Vintage wine in e-bottles shows there's life still in e-commerce

Retail e-commerce is dead according to the pundits. But Direct Wines, a UK distance selling operation with 30 years offline...

Retail e-commerce is dead according to the pundits. But Direct Wines, a UK distance selling operation with 30 years offline experience, is leveraging its fulfilment systems to win new customers and grow turnover online.

Paul Mason

They've planted Chardonnay grapes outside Direct Wines' HQ on an industrial estate in Theale, Berkshire. The vines are just three years old - two years older than the wine retailer's e-commerce operation.

Direct Wines is the business behind prestigious mail order operations like the Sunday Times Wine Club and Bordeaux Direct. It's been going for 30 years, so Tony Laithwaite - chairman of the privately-held company - says it knows all about direct marketing. But the company was late into e-commerce. After a series of unproductive online marketing ventures, Direct Wines decided to make a serious move online in January 1999.

Now, while the pundits are telling us that B2C e-commerce is dead, Direct Wines is giving a textbook example of how to adapt existing retail models to take advantage of the Web. While many dotcom retailers crashed because order systems could not cope with peaks, or because fulfilment was faulty, Direct Wines recognised early on that its existing back-office processing and fulfilment was its strongest online asset.

The company worked with MarchFirst to build a transaction-based front end. It started testing in September 1999 and went live in November. Since then Direct Wines' online sales have grown from zero to 6% of turnover - £3m this half year, targeted to deliver £10m by the end of 2000. Now, one third of new customers are coming from the Web. About half of those remain pure online customers, while an increasing number of existing customers are migrating online.

It appointed its first e-commerce manager two months ago and is set to install a new front-end architecture in September, to offer Amazon-style B2C services like instant callback, one-click ordering and individual customer profiling.

Yet senior managers remain blunt in their refusal to change the business model to suit online fads. "We didn't have to change the business. The Web had to fit into the way we do business rather than the other way round," says managing director Greg Hodder, who ran the Web project personally for the first year.

Initially Hodder saw the Web as another channel to its existing customer base - but quickly realised that it was also a way of winning new customers. Despite 30% year-on-year growth, Direct Wines realised it had to be on the Web to fend off start-up competition.

"We are a sales-driven organisation, but our main criterion was not just extra revenue. It was very important that we become established as a main player in quality wine on the Web. Our reputation and image had to be strong there - that was more important than the sales volume. It was also critical that, as a service-led organisation, the robustness and service criteria were extremely high," says Hodder.

Online competitors have swarmed into the market for wine on the Web. But according to Hodder one of the biggest barriers to entry is fulfilment. He sees the company's existing back office systems as the key asset to leverage in the online market. "You have to have a robust fulfilment system to give quality service. Trying to outsource call centre work, warehouse management, buying, delivery and tracking is difficult. Having the systems to do that, and to deal with peaks and troughs of demand, costs many tens of millions."

Chris Terelak, marketing manager, project managed the launch. The biggest challenge, he says, was linking the front and back end systems.

"The testing period was crucial to iron out technology issues. We're a complex company with different types of customer and an extensive product range. The biggest learning curve was getting the integration with the back end systems right. It was a big technical challenge for the developers we were working with - and continues to take up a lot of time and energy."

Terelak says the main difference between the offline and online product launch cycle is the need for tightly documented service specifications with the IT supplier. So IS manager Brian Grieve was involved from the start in negotiations with the developers.

The Web platform was developed by Marchfirst and is hosted by Attenda. Behind the Web front end sits a Microsoft SQL Server 7 database running on its Windows NT operating system. But the back-end systems are the company's main fulfilment engine, running at its Berkshire HQ and warehouse. There is an Oracle database running on Hewlett-Packard's robust HP-UX brand of Unix. The company's e-mail push and call centre operations are handled in-house.

There is, as yet, no realtime access from the Web to the back-office. Orders are processed in the central HQ and information from the Web is gathered in hourly bursts via file transfer. Realtime integration could come, says Grieve, but adding front end functionality is more important at present. Hodder says, "We haven't prioritised online order tracking. We've talked to our customers and it isn't something they want. They want to know their wine will arrive in four days' time, not that it's stuck on the A40."

To a consultant, armed with an e-business transformation model, Direct Wines would look "stuck" at what they call stage two. It has gone beyond e-marketing and is selling successfully online. But it is not yet doing e-procurement, and its back-office system is not transparent to the customer. Yet Direct Wines insists there are sound business reasons for this approach.

"Our suppliers are small farmers who even regard the telephone with suspicion," says Laithwaite.

Hodder adds, "It's important to understand whether your strategy is going to be Internet driven or driven by the market, for which you use the Internet. Trading with wine suppliers is a good example - we've taken the decision to provide quality wine and quality service - not large volume commodity wines. People who say 'we're going to become an e-business' then think they've got to trade online with producers, end up having to trade with the large wholesalers. They are Internet-enabled, but by then you are just selling Jacob's Creek. You're an e-business, yes - but you've lost your position. It's terribly easy to become seduced by the technology."

With the first phase of e-commerce delivering bottom line benefits, Hodder has handed over to e-commerce manager Grainne Newborough the task of developing the service.

This consists of rolling out added site functionality, using third party software on MarchFirst's platform - and winning new co-branding partners. Direct Wines already runs wine clubs branded for BA and NatWest and has worked with MarchFirst to offer a two-week turnaround time for developing a fully branded online wine club.

So while the core business model does not demand an end-to-end Internet operation, Direct Wines is growing its B2B activities by effectively offering Web development services to its co-branding partners. Terelak says, "In the offline business this process of building a branded service, through direct mail etc, was very time consuming and costly. On the Web it is much quicker and - once you've invested in the software - less costly."

Hodder is unfazed by the challenge of dotcom rivals. "The organisation that's most likely to do well is Tesco. It has the resources - and you need a massive amount to get it right. The dotcoms will crumble from a service point of view," he says.

What would the team have done differently if they could run the project over again? Terelak says, "We could have put a lot more resources into the development of the site and got to the critical points much earlier." Hodder interjects, "That would have meant delegating tasks to other people, which would have jarred with the strategy and organisation." "We could have gone earlier," adds Laithwaite, "but then, some firms started too early and failed".

Direct Wines has a long way to go before it is a fully transformed e-business. But it is doing two things vital for a new clicks-and-mortar company: it is leveraging its physical assets, not just its warehouse but a whole IT fulfilment system geared to lifetime customers.

And by using IT suppliers selectively, and keeping a lot of development and systems in-house, it has placed itself in a position to offer Web development services to other businesses.

Key challenges for the firm will clearly be scaling the Web offering as business grows - and working out ways to deliver new-economy style cost savings from the Web rather than simply maximising the customer relationship.

But its record to date testifies to a fact that is quietly dawning on frenzied financial markets. There is no Holy Grail "e-business model" - only the Web applied to make existing business models work. Sometimes the results can be spectacular. But Direct Wines shows that even for businesses playing a long game, the rewards of e-transformation can be immediate.

The e-commerce team

Grainne Newborough has been in the e-commerce hot seat for just two months. A psychology graduate with 12 years experience in direct marketing, her previous job was as a brand marketing manager at Compuserve.

Newborough reports to the firm's marketing director. Her two responsibilities are to develop the existing site and find new business partners. She also manages the relationship with MarchFirst.

The Web operations manager reports to her and manages a team of five Web engineers (HTML authors). All but one of the team came up through the firm's call centre.

Newborough says the key strength of the e-team is that it already knows the offline business. "A lot of university graduates come into the call centre as temps or first jobbers, with huge potential, and we've recruited to the Web team through that. Outside of myself everyone else in the team has worked in the company for about 6 years. They all started in the call centre and have a wealth of knowledge of how the company uses IT. It's very rare that you have an e-commerce team that has six years worth of experience in the company."

Parallel to the HTML team is a Web interface team of three programmers working within the IS department. They manage the interface between the NT front end and the Oracle-based processing and fulfilment system.

While the e-commerce team meets weekly, and includes the MD, that does not include the IS manager. Newborough liaises with the IS department "about once a month formally, though there is a lot of informal contact on a day to day level. The key role of IT is in testing and "reality checking" the e-commerce plan, says Newborough.

Company CV - direct wines

  • Staff: 380 plus 200 temporary staff

  • Turnover: £130m

  • Online launch: November 1999

  • Percentage of sales on Web: 6% - target for 8% this year.

  • Conversion of site visits to sales: 6%

  • Page impressions: 1m in 6 months to June 2000

  • Average delivery time: 3 days

  • Key players: MD Greg Hodder, e-commerce manager Grainne Newborough, marketing manager Chris Terelak, IS manager Brian Grieve

  • Main technology partners: Marchfirst, Attenda

    Source: Direct Wines

    Web synergy: Squeezing the last drop out of inventory

    Bin-ends are a familiar concept in the wine trade. Small quantities of a discontinued line are often sold at a discount. Hodder says, "In the past we've had a bit of problem with them, had to agglomerate them into mixed cases. The Internet is a wonderful medium to just put 12 cases on and, when they've sold, switch to another one. You can even do countdowns to the last bottle. The customer gets to access small parcels of wine at an interesting price.

    "Also, there is a speed issue. Because we sell specialist wine, there can be high demand when we release a certain one. On the Internet you can get them quicker. Likewise e-mail push becomes a valued service - if we know you like Farnese, you get an email when the latest batch comes in."

    Grainne Newborough says, "One of the differences with the Web site is that its much easier to access all of our range. It is a big list - 2,000 wines - and its changing fast. To print a paper list would be out of the question."

    IS Manager Brian Grieve

    IS manager Brian Grieve controls a 36-strong IT department. He highlights security and testing as the key challenges as the firm moved online.

    "Security has been a huge issue. We have a security policy, with the computer services manager having prime info-security responsibility." Direct Wines employed third party security testing company Cyrano, which regularly attempts to hack the system.

    "The key security challenge is about firewalls and keeping them up-to-date," says Grieve.

    As for skills, "We've been training Web skills in to our developers, though, we haven't reached the stage where they're fully skilled up and decide to go off. The Web means that people now have a high market value - we have to pay them the going rate."

    The firm's sales order processing and telesales software was developed in house using GTX - "which is a bit like Oracle forms, but with scripting," says Grieve. For customer segmentation and analysis the firm uses the SPSS statistics package.

  • Read more on Business applications