May 21, 2012

The REALITY of Being a 5th Column Company

A few weeks ago SVB released a seminal report regarding the 2012-2013 State of the Wine Industry.  Every year this is an amazing report with insights into the future of luxury wine in the US, insights into wine industry business mechanics, and US economics in general layered under amusing movie metaphors.  A common theme (appropriately considering the Bank’s origins) has been about technology and how it intersects with wine.  Prior to this year they have been small bullet points or paragraphs but this year the author, Rob McMillan, redefined a part of our industry naming us “The 5th Column.”  If you have not read the report here was the origin of his new moniker for the digital sales and marketing tools that power the wine industry:

“In the same way, the term Fifth Column was coined during the Spanish Civil War when Madrid was under siege from General Vidal. Vidal announced over the radio that in addition to the four columns of attackers closing on the city, there would emerge a Fifth Column — an ad-hoc group of loyalists emerging from within the city who would rise up against the incumbent order.”But make no mistake, succeeding as a member of the 5th Column is fraught with challenges that destroy most companies that attempt this perilous journey:

  1. The potential addressable customer base is rather low, only about 7500+ wineries in the United States.
  2. These wineries are fragmented across California and the US and every region behaves differently as it relates to e-business.
  3. Wineries don’t invest in digital solutions (in both cash and resources).  Out of 7500 US wineries there are less than 50 dedicated e-commerce employees, 50 dedicated social media employees, 10 digital directors, and 5 VP’s of digital.  Salary rates for these digital employees is 20% to 40% less than comparable jobs in San Francisco and San Jose.
  4. As a result we are forced to charge far, far, far less than our competitors in other categories (for example Radian6 charges $600/month for what we give wineries for free and $1800/month for what we charge for $45/month.  Click here to see.)
  5. These factors (and more) make serious investors gun shy to invest in 5th column companies.  This slows and stifles growth.  Wineries want more features that match their needs but aren’t willing to pay to get them and the company’s have virtually no potential to acquire serious investment to build the tools needed to catalyze the wine industry forward.
  6. Most major digital decisions are made by the finance department, namely the CFO or the controller to make it easier to integrate with their accounting system.  This means most sales and marketing tech decisions are driven by accounting and prioritize things like integration over better sales and marketing functionality.
  7. Wineries make decisions slowly (almost annually) so the sales cycle is incredibly slow.
  8. There are very few contemporaries to speak and learn from.  Thus we are almost always forced to be pioneers.  As an example when I started Inertia Beverage Group there was no e-commerce solution that had ever been built for the wine industry (and in fact no solution outside of the industry that had the challenges of compliance, wine club, etc).  Every step was invention.  Much of it was very successful but we stepped on land mines as well.
  9. Wineries (and maybe correctly but I don’t think so) generally view and fund direct to consumer efforts disproportionately around the tasting room and fail to invest in the channels with the greatest growth potential (off-premise DTC channels like wine club, telephone and e-commerce).  As a result these latter channels are starved and unable to succeed.
  10. We as an industry SUCK at customer service EXCEPT when a customer is in our tasting room.  CRM is treated as a four letter word and less than 5% of our industry has any CRM program. When I say program, I am not talking about the software but about the culture of customer relationship management.
  11. Wineries often want things “custom built” and don’t understand that by asking developers to make something custom you experience extra cost not only for the first implementation but on-going support and maintenance.  I can’t tell you how many times I have seen wineries build custom e-commerce solutions or CRM solutions and find that their decision becomes an albatross to support and keep up to par with parallel software.

So why do people like us get in to this part of the industry?  We definitely don’t do it for the riches.  Keeping the lights on at VinTank (without me getting paid a cent) is approximately $450K per year.  To achieve sustainability,  we need to convince over 1000 wine brands to upgrade!!  Now I can assure you that I am not shopping for a yacht with all that spare profit or taking monthly vacations to French Polynesia.

You may argue that we are doing it for the “exit” like Facebook achieved last Friday or all the other tech sales successes you read about in the news.  In all honestly, there has yet to be a significant exit for any wine tech service company.  Moreover, in terms of revenue, the largest in the 5th Column is probably Shipcompliant with estimated gross revenues of $6M – $8M (after 12 years in business and essentially a monopoly in their category.)  The rest of the 5th Column companies are lucky if they generate 25% – 35% of that figure.

You may say we got into this industry due to the amazing flexibility for our schedules and the ability to have infinite vacation time.  Unfortunately this also is not true.  James, Evan and I definitely put in 14 – 18 hours EVERY day.  We spend endless time writing code, articles, and emails.  We are constantly reading and curating new resources to share every Friday with all of our winery clients.  It is a tireless job and every hour is valuable not just for work, but to try to be great for our families.

And perhaps you think we got into it for our love of wine and the wine industry.  Though we are all big fans of wine (who isn’t?) and we live in the beautiful Napa Valley, there is a point of saturation around how many visits to a winery seem magical (really, another bladder press?) and  tasting a great bottle of wine isn’t a substitute for a nice vacation or spending time with our families or paying our mortgages on time.

So why do we get in to this business?  Why do we work so hard to try to help the industry succeed with digital tools?  It is because we know in our deepest fiber that what we are building will help wineries succeed.  Because we think we can make a difference. Because we see that the future is today, even if our winery partners do not.  Because we believe that the industry, albeit slowly, will reward our efforts by voting with their dollars to allow us to do better.  Perhaps we are idealistic.  Perhaps we are fools.  But in the end our motivations are simple: we believe.

Do we see ourselves as insiders rising up against the incumbent order as per the description of the 5th column?  Yes, quite often we do, but not because we want to overthrow the incumbents.  It is our goal to help them see that the world has changed and there are tools and channels, if properly invested in, that will yield 10x the results and stability that are no longer possible in the most difficult wine market in our life times.  More often we feel like people with a deep passion for helping wineries succeed.  A passion for learning and sharing our knowledge.  A passion for building something great (and from my personal experience I know that VinTank’s software is one of the best solutions ever built for the wine industry).  It is most often an unrequited love.

So who are the best 5th Column Companies?  In our opinion, this is the list of companies that do the best job and are most dedicated to the wine industry.  They may have their own flaws, but considering the challenges they face to build a successful, innovative and sustainable company, they have earned their place on VinTank’s list.

And here are some of the fantastic service companies that help leverage these tools:

It is very probable that I’ve missed some others that belong on this list but in asking our many winery colleagues (over 140) only these names were mentioned.

  • Great article Paul. From a certain perspective, this industry is heart-breaking. No matter how much you help a winery succeed, the wine itself cannot scale– it is finite, and it takes a long time to grow (both in planting a vineyard and aging the product). So while almost any other industry can just hire another factory/employee to build more iPhones, beers, books, distilled spirits, pants, tv dinners– a winery is stuck with what they got, and even worse, they are stuck with what they got that harvest. 

    • Josh, thanks for the nice comments.  I do agree about scale and being subject to nature but in those situations (for most wineries), the solution is channel shift to more DTC or DTT to capture more margin and digital tools provide the best mechanism of achieving that goal.

  • Paul, another insightful article, as usual. I’m glad that there is someone who is telling it like it is for the bizarre vertical that is wine.

  • I’m convinced that digital tools of the like offered up on Paul’s list will eventually be adopted by most wineries as a fundamental means of doing business (or at least selling wine). The key is for more wineries to believe in and have evidence of the return on investment that comes with a focus on digital support tools. Some wine companies see the ROI. Others, not so much. As Paul notes and as I’ve observed for many years, the Wine industry, all facets of it, are very slow to adopt new technologies and to change. It has to do, I’m sure, with the fact that farming, at the heart of the wine industry, is inherently a conservative-minded business.

    Really interesting perspective.

  • Great insightful article – thanks

  • My feeling is that wine brands who want too much for nothing & do not recognize the extra value of upgrading to the paid version of some of these tools will probably screw other things up in terms of the biz aspects of their business. Which means eventually going out of business!

  • Jmcann


    Didn’t you attract “serious” money at IBG?

    • Aside from my large raise at IBG $15.6 million (which was the largest in 10 years for a wine tech service company and I had to move mountains to achieve that raise and I used it to push the entire industry forward in wine e-commerce, DTT, and much more), there have been only four significant raises in the industry: Vintners Collective (over $1M), (undisclosed), Vinfolio (undisclosed after bankruptcy) and Lot18 ($46M).  That is not a lot of cash infusion to help the industry move forward compared to other verticals.  Moreover, only one is a service company with a small raise and the rest are retail endeavors.  If you try to raise money in the industry professional investors shun wine in general.  #fact.

      • Jmcann

        Unfortunately, the wine industry has a terrible track record of returning the equity raised… certainly didn’t help the industry’s reputation.

        • Neither did, New Vine Logistics, and a whole host of other disasters.  That being said they were no worse than disasters in other industries.  However, the challenge to be a major 5th column player in the wine industry has yet to be solved.  The three most pervasive solutions in the industry are Shipcompliant, and us.

  • George Christie

    Paul….another great article, and of course, thanks a ton for the mention and the support!

  • The 5th Column is alive and well. Thanks for the coverage of the StOTI Report and the nice synapsis of the top components in the 5th Column. Fight on!

  • Showing some Berserker love!

  • Pingback: Terroirist: A Daily Wine Blog » Daily Wine News: Changing Tastes()

  • Tim Duggan

    This is a great article, Paul. I have observed nearly all of your points firsthand while working for one of the companies you named as part of the 5th column. I also find a puzzling level of mistrust in the wine community for people offering tech solutions. I can easily demonstrate with hard number how my company can save a winery both time and money and allow them to marshall their resources into more productive areas like sales, marketing, etc and they still refuse to believe it. What gives?

  • SueW

    As a new 5th column biz, Wine Clubs Online, I understand the thought process of the wineries.  Having been in agriculture for over 20 years, I get it.  As a business veteran and marketing consultant, I continue to challenge myself, as well as other businesses, to move on from the “this is they way we have always done it” mentality and embrace the new frontiers.  Really experienced this firsthand living in Nevada for many years with the influx of Californians moving to Nevada. Every biz office in Nevada had a sign on the wall that read “I don’t give a damn how they do it in California!”  Tom Wark, I agree with your comment.  Eventually, we all come around, just some faster than others.

  • Hi Paul

    I think you nailed a lot of things in this one. I watched the SVB webinar and was happy to see them place some emphasis on the 5th column. When I was contracting in other verticals, customers would come to me, knowing exactly what they needed. In the wine industry, I need to court each customer, educate them, and the process is much more drawn out.

    As someone who came into this industry from outside, I’ve been shocked on a daily basis at how unwilling wineries are to adopt technology. As we say, they’ll spend a million on landscaping but balk at the idea of paying for marketing, crm, social services. Much of the reason for this lies in the nature of the industry, which is made up of farmers at its core. The big multibrands might get it, but most of the wineries out there have small staff and aren’t managed like a business.

    Bottom line, there’s a lot of money in the wine industry and a ton of growth. We have what, 7500 wineries in the US now? As the market expands and brands want to compete, they’ll soon realize that younger customers don’t care about scores and don’t read Wine Advocate/Spectator.

    On a side note, one thing that helps is to show the wineries how these services benefit the bottom line. If they don’t see how they can sell an extra bottle of wine, they gloss over. In your case, there has been a lot of skepticism about social media and whether it drives sales. Google recently introduced multi-channel reporting, which can show how social channels interact with others and help assist or create sales.

  • Excellent post and gives one pause.

    Customer direct through wineries is one way to measure this. I’m interested even more so in the online component generally:

    -amount of wine sold online direct from non-storefront enterprises like Lot18?

    -amount of retail that is sold online. That is shops with online components that do a sizable business like Astor or K & L?

    -any sense that can be made of the plethora of custom POS systems used at retain and retail online?

    Can you provide a glimpse or a direction to dig into these numbers? Or others in the community?

    Thanks in advance. And thanks again for this post.

For Your Continued Enjoyment...

May 23, 2012

If you think we have it tough, check out the ...

A few days ago I wrote about the struggles and challenges we have as a... more

March 30, 2012

The 9 Most Important Wine Bloggers in the US...

In the world of wine, these are the best of the best who run their... more

March 28, 2012

Hey Wine Industry, You’re Looking at Wi...

A great post by Meg Maker made me reevaluate the industry’s perspective on wine bloggers. I... more

March 23, 2012

You Want Innovation, We Want Your Support...

I woke up this morning jazzed to go to work. Ahead of me was a day... more