The Green Sheet Online Edition
December 10, 2012 • Issue 12:12:01
What Amazon's wine distribution model portends for payments
We've had a lot of changes lately in Sonoma County, home of The Green Sheet and my company, CrossCheck Inc. This year we were named the second best wine destination, after Tuscany by TripAdvisor.com. This would be astonishing to anyone who visited here, say, 25 years ago, when tourists went directly to Napa and bypassed Sonoma. Now we say: Napa is auto parts; Sonoma is wine.
Recently, I attended a meeting of a local organization, called BayPay (www.baypayforum.com). It is a resource for payment professionals in the San Francisco Bay area. I was surprised to learn that the organization has 2,300 members. (Who knew there were that many payment professionals in the area? I thought I must be out of the loop.)
A corrected assumption
Anyway, the meeting revolved around a vote taken by the members on what was the most promising new development in payments, and guess who won? Yes, it was Square Inc. But the discussion centered on other players, notably PayPal Inc. and Amazon Inc., and even traditional merchandisers such as Starbucks Coffee Co., as well as grocers and big-box retailers.
Then one of the attendees, Archie Emerson (www.eaglenx.com), commented on the PayPal business model, and how PayPal tries to get the consumer to pay from a pre-arranged demand deposit (DDA) account (or from a credit already in a PayPal account), so that PayPal doesn't have to pay interchange to a card issuer.
You could have heard a pin drop, because everyone else in the room just assumed that interchange was a fixed, inevitable and immutable part of the card-not-present world. They forget that all payments ultimately come out of the DDA account, and there are alternatives to interchange. PayPal has figured this out.
Three's the Amazon charm
Now, another big change is happening. Amazon.com is getting into the wine business, or to be more accurate, the company wants to dominate the wine business. You might think that this is no big deal, but you would be mistaken. It is easier to ship a weapon in the United States than to ship a bottle of wine.
After Prohibition, wineries were required to use a three-tier distribution system of producers, licensed wholesalers and retailers. In 2005, the U.S. Supreme Court struck down laws in two states that prevented wineries from shipping directly to consumers, and some cracks started to appear in the traditional three-tier model. However, to comply with existing federal and state laws, today a winery would have to comply with 10,000 rules and regulations, literally.
Remember the line from an old commercial, "It's not nice to fool Mother Nature"? Well, it's not smart to bet against Amazon. Sure, the company failed twice before in this space. In 2000, it invested in a startup called Wineshopper.com, then launched state by state to climb the regulatory mountain, but Wineshopper.com went broke just a year later.
Next, Amazon regrouped with a successor company, New Vine Logistics, but a few years later the other investors in the venture pulled out. Amazon wanted to offer a platform for licensed wineries to sell, but not hold licenses itself, but the regulatory agencies ruled that everybody in the chain had to be licensed.
Then, a year ago, things changed again. Now regulators have determined that a third party (a website) could "be involved" in the sale of wine as long as the winery, or license holder, "controlled, or was ultimately responsible" for the transaction.
Now, an online buyer can complete the entire transaction on the Amazon website, and the winery will handle the compliance and shipping, so the winery is controlling the transaction. The new regulatory stance is what opened the door for Amazon in this space.
An ISO for wineries
This is serendipity for small wineries (we have 250 of them here) because most of them are too small to have a major distributor sell their wines. In fact, just being able to get into all the states where selling wine directly is legal would be a big thing.
This begs a discussion of how Amazon itself is doing. On Oct. 25, 2012, the company released its quarterly earnings. It posted a loss of $274 million, and an operating loss of "only" $28 million. Two years ago, Amazon invested $175 million in a company called LivingSocial, and this quarter it wrote off $169 million of this investment, an astonishing 95 percent loss.
As analyst Brian Nichols pointed out, Amazon is a company with slow growth and no timetable to profitability, and what will happen when consumers have to start paying the sales tax? Yet, one analyst, Pascal-Emmanuel Gobry, said that Jeff Bezos is the next Steve Jobs. Amazon has had an annual operating margin of only 2 percent over the last 5 years - not acceptable in many industries.
Some analysts have said that if the company just cut back on growth, it could be really profitable, but who knows? Amazon has a market cap of over $100 billion. If you are an ISO, is this a company you want to bet against? Amazon websites attracted over 100 million unique visitors in August 2012. What Amazon is really doing here is performing the role of ISO for the winery: processing the transaction and taking payment and getting a commission for doing so.
ISOs should study this carefully, because this is not the last industry where payment processing will be turned upside down.
A streamlined network
Now, the most interesting part, at least for an ISO in the payments system, is what does Amazon charge? Amazon charges the winery a 15 percent referral fee, a cooperative fee of $49 for every $350 in sales, and a subscription fee of $39.99 a month.
As I calculate this, the commission just for the cooperative fee is 14 percent. Is it too expensive for a winery? Well, it depends on your price point and how much in incremental sales Amazon can generate for you.
But if suddenly you can sell all your wine in one month, just like on the QVC shopping network, well, as my wife the winemaker says when asked about her wine preference, "The best wine is sold wine."
Then, on top of this, consumers will pay a shipping charge of $9.99 for up to 6 bottles, and $19.96 for a case (12 bottles). Wineries have to make up the difference between this and the actual shipping cost. Amazon has thought of everything.
Remember, before this, the winery sold to a distributor who sold to a retailer who sold to a consumer. Sometimes, a wine broker was involved, too. Each party took a commission, perhaps 10 to 20 percent. What Amazon is really doing is creating a more efficient payment network. In contemplating this, you have to ask yourself, What industry will Amazon go after next, and of course, how can you compete with it?
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at email@example.com.
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