rescinding purchase – As possession of your money provides some protection from the auction house being stuck with the cost of resolving buyer claims (e.g., regarding authenticity, quality, or title), delaying the seller’s payment provides time for potential buyer claims to be raised.
2. Buyer’s money may not have been collected – Virtually all sale contracts require collection of monies from the buyer before payment to the seller.
3. Reimbursable expenses may need to be calculated – Charges for shipping and other reimbursable expenses may need to be gathered as these are typically deducted from any sale payments.

Bottom line: 

1. Read the sales contract!  All of these payment details are spelled out in the sale contract you're required to sign.  Contracts I’ve seen from major auction houses state 35 days in one instance and 50 days in another.
2. Consider superior substitutes to auctions such as Vinfolio’s personal selling service where payment is guaranteed in 0-7 days after the sale.  Note that immediate payment occurs for larger cellars that are bought outright.  Inspection is performed at the customer’s location and funds are wired and received before wine is removed.

Vinfolio, for example, just signed a contract today to purchase a private cellar in the Midwest for over $400,000. Here’s a quick summary how our process works:

1. We price the cellar based on our expected retail selling prices (which are almost always higher than auction averages).
2. Our fee, which is effectively our retail margin earned when we later sell the wine, is factored in and the seller receives the net amount.
3. Payment is made as soon as the wine can be inspected (which in this case is at the customer’s home by staff we fly out).

The result: the seller nets more, is paid faster, and the transaction is completed far quicker than with an auction house.

There are no statistics on the volume of fine wine sales made by collectors to retailers or other alternative channels. My guess is that it’s greater than the auction house channel and a clear substitute for private collectors to consider who currently default to thinking “auction” when they think “time to sell.” Hopefully we can change that mindset.

For details on individual auction firm performance in 2006, please see the Decanter.com article “US/UK auction roundup” or the Wine Spectator article “2006 Wine Auctions Break the $200 million mark."

1. Tastes have changed, prefer other categories of wine now
2. Overbought, need to sell before wine is past maturity
3. Didn’t like a wine upon trying it and don’t want remaining bottles
4. Financing drinking with gains from sales
5. Value appreciation, too expensive to drink
6. Divorce, death and taxes
7. Balancing cellar between red and white
8. Trading to fill holes in verticals
9. Need cash for a special project or living expenses
10. Changed entertainment style, prefer large bottles over 750mls
11. Medical conditions
12. Charitable donations
13. Moving
14. Emotional connection to certain wines have faded (see the Wine Spectator’s James Moleworth’s blog post, “How wines stay in my cellar”, which inspired this post).