Winc the Netflix of wine? (Nope)

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A second Netflix/Winc article on customer retention and algorithms is in production.

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Wine Executive News has reached out to Winc for comment, but has not yet gotten a response. Company comments will be included if/when received.

 

Winc is seeking to raise another $17 million on top of the $50.5 million it has already burned through in the past 9 years. That comes on the heels of last year’s SEC Regulation A offering that sought to raise $15 million for its Series D Preferred stock. That offering closed on Sept. 30 and, according to Winc, raised $8,301,382. Of that$4,827,058.77 came through the Seedinvest web site.

Yet another offering is not an unusual activity for the chronically unprofitable Winc which — in order to stay afloat — has gone to investors almost every year of its nine years of operation.

Netflix of wine. Really?

More startling than another offering is Winc’s statement that it is “the Netflix of wine.”

Doing that means that direct wine shipper Winc has set a stratospherically high bar for itself. To see how Winc measures up to its own assessment, Wine Executive News (WEN) set out to compare the two companies.

The metrics

To compare the two companies, WEN employed a set of metrics that include:

• type of company,
• financial performance,
• products including scalability, physical characteristics, and creation
• the market,
• regulatory issues,
• cost of goods sold,
• delivery mechanisms,
• customer acquisition & retention,
• long-term viability (including potential exit strategy.)

The Markets

To begin, it’s useful to keep in mind that Winc has the advantage of playing in a larger market that is three times larger than Netflix’s:

• U.S. Home Entertainment Market Topped $25 Billion in 2019, according to the trade association, Digital Entertainment Group.
• According to the Wine Institute, U.S. wine sales in 2019 were $75.1 billion.

Both companies face intense competition.

Significantly for Winc, most of its revenues come from a small subset of overall wine sales: Direct-To-Consumer (DTC) which, in 2019, saw revenues of $3.2 billion. Winc is trying to grow revenues in this intensely competitive wholesale channel that can carry significantly lower (30-50%) overall per-bottle margins.

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Netflix & Winc

Netflix and Winc both offer consumer products of personal perception and preference whose characteristics are almost impossible to describe or recommend on an individual level. Selection of both products are decided by internal mental and psychological influence rather than externally measured metrics such as horsepower, speed, or frequency. Both companies are direct-to-consumer growth companies, albeit at vastly different stages in their life cycles.

Netflix — like Winc — was once a small, gutsy, struggling, technology start-up with a history of operating losses.

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The “logic” of investing in money-losing companies

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Netflix: Successful tech unicorn grabs market share and profitability by being unprofitable (for a limited time)

Netflix has demonstrated the characteristics of a successful tech unicorn in that it borrowed its way through deficits to market dominance. That, along with the evidence that its business model will continue to prevail, kept investors engaged.

Netflix is now a commanding global player with a current catalog of more than 13,000 titles with about 5,000 of those in the United States.

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However, the company managed to consistently cut losses. When it neared profitability in 2002 it launched a successful IPO, then posted its first profit the next fiscal year.

The results, as charted below by macrotrends, eventually took Netflix into exponential growth starting in 2016.

By comparison, Winc’s financial performance …

Winc has not made a profit in its nine years of existence.

And while its investment website claims a compound annual growth rate of 195%, Winc does not offer nine years of income statements to back that up.

In addition, the 2017-2018 revenue numbers that are provided show inconsistent income and no trend of decreasing losses. The company offers no prospects or projections for profitability.

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Winc’s desire to ride tech’s coattails

It’s clear from the language on Winc’s investment web site that they are trying to appeal to the same investors who are interested in speculative, growth-oriented, but non-profitable tech companies. The statements, however, do n0t always coincide with reality.

“Own Part of the World’s Only Data-Driven Winery: Winc is disrupting America’s $72B wine industry by designing wines using real-time customer data…

No evidence of disruption is presented.

“At Winc, we’re determined to upset this archaic industry. We’re the world’s first data-driven winery built for modern-day consumers. We collect data from over 715,000 customers in real-time to make consumer-led wines loved by the masses. “…

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This is incorrect. Constellation Brands, The Wine Group, and the E. & J. Gallo Winery have used customer data for decades to create brands.

“A large prominent investment research group is calling us the “The Netflix of Wine.” Today, you can join our team as a shareholder as we reshape America’s $72 Billion wine industry….”

The comparison with Netflix cannot be found in Winc’s offering statement filed with the SEC. Likewise there is no link to the “large prominent investment research group” or any report from that organization.

No excerpts from that study are offered or whether Winc paid for the study.

“An investment in Winc is an investment in a vast e-commerce and wholesale distribution network unlike anything in the current wine industry.

“Massive” is a stretch lacking either data or credibility because:

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Looking closely at Winc’s own metrics

Another section of the Winc investment website offers four company metrics whose analysis reveals interesting results and data not available elsewhere in the offering statement.

 

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More Winc/Netflix differences: Product

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Netflix vs Winc: The Product

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This detailed business school analysis of those early days offers a look at the pricing and strategies that got them started, and which eventually killed off Blockbuster and other rental stores. A vast collection of recent (2020) data can be found here: Netflix Revenue and Usage Statistics

What’s more, Netflix’s entry into digital streaming content eliminated most of Netflix’s cost of DVDs and associated shipping and inventory even though it still engages in that as a small portion of its operations.

Product Manufacturing: Winc

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Wine = Heavy and expensive

Wine is labor and material intensive to make, handle, and store. And expensive to ship. Depending upon the type of bottle, a 12-bottle case of wine normally weighs 30 to 40 pounds. Significantly more than a DVD.

In addition, a federal license from the U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB), is necessary for them to make wine. Winc also needs to obtain TTB permission for its labels. Differing laws from state to state mean that Winc can ship to most states, but not all.

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Wine = Limited market: About 12% of the population

Whereas a DVD or a video stream has a near-universal and unregulated market in the United States, Winc’s market is extremely limited to about 12 percent of the population.

This is because:

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Winc’s main sales channel: Small and tough

While Winc’s promotional materials focus on overall wine industry sales ($75.1 billion), the Sovos DTC report, above shows that Winc’s main market in 2019 is actually estimated at a small fraction of that: $3.2 billion.

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Customer retention and churn

Netflix’s narrow product focus on an inexpensive and easy-to-ship product allowed it to focus all its efforts and most of its capital on acquiring customers and creating a recommendation algorithm that serves up exactly what its customers desire.

This article from the Harvard Business Review notes that acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. Indeed, a study by Bain & Co found that a 5 percent increase in retention rates can boost profits anywhere from 25 to 95 percent.

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Recognizing that it could retain more customer subscribers by serving them content they really wanted to see, Netflix has focused untold programming dollars into its super-secret recommendation algorithm development program. Happy subscribers were behind the 2006 “Netflix Prize” offer to pay a $1 million bounty for an algorithm that could increase its accuracy by 10%.

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Winc’s customer retention problem

Winc’s filings, website, and other information offers no statement on customer retention. Indeed, no information is offered on how many current customers the company has.

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The $4.78 million decrease in direct sales — a 13.9% decrease over the previous year — came because, according to Winc, it did not spend as on acquiring new customers as it did the previous year.

This substantial loss illustrates Winc’s dependence on bringing in new customers to make up for its inability to better retain its existing base. Given the total lack of data concerning current versus inactive customers, there is no way to accurately assess this issue.

Pandemic boost: Can Winc retain the boost?

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Winc’s investment web site indicated that it had gained 137,000 new customers between March – June of 2020. However, a mid-August article in Forbes quotes the company as having gained 20,000.

Like others in the wine business, the retail lockdowns of stores, restaurants, and bars provoked a sudden shift to online, DTC sales for wine, other alcoholic beverages, and many other consumer products.

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Pandemic gains, however, were greatest for the 13 largest wineries — topped by the E&J Gallo Winery, The Wine Group, and Constellation Brands.

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Finally: Winc loses $4.78 milli0n chasing $600K

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Additional Netflix links[Redacted free edition]

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