Amazon’s recent purchase of Whole Foods Market for $13.7 billion and its newly launched NEXT custom-labeled wine division spells trouble for many wine producers and sellers.
On June 28, the highly regarded King Estate Winery in Oregon launched NEXT, a joint wine project with Amazon to produce and sell two single-variety wines, a $20 pinot gris and a $40 pinot noir, alongside a $30 red blend with more labels in the pipeline.
For the winery, the NEXT project is aimed at extending King’s direct-to-consumer reach, selling featured wines on amazonwine.com, while for Amazon, the project creates a prototype for what might be considered an expensive version of Trader Joe’s “Two-Buck Chuck.”
Like Trader Joe’s, many retailers have their own line of wines, but Amazon’s entering the fray with their massive reach signals a whole new era. Amazon is already an online powerhouse that in 2016 accounted for 43 percent of U.S. online retail sales, according to Business Insider. Beyond online, by purchasing Whole Foods Market Amazon gained a mainstream grocery brand with more than 430 physical stores, a well-oiled supply chain, 330 liquor licenses across 41 states and a 10 percent stake in Instacart, a grocery-delivery startup.
Looking back to see the future
When Amazon started selling books and music, many local shop owners believed that customers might occasionally buy a book or CD from an impersonal online store but that most would continue to support their locally owned stores. What these shop owners failed to realize was that many customers found it impossible to resist Amazon’s lower prices, the thrill of shopping online or the convenience of having their purchases delivered.
We all know the result: Many publishers and bookstores were sold, consolidated or forced to close their doors. Similarly the music industry, collaborating with Amazon and others to provide instant downloads, has resulted in a revenue decline of more than 50 percent, from a high of $14.6 billion in 1999 to $6.3 billion in 2009, statistics show.
Why would wine be any different from books or music? Since 2012, Amazon Wine allows customers to buy wines online. Amazon takes a significant cut when a wine is sold on its site and often requires the producer to pay a portion or all of the shipping and handling. So far, the impact of Amazon Wine seems negligible, but that’s about to change.
Wine beyond online
Amazon has been considering brick and mortar for years. The stars finally aligned when they bought what many consider to be the ultimate prize: Whole Foods Market.
How did Amazon pull this one off? First, Whole Foods was in trouble — since 2012 its stock price had fallen as revenue growth declined due to competitors such as Trader Joe’s, Albertsons and Safeway offering cheaper prices for similar products.
The sale was nearly inevitable when activist investor Jana Partners took a 9 percent stake in the company earlier this year. Partners is known for stepping in when a company is in trouble and then stirring the pot to get it sold, resulting in a quick, hefty profit for himself and his investors.
What does Amazon want to do with their new Whole Food mini-empire? It’s no secret — expand it. Last year, Amazon reported that the U.S. market has room for up to 2,000 of its Amazon Fresh-branded grocery stores, referred to as Amazon Go.
The first of these stores opened for Amazon employees in Seattle earlier this year. Shoppers use an app to add products to a digital shopping cart. Customers then have the option of picking the items up at the physical location (which is done by filling their own shopping bags and then walking out of the building without waiting in a checkout line, Amazon automatically charging their account for items taken, like in some futuristic movie) or the items can be delivered via the newly acquired Instacart or other such services such as Amazon Fresh and Amazon Prime Now.
Consequently, what had been quaint Whole Food Market stores will soon act as high-tech distribution and pickup points for groceries, wine, beer and other household items. These locations will also become gathering places for customers to commune, eat, drink, taste, test and explore other featured items (e.g., NEXT-styled wines) and experiences. And the effect of all this will be instant competition for any nearby businesses, but especially other grocery stores and wine and beer retailers, as well as wine producers.
Will the Amazon flow in the Napa Valley? It already has started to trickle. Just search for Napa Valley wines on the amazonwine.com site, and you’ll find a surprising number of highly rated and regarded wines already there, although not under the Amazon label as of yet. However, we should all watch closely for the first vintner to produce the equivalent of the Napa Valley NEXT wine brand.
Like the bookstores of old, for the smaller retail shops expect the downward pressure on wine pricing and increasing competition for customers to continue. Wine, beer and spirit producers not involved with Amazon will find they face these same pressures but with the added pain of losing direct-to-consumer business and wine-club members as customers opt for comparable Amazon Go goods and services. Distributors will likely find increased pressure to consolidate into even bigger behemoths or risk being relegated to the sidelines.
The world of the future does not look like the world of the past. That is clear. What is less clear is how to maintain a wine that is authentic and genuine to its place and people while staying in business. For those who attempt this with honor and integrity, history will look back at you and smile. I wish you Godspeed.
Originally published in the Napa Register, August 2017