Winning as a wine retailer

The past two weeks was a great education on the business and overall trends of the wine industry. In particular, we had a close up look at the various choices and paths that wine producers could take. While we did not go into as much detail on retail, I have always contemplated opening my own wine retail in the future. When I started drinking wines 14 years ago, there were still not many wine shops in Singapore. Many have since popped up all over the island. Most have come and gone as it is a highly competitive business. If I were to start a wine retail business, I would model it against K&L wines, as I think they have created a nice niche for themselves.

First, K&L wines offers a highly curated consumer experience. It starts with the small store space, just about 2000 square feet, which makes wine browsing a  manageable and enjoyable experience. The staff are highly passionate and knowledgeable about wines. I also trust the wines sold by K&L. I've almost never been disappointed by any wine I bought there. They also have a reliable supply of popular and unique small production wines. This means, however, that K&L needs to manage their relationships with a whole host of wine producers and distributors.

Second, K&L is focusing on a sustainable business. Despite its strong branding, nation-wide repute and growth potential, it has limited its presence to key cities in the West Coast and kept to 3 stores in San Francisco, Hollywood and (thankfully) Redwood City, as well as an online store. They have built a strong business targeting high net-worth consumers in the Bay Area and LA. While it is tempting to expand to the East Coast, there are several incumbent retailers there hat have their own loyal customer base. It would be more astute to bank on their strong reputation and grow their online presence to ship to other states.

Third, K&L offers value-added services such as wine cellaring. This creates complementarity and lock-in as premium customers are more inclined to go through K&L to order low availability premium wines and have K&L directly store the wines in their personal lockers. Customers would also be inclined to fill up the lockers and buy more wines. For those of us thinking it might be a tough business given the pricey real estate, they are likely making great money. Having done some rough calculations, at full capacity, their wine locker business would yield revenues of $20 per sq foot. Assuming storehouse rent in Redwood City to be $5 per sq foot, even after factoring operating costs their gross profit margin could be somewhere between 200 to 250%. 

There’s always room for improvement and K&L could start by revamping their online store. While I find K&L’s website good, it is setup like a translation of their physical store to the online space. They would need to modernize their online platform to be more approachable for newer consumers and actively court the younger millennials in the Bay area.