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Success in a Bottle: Wine Sites Finally Start to Win Over Web

Thanks to More States Opening Borders to Shipments and the Success of Daily-Deals Sites, Category Has Improved With Age

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From soil to sip, it takes a long time to make the finest wine. So it's fitting that the industry's journey to online buying has been a slow one, marked by legal and legislative hurdles that have scared away some of the biggest retail players.

Phillip James

But a scrappy group of pure-play wine sites may have finally uncorked the right formula to bring more wine online. They are companies like 13-year-old Wine.com, which has restructured under new management, brought in top marketers and launched a daily-deals site that helped it post its first profit in fiscal 2011. And they are upstarts such as Lot18, co-founded last year by 32-year-old adventurer Philip James, who has scaled Mount Everest but whose greatest achievement might have been luring some $13 million in venture capital.

The path was cleared in 2005 when a Supreme Court ruling forced states to make a choice: Allow shipments from out-of -state wineries or prohibit shipments altogether. State after state has opened its borders, including Maryland, which on July 1 became the 38th state to permit shipments, according to Free the Grapes, which advocates for looser rules. But the wine wars are still raging as wholesalers, who have fought direct shipping in some states, push a bill in Congress that wineries say would kill interstate shipping.

The uncertainty has kept some of the biggest retail players on the sidelines, although there are signs of more engagement. Amazon, which abandoned a wine-sales effort two years ago before it really got off the ground, got back in the game last year when it bought woot.com, which runs a wine site at wine.woot.com.

The direct-to-consumer shipment market represents just 1% of the U.S. wine industry, according to trade publication Wines & Vines. And sales on the internet are only a slice of that 1%. But the online market is growing.

Wine.com began its path to profitability in 2006, when it hired as its CEO Rich Bergsund, best-known for launching hobby and crafts e-commerce site IdeaForest. In 2008, it brought in Amy Kennedy, former head of marketing for Old Navy's retail site, to run its marketing. Her first move was to slash the department's budget by 60%, cutting print buys and moving funds to digital. A breakthrough came a year ago with the launch of flash-sale site WineShopper, which sends daily emails to registered users with discounts of up to 70% that last 72 hours or less. Wine.com now boasts more than 1 million registered users, selling some 2 million bottles in the past 12 months. It broke into the black in the year ended March 31 on revenue of $56 million, the privately held firm said.

Lot18

Wine.com takes ownership of wine before selling it, which lets it control inventory. But because it owns the wine, it's considered a retailer, and retailers must abide by stricter interstate-shipping rules than wineries. Wine.com gets around this by putting its own warehouses in certain states.

Lot18 acts as a middleman, pairing wineries with buyers. It has 350,000 members, keeping a waiting list to balance supply and demand. A team of "curators" picks the wines, tasting each one and then describing their selections in daily emails. "We're able to get wines that are so good they won't even make it to the retail store," said Mr. James, who is president and co-founded the company with Kevin Fortuna, former CEO of Quigo, an ad technology acquired by AOL in 2007.

Lot18 recently added gourmet foods and is even pondering selling spirits. The growth is fueled by some $13 million in venture funding, including investment from New Enterprise Associates, which has backed startups such as Groupon. Mr. James, a U.K. native, was part of a harrowing expedition on Mount Everest in 2003 when a climbing partner broke his leg on the way up and it took the team five days to get him down the mountain. "When the VCs ask if I'm going to be tenacious and stick to it," he said, "I just talk about Everest."

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