Does it Exist and is it Priced Too Low?
Posted on | June 1, 2009
Written by | Ian Griffith
Ever since it launched as a bookseller in 1995, Amazon.com has been relentless in its quest to squeeze efficiencies from the fulfillment of online orders. One way they do this is to have distributors drop ship specific orders directly to consumers, working from a selection of inventory that Amazon does not keep in stock. As a result Amazon is able to turn their inventory fast enough that on average they collect from their customers before they need to pay suppliers.
This business model has been tried with varying degrees of success in the wine business. There are a number of wine websites that include products listed by their distributors; including Wine.com. While the complexity of wine is definitely one of its attributes, this complexity has the potential to generate data errors at every tier of the trade. For something like Amazon’s business model to succeed for wine stores, the concerns of critics who point to frustrations with shopping for wine online need to be addressed.
Managing Virtual Inventory
In April, Dorothy J .Gaiter and John Brecher of the Wall Street Journal published a critique of online wine stores and with it a rebuke against “phantom inventory”. They write, “When we order online now… at least some of the wines ordered are not available”. Their speculation is that much of this problem stems from wine that “might be at a warehouse somewhere or even could possibly be at a distributor”. Unfortunately, wine stores are used to operating with inaccurate or incomplete inventory information. This leads to small errors that have little impact in the store, but cause great frustration online.
Most retailers are typically unable to manage the constant updating of distributor items as they come in and out of stock, and as prices change. Poorly maintained distributor updates can lead to cancelled orders and frustrated customers. Beverage Media has built sophisticated tools to manage this updating automatically for our retailer customers who use “virtual inventory”. While the listings in the beverage journal are updated once a month, we work with many distributors who provide daily updates for virtual inventory.
Who Benefits
Sections of the wine trade have expressed a different kind of frustration with stores that list distributors’ inventory online. We heard about a winery who called a store selling virtual inventory to ask that they raise their price, yet this winery acknowledged another store with stock of the wine was listing it at the same low price. The vast majority of wineries who ask for a price point would expect it to be applied equally by all stores. Some importers with wholesale operations have expressed ambivalence about having their wines priced aggressively on the internet when they are trying to sell the same wine in other markets.
Just as retailers are using virtual inventory to attract new customers, wineries benefit from new retailer customers who are fulfilling orders placed by consumers and could be interested in making deeper commitments once they have seen the product sell online. If an importer wants to protect certain items from price competition they can use the availability updates to control which items that are listed as virtual.
Retailers who sell virtual inventory will always want to take advantage of their lower cost structure to attract new customers with aggressive prices. However these stores can’t expect to benefit from deeper deals on a wine and this is where a store that takes a position will have a lower cost. Virtual inventory sales are based on front line bottle or case costs as the store tries to avoid the scenario where they must purchasing a case to sell a bottle.
Of course this model only works if consumers are satisfied with the service from virtual inventory. The millions of dollars in virtual inventory sales we see suggests that they are. Also, the breadth of items sold as virtual inventory suggests that consumers appreciate the access to product that was tied up in the wholesale tier and may not have been widely available online. While drop shipping from wholesalers to consumers is probably not legal in most states, retailers do appreciate receiving customer payments before their supplier bills are due.