Friday, November 14, 2008

A Trio of Wine

Is the wine industry changing right under our noses? Three points to consider. First, Amazon is getting into the wine business (again). For a number of reasons, including the myriad of interstate shipping laws, the wine industry has encountered problems transitioning to the web. Amazon invested $30 million in an attempt in 2000 to get into the online retail side of wine, but to no avail. Now they are at it again, this time giving producers the ability to set the sale price. Retailers will receive 47% of the retail price -- slightly less than what they receive in the traditional three tiered pricing system.

Second, wine is making its way out of the countryside and going urban chic. Vintners are increasingly moving into old factories and warehouses in cities, many of which are traditionally unassociated with wine and wine production.

Finally, Intrade has just announced an agreement with Live-ex: The Fine Wine Exchange to create the first publicly traded wine futures contracts written on the fine wine market.

These will be interesting developments to watch, maybe shedding light on questions like whether the rents that middlemen in this industry earn are more a function of the services they perform (in terms of providing information to both sides of the transaction and lowering transactions costs of exchange) or more artificially attributable to laws and regulations. It may seem that if consumers can detect quality themselves and obtain information from producers and reputable sources, online retailing will be successful to the extent that companies like Amazon can navigate the tangle of regulation.

But I think that information availability is not really the problem (costly search may increase with online retail). There is plenty of information out there on the various vineyards and producers, but that information is costly to condense and make accessible. I have not settled on one explanation, but I tend to think that middlemen provide a useful and necessary role in the market for wine. There is a personal component of wine that I have yet to put my finger on, but I think its the reason that user-based content or social networking wine sites like Snooth have not really taken off (who are also now selling wine). Wine has all of the interesting components of ex ante unobservable quality, repeated play and reputation, and ultimate subjective enjoyment that make it interesting to discuss, but there is more to the experience of wine than its components. While I am a big fan of wine becoming more accessible, I think there are components of the wine experience that will continue to lend itself to a market heavily structured with middlemen and intermediaries. Any thoughts?


Matt E. Ryan said...

I think there is a certain hubris to acquiring your own information in this day and age-- wine included, but products, books, cars, etc., as well. Whereas before people could have a "electronics" guy or a "car" guy, now people like to be everything to themselves. It's not efficient in the traditional sense, but that's my take.

That said, I think the direct availability of wine helps people out. If the value in having a local wine store is not the information you get but simply the availability of more wine, the the jump to online increases the choice set, and from the comfort of your own home.

I think this can take off, but like you mention, the regulations are especially tangled. I've heard that each winery must deal with each state individually-- though maybe Amazon can get some economies of scale here. (That would be a great economic freedom measure-- take a slice of large wineries and generate some metrics of sales across the states.)

Though you may able to answer this better than I, Emily, as I'm a lowly beer drinker. Do you think people can enjoy buying wine online? Is there something about the experience of physically picking out a bottle that is part of the pleasure of wine consumption?

Justin M Ross said...

I personally hold deep affection for carefully selecting which flavor of Arbor Mist I will enjoy from the isles of Wal-Mart ;)