Winc, a wine box subscription business valued at $112 million, has recently filed for bankruptcy, leaving many people wondering what went wrong.
In this blog post, we'll take a closer look at the industry, business model, and financials of Winc to understand why a seemingly "good" company has failed.
Industry and business model
The wine industry is known for being fiercely competitive, but Winc has differentiated itself through its "Ideate, Launch, Amplify" framework. This framework allows Winc to access consumer data, predict which wines customers will purchase in the future, and then outsource production to a small batch manufacturing company.
This keeps the business model asset-light and focused on marketing rather than manufacturing. Once a product is produced, Winc sells it through email marketing to customers they've identified as likely to purchase the product, and if there is strong demand, they scale the brand through ads. In addition to selling through email and retail stores, Winc also offers subscriptions, which increase customer lifetime value.
However, it's worth noting that this business model also has its challenges. By outsourcing production, Winc is reliant on external partners for a crucial aspect of its operations. This can be less predictable and more vulnerable to disruptions, and it may have contributed to the company's difficulties.
In addition, the fact that wine is heavy to ship and has a relatively low average order value (AOV) of between $60 and $70 may have thinned margins and limited the company's ability to absorb rising costs or declining revenue.
When we look at Winc's financials, we see some red flags. From December 2020 to September 2022, the company's cash position declined from $7 million to $2.8 million. Over the same period, total liabilities increased from $22.6 million to $36.8 million, while gross margin declined from 41% to 36%.
These numbers indicate a business model that isn't working, a growing mountain of debt, and a shrinking cash position.
It's worth noting that the COVID-19 pandemic and the resulting economic downturn may have exacerbated these trends and made it more difficult for the company to recover.
In addition, rising ad costs, which have been affecting all direct-to-consumer (DTC) companies, may have put pressure on Winc's marketing efforts and reduced the effectiveness of its advertising campaigns.
Factors Contributing to Winc's Failure
There are several factors that contributed to Winc's failure in the competitive wine industry:
- Wine is typically an impulse purchase for most consumers, and it can be difficult to shift consumer behavior to adopt a direct-to-consumer (DTC) wine subscription model. This means that Winc had to work hard to convince customers to commit to a recurring purchase rather than just making one-off purchases as they felt inclined.
- Wine is heavy to ship and has a relatively low average order value (AOV) of between $60 and $70 for Winc. This means that the company may have had thin margins and limited room to absorb rising costs or declining revenue. Additionally, the company's 10-k does not disclose its average shipping cost per order, but this is likely a significant expense.
- Ad costs have been rising for all DTC companies, including Winc, and the company has not had enough time to enter retail markets and maximize customer acquisition costs through impulse purchases. This means that Winc had to rely heavily on digital marketing to reach customers, which can be expensive and increasingly competitive as more companies enter the DTC space.
- The COVID-19 pandemic and the resulting economic downturn may have exacerbated the challenges that Winc was already facing. For example, the pandemic may have disrupted the company's production and shipping processes, increased marketing costs, and reduced consumer demand for non-essential products like wine.
What can we learn from the failure of Winc?
There are several lessons that founders and entrepreneurs can learn from the failure of Winc:
- Understand your industry: It's important to have a deep understanding of the industry you're entering, including the competitive landscape, consumer behavior, and potential challenges you may face. In the case of Winc, the wine industry is known for being fiercely competitive, and the company struggled to shift consumer behavior to adopt a direct-to-consumer (DTC) wine subscription model.
- Monitor your financials closely: Regularly reviewing your financials can help you identify potential issues before they become major problems. In the case of Winc, the company's financials had been declining over time, with a shrinking cash position and rising debt.
- Be aware of external factors: External factors such as the COVID-19 pandemic can have a significant impact on your business, and it's important to be prepared to adapt and adjust as necessary. In the case of Winc, the pandemic may have disrupted the company's production and shipping processes, increased marketing costs, and reduced consumer demand for non-essential products like wine.
- Consider the sustainability of your business model: It's important to consider whether your business model is sustainable in the long term. In the case of Winc, the company's asset-light model, which relied on outsourcing production to a small batch manufacturing company, may have contributed to its difficulties.
- Be prepared for challenges: Starting and growing a business is never easy, and founders should be prepared for challenges and setbacks along the way. The failure of Winc serves as a reminder that even seemingly "good" companies can struggle and ultimately fail if they are unable to adapt and overcome challenges.
In conclusion, the failure of Winc serves as a cautionary tale for businesses looking to enter the competitive world of wine or any other industry. The company faced a number of challenges, including a difficult industry environment, declining financials, and external factors such as the COVID-19 pandemic. Founders and entrepreneurs can learn from Winc's experience by understanding their industry, monitoring their financials closely, being aware of external factors, considering the sustainability of their business model, and being prepared for challenges. By taking these lessons to heart, they can increase their chances of success and avoid the fate of Winc.