Geerlings & Wade - Cutting Through the Vines (2,787 words)
By Scott Shrake
Facing restrictive state laws, this wine cataloger uses direct marketing expertise and a smart software system to reach an increasing number of customers
Catalog marketing reaches people you wouldn't reach otherwise because of geography or other reasons. But imagine if the goal of reaching customers were complicated by a vast tangle of laws that divided the country into a zigzag of possible/ impossible transactions.
This is the challenge faced by Geerlings & Wade of Canton, MA, one of the nation's largest direct merchants of wine. Through ingenuity and a wonderfully robust computer infrastructure, the company has grown its business exponentially—despite the complex circumstances surrounding the sale of alcoholic beverages.
Huib Geerlings and Phil Wade founded the company in 1986. The two accountants saw a strong need to supply European wines to the American market through a direct channel that hardly existed then. Not until 1989 did the company reach $500,000 in sales. The cataloger now can sell that much in three strong days.
Geerlings & Wade, which went public in 1994, measures its growth in part by the size of its last-12-month buyer base: In 1991, the company had 10,000 last-12-month buyers; at the end of 1999, it had 135,000. Furthermore, the annual number of cases sold has risen from 31,000 cases in 1991 to 365,000 cases in 1999. CEO David Pearce attributes the company's growth to both the expansion into new states by opening licensed retail facilities, and strong direct mail and catalog efforts.
Geerlings & Wade specializes in privately sourced rather than brand wines, with a buyer in California and one in Europe. These buyers, wine experts themselves, deliver as many as 100 samples to Francis Sanders, the company buyer, so he may choose one wine to offer as a "feature" to the customers.
Pearce explains, "Instead of the [usual] proposition where wineries advertise their wines to the public and drive people to retail outlets to buy the wine, we're a wine expert for our customers. We select the best wines from each vintage, offer them at great prices and make further recommendations in our mailings, on our Web sites and on the phones." Moreover, Pearce says, "We can sell large quantities [in lots of 10,000 cases at a time], which is attractive to the wineries. They seek us out, because we can sell a lot of wine for them."
Laws of the Land
The repeal of Prohibition in the 1930s was a welcome change for those who enjoy wine—but for those who sell it, the laws that followed posed new problems.
When Prohibition was repealed, a national "Three-Tier System" was established to regulate the sale and distribution of alcoholic beverages, in order to prevent monopolies and to promote tax collection in all states. In short, the system requires that before a consumer may own an alcohol product, three parties before them must have owned it inside the United States: Either a winery or importer owns the wine first, then has to sell the wine within the same state to a wholesaler, who then has to resell that product to the retailer, who then can sell it to the consumer.
Furthermore, the 21st Amendment to the Constitution gave the states the right to regulate their own alcoholic beverage laws and rules—which means 50 entities with different rules and laws. Some states decided to operate as monopoly or control states, meaning the state became wholesaler and retailer in one, disallowing any legal private sale of alcoholic beverages.
These special legal considerations, says Pearce, "drive our extraordinarily complex operations." More to the point, adds Gregg Kober, vice president of operations at the company, "None of the 1933 laws contemplated direct-to-consumer business."
Both Pearce and Kober have a solid understanding of cataloging, each having spent years at direct marketing companies before joining Geerlings & Wade in 1996. They are assisted by the company's liquor counsel, whose expertise keeps the company compliant with the myriad laws. "Fewer than 10 national law firms specialize in alcoholic-beverage law; we use two of them in addition to our corporate counsel," Pearce says.
"It's not like you just have to learn one set of rules and comply," Pearce attests. "You have to learn each state's rules and deal with each individual regulatory agency," to say nothing of varying interpretations of their laws.
Following the alcoholic beverage laws is critical to the company's survival. If state regulators determined that the company had violated a law, the company could be fined or, in an extreme case, its license could be suspended or revoked.
One relief in the challenge of selling wine direct is that some states have passed reciprocity laws, allowing merchants and wineries in one state to ship to another state if it provides the same courtesy. Other states have passed, more recently, direct shipment laws allowing merchants to ship from any state, as long as the destination state's rules are observed.
The rules may include collection of excise tax by retailers (traditionally collected by the wholesalers), collection and payment of sales tax to the state, and constraints on the amount of alcohol you can ship to one person at one time or period of time.
Pearce adds, "In most catalog or mail order situations, if you haven't created 'nexus' for the company by either having a physical location with employees or direct salespeople on the ground, you aren't obligated to pay the state sales tax."
But as a quid pro quo for allowing companies to ship alcohol directly to its residents, certain states ask that you pay the sales and excise tax and agree to ship the quantities allowed, says Pearce.
A Countrywide Presence
From its licensed retail/warehouse facilities in 16 states, the company sells wine directly to customers in 30 states. "We believe we are reaching over 85 percent of the wine-drinking population in the United States," Pearce affirms.
As state-by-state expansion has occurred over the past few years, Geerlings & Wade is able to meet new customers, penetrating the markets in those states and selling more each year, he says.
Geerlings & Wade has distribution "hubs" in three reciprocal states: California, Connecticut and Illinois. The other 13 licensed locations only ship intrastate.
Pearce explains: "Louisiana passed legislation permitting a retailer to ship anywhere in the country, and we just chose to ship there from Illinois because it made the most sense for us. From our California warehouse we ship to other reciprocal states west of Illinois. Then we ship from Connecticut to Rhode Island and New Hampshire, because they've opened [themselves] as direct shipment states."
The laws lead to some illogical but necessary routes of commerce. Massachusetts won't allow shipment to or from any other state. So instead of shipping from there to New Hampshire, the company has to move product from Connecticut to New Hampshire, even though you have to cross Massachusetts to reach New Hampshire.
With the exception of a pure retail operation on Newbury Street in Boston, Geerlings & Wade typically locates its facilities in industrial parks. The facilities usually comprise a 400- to 500-square-foot retail showroom where the product is on display and people can walk in off the street and buy wine. Attached is a 5,000- to 10,000-square-foot warehouse in back, where the product is shipped out.
Pearce says, "Some wine merchants cover a few states from licensed facilities, and others don't hold any retail licenses but work with retailers, giving them less control over how the product is packaged, sold and delivered.
"Meanwhile, Geerlings & Wade controls these functions from the wine sourcing down to the delivery in some cases."
Delivering in Various Ways
The catalog business was founded on the notion that in various situations, people prefer to shop by mail—even for a highly specialized item like wine. So Geerlings & Wade makes sure customers get the information they need, whether from the Web site, www.geerwade.com, a phone rep or a warehouse worker who doubles as a retail salesperson.
Since not all employees are wine connoisseurs when hired, the company takes care to bring them up to speed. "Our people are wine lovers, but they don't put on any airs about what they do," says head of operations Kober.
Most of this advising is by phone, he says. About 98 percent of orders are direct, with 13 percent of those direct sales made through the Internet. Kober says one of the reasons the company has so few orders placed in person is the remote locations of the sites, which is necessitated by the need for large warehouse space. Yet some customers still wish to see the labels and feel the bottles, so they come in, he says.
Most mail order companies have two or three large warehouses because of economies of scale. Typically, it wouldn't make sense to have 16. But because of the legal constraints of selling wine, Geerlings & Wade must.
The company turns its special circumstances into an advantage in terms of competing with other online or direct retailers, in that typically it ships an order from inventory located in the same state where the customer lives.
"So as soon as we pick and pack the order, and it's picked up by a third-party courier or delivered by us, it arrives a lot faster than if product has to be shipped from California to New Jersey, all the way across the country," says Pearce. Kober adds that it's typical for a customer in the state of New York to have a product ordered on Wednesday delivered on Friday.
"Another difference in our system is that depending on the state, different people are allowed to deliver wine to our customers. In some states, it's UPS, in others we use a courier service and in some states we do it ourselves," says Kober.
In Massachusetts, the law requires each delivery vehicle of alcoholic beverages to have a permit. So UPS or a courier would have to get permits for all of its vehicles in Massachusetts at a cost of $35 per truck to comply—not entirely practical.
Also, says Kober, in some states the reporting requirements of the delivery company—who they delivered to, the recipient's date of birth, identification number, etc.—are too burdensome for standard delivery companies. And of course, the USPS cannot deliver alcohol by law. Geerlings & Wade also has its own fleet of 12 delivery vehicles based in Massachusetts and New Jersey.
In marked contrast to the complex wine-delivery situation, Geerlings & Wade's wine-accessory inventory is stocked in and delivered from Canton, MA, rather than divided among the 16 distribution centers.
Pearce sums up, "Direct marketing is a business of watching pennies in order to make money, so we work hard at reducing our delivery costs. In Texas, for instance, we use multiple couriers to minimize our costs; we do that as well in Massachusetts." For deliveries to western Massachusetts, the company has found that third-party couriers are more economical than the proprietary delivery fleet.
"These savings are passed on to the customer in lower product prices," Pearce says.
Inventory Forecasting is Key
The first question this wine merchant asks its customers is, "Where will you have it shipped?"
The company must find this out so it can select and ship product from the correct facility to avoid violating interstate shipping laws. Once the shipping destination has been identified, all of the specific state rules come to bear on the transaction.
But the biggest challenge for the company is inventory management. Once Geerlings & Wade has purchased product from a licensed wholesaler and inventoried it into its retail, that product cannot be moved to any other inventory and must be sold to retail customers.
"So when we send out a mailing to market 10,000 cases of a certain wine, we must accurately forecast the demand by state. We carefully determine how many people we're marketing to in that state, and what their expected response rates and average order value will be so we don't end up in an overstock position," Pearce explains.
Because in the alcoholic-beverages business, he says, "you can't sell off inventory to someone at 10 cents on the dollar. So we really don't have many alternatives but to be accurate in forecasting."
Geerlings & Wade's average inventory in each state is 750 SKUs of its total 1,500 product universe, in which costs range from $7 a bottle to $1,000 a bottle. The number of SKUs seems large because each wine vintage has its own SKU.
Super-Smart Software System
To correct Year-2000 date-related computer issues, Geerlings & Wade phased out its homegrown order-processing software in July 1999 and installed the CatMan fulfillment system from Avexxis Corp. of Avon, CT. The new system provides almost 100 percent of the company's functionality except for its e-commerce software operations. The system accepts all orders, controls all inventory and reporting, enables all marketing efforts and does the accounting.
"It's really beginning to end, in terms of how we run our business. It's our circulatory system, our lifeline," says Pearce.
The new system, nicknamed WineCat, was customized to include all the controls that have to be in place for Geerlings & Wade to comply with myriad state laws.
For instance, says Kober: "The system has to know whether it's OK to ship from California to Iowa—or that some reciprocal states have monthly limits on the amount you can ship to customers. The system has to keep track of that as well."
It also helps immensely with inventory issues.
"In some states such as New York different towns impose different sales tax rates—and Geerlings & Wade is responsible for collecting the correct tax. Or in New Hampshire, a customer can order only 60 bottles per year," says Pearce.
These constraints and rules must be programmed into the order processing software and be duplicated by the Web programming as well.
All customer data and transaction history is held in the system: how they paid, how product was shipped, and so on. Geerlings & Wade has designed for its four Internet sites a feature that allows customers to view their own purchase history. By pressing a button, they can reorder previous selections or receive another recommendation.
"The WineCat and Internet databases talk to each other," Kober says. "The Web site was built with the understanding that it had to replicate a lot of the business logic we were building into the WineCat system," a project that was going on more or less simultaneously. "The Web site needs to understand that in Texas, for instance, there are dry ZIP codes; the Web site needs to check [those things] just like a rep would on the phone," he adds. He says the Web site reconfigures itself to show the state's inventory as soon as the visitor logs in his or her ZIP code.
Kober says, "There are things you do day in and day out, and you need to make sure when you turn a new system on in our business [that they are included] so you don't make mistakes that are going to cause you difficulties with your license or with the regulatory authorities."
In terms of getting the new system in place, Geerlings & Wade worked in a compressed time frame: It wanted to get the job done before the year 2000, "and like any retailer, our fourth quarter is the most important one of the year, so we had to be up and running by August, or else we couldn't do it," Kober recalls. The job took six months. Kober says that "literally, the people from Avexxis would sleep on the desks here, they'd take a little snooze from midnight to four, and then they'd be up and working on it again. We went with Avexxis because that's their forte, building custom applications under tight time frames."
WineCat runs on a thin client-server, and reps access it through their PCs. It helps all of the selling staff by keeping the 1,500 SKUs with all of the information a human mind could scarcely store, available for ready access. Through a keystroke, Kober points out, sales people can provide—or the customer can find out for herself on the Web site—what the product tastes like, its attributes, food-pairing suggestions, longevity and more.
Wine sales is very subjective, especially the way Geerlings & Wade operates—selecting featured wines and presenting them to the customer as their wine expert.
"So, there's a very high degree of trust between the customer and the company," Pearce maintains. "Therefore, we can cross-sell and upsell much more readily than you could in other direct marketing businesses, because we are looked at as an expert and a buying agent for our customers."
