Why some online wine clubs succeed as others struggle
Multiple online wine clubs based in the North Coast or with deep Wine Country roots have faced financial trouble in recent months, something also seen in newly released data on direct-to-consumer shipments last year.
But industry analysts say that the challenges may have more to do with their subscriber-growth strategies than with the prospects for virtual clubs.
Naked Wines, a U.K.-based club company with Napa-based U.S. operations, is tightening its belt after acknowledging last summer that it over-estimated how much wine consumers would buy.
Winc, based on the Central Coast but a big buyer of North Coast wine in bulk, filed for bankruptcy in November after running out of options to refinance debt. On Jan. 18, the court approved the sale of club assets for $11 million to Project Crush Acquisition Corp LLC, an entity connected to Los Angeles-based Amass Brands, a beverage and personal care products company run by Winc co-founder Mark Thomas Lynn, according to court and public records.
And while Sonoma-based SommSelect ended up in bankruptcy court reorganization in the second half of last year, its financial statements and analysts following the venture suggest it got there because of a legal battle with a founder, rather than a problem with the business model.
“SommSelect is a financially stable company and was doing fine. Unfortunately, they had a shareholder dispute,” CEO John Fechter said.
At the helm of the company for the past 18 months, Fechter and Ken Young, chief operating and technology officer, are employed under a contract with G2 Management Services to run the company.
SommSelect filed for Chapter 11 reorganization on July 14, 2022, and most notable among its listed debts was a $3.94 million judgment from a 2019 Sonoma County Superior Court case brought by co-founder Brandon Carneiro. The company board fired Carneiro as CEO in 2018. He claimed he wasn’t fired for cause and wasn’t adequately compensated for his 3.94 million shares that other shareholders purchased as part of his exit from the company.
A jury in late 2021 agreed that Carneiro was owed more under his original buy-sell agreement, awarding him $1 per share, up from 23 cents a share in a valuation provided to the company board, according to court documents.
At the beginning of last month, Carneiro reached a settlement in bankruptcy court to reduce the amount owed to $330,000. That became part of the company reorganization plan, confirmed by the court on Dec. 12, 2022. It includes $1.8 million in exit financing from shareholders and G2 Management Services.
Because of $1.62 million in payments on its outstanding debts when the plan was confirmed and other ongoing payments in the plan’s five-year time frame, SommSelect expects to have put over 100% of its disposable income over that period toward paying commitments, according to the document. As a result, the company expects to eke out earnings totaling only $944,000 over all five years.
Yet outside the legal battle, SommSelect has enjoyed strong financial growth over the past three years. For example, its 2021 IRS tax return in the bankruptcy court record showed 2020 earnings of $3.43 million on gross revenue of $10.32 million, up 34.5% and 42.9%, respectively, from 2019.
“They had experienced explosive growth through COVID. Sales were skyrocketing,” Fechter said.
Third-party wine clubs enjoyed a surge of orders in the first weeks and year of the pandemic, a period of heightened consumer purchasing often called “pantry stuffing.”
“You had a whole bunch of people who when COVID hit ran out and started ordering wine online, because they just realized that at that point that it was legal for them to do or even accessible. Because at that point in time, everything became deliverable,” said Dale Stratton, president of Wine Market Council and an adviser on consumer shopping behavior for Napa-based Azur Associates.
The council, an industry consumer research group, had found in previous consumer surveys that one of the barriers for wine club subscriptions was that consumers didn’t know it was legal to get wine shipped to their state.
Since the U.S. Supreme Court’s pivotal 2005 Granholm decision started knocking down state laws that protected in-state wineries from out-of-state competition, currently there are only five states with significant restrictions on wineries’ shipping directly to consumers, according to Sovos ShipCompliant, a national regulatory compliance firm. Mississippi and Utah prohibit it, and it’s severely limited in Arkansas, Delaware and Rhode Island.