Online wine marketplace and cloud based wine cellar
What they do: Underground Cellar is an online wine marketplace where consumers receive free upgrades for rare bottles from prestigious wineries. Members can also store their purchases in a humidity and temperature controlled wine cellar and have them shipped overnight, all for free.Why it's a big deal: Wineries hate using discount retailers to get rid of excess inventory because it cheapens their brand and makes customers expect lower prices. Underground Cellar solves this by randomly upgrading some purchases to valuable premium wines. Customers save money with free premium upgrades, and wineries don’t dilute their brands. They have nailed the wine market with over $300,000 in revenue last month, but more importantly, they have pioneered a model where even non-wine premium brands can sell excess inventory without the damage done by deep discounting.
Jeff founded and sold Arcadia Enterprises, a cloud-based employee management tool. He is also a marketing expert and Univ. of Ariz. alum.
Manager at Microsoft & Founder of Elix Technology. Before that, Ben earned his degree at Brown University.
Digital trends analyst with expertise in cryptocurrency and commodity markets.
Why people love us
Because they’ve finally found a way to sell excess inventory without destroying brand value. The Groupons of the world are failing because discounts condition customers to expect lower prices from the brands that use them. Undergound Cellar has a better model: free upgrades for customers instead of discounts. Increased sales that protect the brands ability to charge the prices they want. They’ve started with wine, but the vision is a model that applies to other verticals like food, cigars, tickets and gift cards.
But it’s the team that gets us really excited. These guys are smart. Not only have they figured out how to solve the discounting problem, they have also solved important problems specific to online wine purchasing, like shipping costs. Most online retailers split a near $60 per case delivery charge between themselves and the end customer. Underground Cellar figured out a way to make money on shipping while making it free to the customer. And this is not their first rodeo. Jeff, the CEO already has one exit under his belt, and has taken Underground Cellar to 70% month-over-month growth with customers that spend 280% more per month than the industry average. With the amount they make per customer ($770) 15 times as much as it costs to acquire one ($50), there is plenty of growth ahead. This is a team to believe in.
Some of our investors
27+ investors since our founding
We help wineries quickly move inventory without bastardizing their brand. Currently our competitors help wineries get liquidity on their bottled wine inventory by flooding it to market at deep discounts (e.g. like a “Groupon for wine”). The problem is when wineries use these deep-discount sites it trains customers to expect discounts in the future. This not only harms their brand image (“Why is this winery having to slash their prices in half? What’s wrong with the wine?”) but even worse, it can take years for a winery to regain its price-points.
Underground Cellar helps wineries sell their wine without discounts. We realized that luxury wine buyers don’t actually want the lowest price -- they want the highest value. Instead of using discounts to entice customers, our platform provides them value by ‘swapping out’ half of the bottles they buy to better bottles like rare vintages, large-format magnums, or autographed bottles. The winery still gets liquidity on their inventory, the customer gets amazing value, and because our marketplace connects the buyers to the wineries, there's a hefty cut for us as well.
Why do customers prefer you over the discount sites?
When’s the last time you walked into a wine shop with $50 and walked out with a $1,000 autographed magnum? This happens every day on Underground Cellar. We've gamified the wine buying experience and have a die-hard customer base that is addicted to discovering, buying, and storing amazing wine with us. We have experts that curate the best wines form around the world, and we work with brands unattainable by our discount competitors because we help protect their brand, not weaken it.
We're not a wine club and there is no minimum per order or minimum you have to spend every month. This allows buyers to discover and sample from different wineries without having to commit to a large order. Each day we feature a new limited-time and limited-quantity offering where buyers can view the percent chance they have to get each different bottle. Our best deals sell out within hours, sometimes even minutes.
The other really cool thing that our customers love is our CloudCellar. One of the biggest reasons that people are not buying wine on the internet is that it’s very expensive to ship. Wineries currently avoid this problem by passing on the expensive shipping fee, or setting really high minimum orders. But new customers might not be ready to buy an entire case, or pay ridiculous shipping fees for wine they’ve never tried. With CloudCellar, we let customers buy as little as a single bottle of wine, and store that bottle in their personal “Dropbox for wine” in our cellar in Napa Valley. Customers can mix-and-match bottles from different wineries, build out their collection, and then pick-and-choose the bottles they want to ship on-demand at $5 for six bottles, but free for a case.
What does the Cloud Cellar look like to the customer?
There are two awesome aspects to our Cloud Cellar. One is a well-designed page that showcases all the wine in their collection. They can view all the wine they’ve bought, just like they would if they walked into their personal wine cellar. When they’re ready to ship bottles, they can pick-and-choose which they want to have sent out on-demand: six bottles ship for just $5, and a case of 12 ship for free. If a customer wants a bunch of wine for a party Friday night, they go into their online cellar, pick their favorites, and have them arrive at their door for free, ready to serve at dinner.
The cellar is amazing for retention because once someone buys a couple bottles, we can count on the fact they're going to buy ten more bottles in the near future. They intended to store their collection with us from the start, and as they store more and more bottles we become more valuable to them - their entire collection is with us in one place.
How many customers use the Cloud Cellar?
80% of orders go directly to customer’s Cloud Cellar. What we're seeing in some customers is that they're buying way more wines than they'll probably ever drink because we've gamified the wine discovery and buying process -- half the fun is buying it, not just drinking it. So some people are storing literally hundreds of bottles with us in their Cloud Cellar.
But CloudCellar is more than just a way for customers to aggregate their purchases to get free shipping: we also allow them to show off their Cloud Cellar. Users can show off their CloudCellar wine collection like they do when they show off their wine cellar at their home when having guests over. Customers are sharing their CloudCellar URL with friends, which is great for organic referrals.
Who is your target customer?
We have two main demographics. 1) Millennial discoverers; and 2) Baby boomer whales. “Millennial Discoverers” are our fastest growing consumer segment. These are 25 to 35 year olds interested in discovering and learning about wine, and they represent about 30% of our revenue right now. Since this segment of wine drinkers is growing so quickly, we’re courting them now in preparation for the future. The other 70% of our revenue largely comes from what we call, "Baby Boomer Whales." These are people 45 to 60 years old with big wine cellars at home. These wine connoisseurs spend $500-$1,000 per order, and even though they already have their preferences, they are coming to us because we are able to get them access to wines that they can't get in their local market. The wines we have access to are typically reserved for friends of the vineyard or club members.
Why do the wineries throw in these awesome upgrades?
The reason the winery is throwing in upgrades is because they understand doing so will help them move the inventory without resorting to discounts that cheapen their brand. One difference between us and our competitors is our audience. Our competitors market to deal seekers that are always trying to save a buck, get the best deals and biggest discounts, and at the end of the day those are really terrible customers for the wineries. Wine is a luxury item, especially the wine that we deal with. These wineries are looking for people who aren't price sensitive; people that want a very high value for what they're getting, but don't necessarily care about saving a few bucks. Our audience fits this mold. They are luxury high-end customers who might enjoy an autographed bottle or exclusive vintage over some discount. The model and these types of customers are really appealing to wineries.
Can you track the value of Underground Cellar to the wineries?
At this point we only have qualitative data, which is that every winery we've worked with wants to do another deal. They call us and exclaim how our customers are calling back to order full cases and full price, subscribing to their membership or requesting a visit. Our site makes these high-end wineries an object of desire. Customers that miss the upgrades yearn for that exclusive bottle, so they try and seek it out. Some customers go directly to these wineries.
To some extent we might be cannibalizing ourselves by providing such a great product that customers go directly to the wineries to find the exclusive bottles they missed out on. We have programs in the works that will actually capitalize on this. With the program, the customers can reserve exclusive bottles in advance and put money down to buy exclusive wines even before they go on sale. Naturally wineries love this too because we’re effectively selling their stock before they have the chance to.
Also up until recently every winery existed on the site for a day or two, and then poof! It was gone. But now every winery has a page that lives on indefinitely which allows them to launch their own offers whenever they want. Customers can follow their favorite wineries and be notified of new deals immediately, before the rest of the Underground Cellar community. Wineries have already started to send their web traffic directly to our site because we help them engage their customer base so much more effectively.
Can you explain the actual fulfillment process?
We take no inventory at Underground Cellar. We actually don't have a liquor license, and we've done this on purpose because we want to remain a merchant marketplace for our wineries.
When we do a deal for wineries, we say to them, “We think we could sell five-hundred bottles. We want you to set aside three-hundred bottles of your forty dollar Pinot, a hundred bottles of your $40 Pinot, 100 bottles of your $70 Pinot, and autograph a couple of Magnums.” The wine maker sets that wine aside, and then over a one to two day period, we sell it to our audience. Then only when it is sold out, or the clock expires, we close the deal and the winery sends the sold wine to our Cloud Cellar in Napa Valley. We’re never on the hook for the unsold stock, we have a thirty-day float before we pay out the wineries which effectively eliminates all risk of broken product, and all the stock is still covered by the winery’s insurance. Essentially, the winery uses our Cloud Cellar as their secondary warehouse for wine that is already sold, and it is legally managed by the winery so we don’t need a liquor license.
How do you make money?
We charge wineries 20% of the purchase price, plus three dollars per bottle, and three dollars per order. These charges cover storage fees, and allow us to ship the wine for cheap. Most wineries lose money on wine shipping because consumers these days expect free shipping. Wine clubs and our competitors eat that cost. We’ve structured our revenue model to pool the shipping and storage cost across wineries and then make our profit from the revenue share. That three dollars per bottle and three dollars per order is what's associated with shipping fees. When a customer goes to ship their case, each of those wineries has already chipped in to customer shipping. Because we're able to spread that cost of shipping across all our wineries, the customer gets free shipping, and wineries can get bottles of their wine in the hands of new consumers for a low shipping fee each.
For example, if a customer buys four bottles of wine, from four different wineries, that's sixteen bottles. We're going to collect about sixty dollars from those four wineries- three dollars per bottle and three dollars per order, that's about sixty dollars. We can ship that wine for approx. $30-$40. So we have a twenty dollar profit built in on the shipping, in addition to the twenty percent revenue we already took off the top.
What are your margins and profits?
As I mentioned above, we're taking twenty percent of the sale price, three dollars per bottle, and three dollars per order. At the end of the day the winery is keeping about fifty -five percent of the full retail value of the wine. These numbers are actually really good for wineries because they typically make only 50% via other traditional distribution methods. We are just as good, or better than these other channels and that is before you take into consideration we’re doing free marketing for them.
How do you provide free marketing for the wineries?
We're interviewing the winery, creating original content, doing original bottle rendering, stories, and we send email blasts out to our entire audience. We also make Facebook, Twitter, Instagram posts for them. Consider that many wineries already hire expensive marketing agencies and we're doing it for free. Plus, what’s better marketing than actually getting your bottles in the hands of customers that are going to drink it?
What is the market size for Underground?
U.S. wine sales are $32 Billion. Five billion is purchased online every year from online wine stores and clubs, and another $1.5 billion is bought directly from wineries. Our business targets both these segments directly. But we’re rolling out new features that allow us to compete with wine clubs, where our customers can now set a budget and a wine genius will understand their palate, and pick offers for them. The customer still gets the upgrades, and the bottles show up at their door every month. We're going after the deep discount space, the wine club space, the online space, the direct to consumer space, and eventually the retail space. We can provide better margins and brand preservation than most of these channels and we provide a wonderful online experience.
What are your goals for this year and next?
Over the next twelve months we’re going to nearly triple our revenue run rate from $3.8 million to $10 Million. The following year (2016) we're going to do twenty million in revenue, and once we're at thirty million in revenue in the U.S. wine space, that's when things get really exciting because we can really expand. We can scale geographically. There is already a lot of interest from China and other Asian countries.
Do you only work with wineries?
We also have strategic relationships with distributors, retailers, and importers. These relationships allow us to access wines from around the world that we would not be able to otherwise because our volume isn’t large enough. Distributors love us because we help move inventory they often have to throw out to make room for next year’s stock. It’s really painful for a distributor to bring truckloads of wine to the dump, so they’ve come to us from all over the world to sell their wine without diluting their customer’s brands. We now feature wines from outside California, from Bordeaux, Tuscany, Argentina, all over the world.
How fast have you grown the wine community?
We have featured over five hundred wineries through direct winery deals, distributors, retailers, and importers. In total, we have over 100,000 people in our online community. We also have a strong community of people who are fans of ours, not because they're customers yet, but because we're providing great, educational content about wine. We set ourselves apart from other wine content with a fun, edgy, unpretentious approach to wine education. Our team includes leading wine experts in the world that all contribute to our original content. Our Director of Education was on the Board of Directors for The Society of Wine Educators. We’ve been able to convert 2,700 readers to paying customers that have contributed to our $1.3 million in revenue.
How fast have you grown?
Last month we did $300,000 in revenue, of which $66,000 was profit. We had 800 unique customers buying 8,000 bottles of wine, which equates to $375 spent per person. That's an average of $37.50 spent per bottle before the upgrades with an average order value of $170 and 2.2 orders per customer.
Our growth before March is even more impressive. December of 2014 was $50,000 in revenue. January was $93,000, February was $201,000, and March was $310,000. On average, it was about a 70% growth month-over-month.
How much do you spend to acquire each customer?
We’re currently able to get customers at 50 dollars apiece, and with these economics we can pay for those customers in the first month. But that number is falling fast, because if a lucky customer spends $50 and gets a $1,000 bottle of wine in return, they tell everyone they know and invite their wine connoisseur friends over to drink it with them. That has been one of our best acquisition channels, to just let people win; and it happens every single day.
We know for every three people that we pay to acquire, they're telling one new person to sign up for Underground Cellar. Our goal is to pay for less customers and earn more referrals. Soon we’ll get one referral for every single paid acquisition, and then, all of a sudden, we’ll hit organic viral growth. That's the goal.
What is the lifetime value of your customers?
Our first customers spent an average of $700 in their first year, but just last month, over 30 days, the average customer spent $375. This monthly spend coupled with the retention value of Cloud Cellar could mean a reasonable lifetime value period of four to six years. If that's the case, customers may be spending an average $3,500 over their time with us which equates to $770 in lifetime profit. We’re in a luxury market, and $50 to acquire customers for $770 in lifetime profit is really attractive.
What is your barrier to growth?
Supply is not a problem. It definitely was in our earlier days because no one knew who we were and they didn't trust us yet. But now we have built a strong reputation in the industry, and receive numerous inbound leads from wineries that want to work with us, plus relationships with distributors, retailers, and importers. Our bottleneck is finding more customers, which we can do for $50 each. We’re raising this money to get more customers, and then the labor and the technology involvement to support that growth.
What is the big vision?
After expanding our wine business geographically, we could also expand into other verticals. We don’t have deal seekers. We have high end buyers, and we’ve tested food with them before. We did a caviar offer last year. For seventy dollars you could buy a little jar of caviar. You could be upgraded to the hundred and twenty, the two hundred, or the five hundred dollar really rare caviar. We sold $4,000 of caviar in 3 hours.
There are many verticals that we can jump into with our upgrade model: gourmet food, sporting events tickets, cigars, gift cards, hotel rooms, etc. We recently sold $10,000 in gift cards in thirteen minutes. There's a lot of potential for us to bring this upgrade model, and the Cloud Cellar technology into other verticals and other geographies. We're not just going after this 32 billion dollar U.S. wine space. It’s much bigger than that.
How did the idea come about and how did you grow the team?
When I was in college I started a company that made photo ID badges for companies. All of the competitors in that space were undercutting each other because they saw photo ID badges as a commodity. We came into the space with the highest price and the highest value because we included cloud based software. Employers could manage their cards, design the cards, request them to be printed and shipped out, all online. We also had great customer service. This experience taught me that people don’t always want the lowest price, but rather the best value.
I realized wine is luxurious enough that we could focus on its high value and that it’s purchased enough to be a lucrative opportunity. So we sat down and built the first prototype, got some wine up on there, and it worked! When I first launched, it was a closed, private beta. I gave the first original founding members five invitations, and before long, we had thirty thousand people that had signed up. It was like, "Wow! This could be a real business!" With that realization, the four of us moved out to San Francisco. Now there are thirteen of us here.
What is your team like?
We're rockstars + I've built my dream team of hustlers.
Our CTO is Ben Herila, who was previously a Program Manager at Microsoft. We ran a company in Middle School called "High School Humor", and we've just been good friends since then. He's the smartest technological person that I know.
Our COO, Brian Gallagher, went to entrepreneurship school and keeps the ship running.
Daniel Yoo is our VP of Customer Relations, and runs our customer support, he's legit. He hails from AppSumo and other startups where he helped lead the scaling of customer support teams.
Gary Spadafore is our Director of Education as well as being on the Board of Directors of The Society of Wine Educators, he along with Brian Maurer and Neal Coats are our wine experts out in Napa Valley who put our deals together; and a combined 70 years of wine industry experience.
Underground Cellar is conducting a Regulation D offering via Wefunder Advisors LLC. CRD Number: #167803.
These upgrades are also pictured with the deal, and may include any number of premium, high-end wines that would normally cost a lot more than what the consumer is paying. Though the website tells customers exactly how many upgrades they’ll receive based on the number of bottles ordered, the surprise factor is that they don’t know which of the possible upgrades listed will actually be sent with their order until after they purchase.
Our latest recommendation is exciting for a number of reasons. First, you’ll be investing alongside Barbara Corcoran from ABC’s Shark Tank. Barbara’s a real estate mogul who has migrated to startup investing, and happens to be my favorite of the “Sharks” who invest in startups on their top-rated TV show every week.
On a mission to protect wineries from deep discount sites, this app is all about the random upgrade. Wines that have been curated by a team of pros are listed at retail value, and every time you make a purchase there is the potential to receive a wine of greater value. Like Russian Roulette, but you always win. There’s also a free “cloud cellar” option, with which you can store purchases in a temperature-controlled warehouse and have them shipped whenever you prefer.
Underground Cellar is making a game of getting more than you asked for when it comes to great wine.
Startup founder Jeffrey Shaw playfully described it as “wine roulette,” only you can’t lose and the payout is cabernet sauvignon, merlot, chardonnay or other varietals crafted by renowned vineyards.
Underground Cellar operates under the idea that people who love wine face the harsh reality of " you get what you pay for" from bottle to glass. While some online wine marketplaces bring the cheapest wines to the most people, the folks behind Underground believe you could be willing to spend a few extra dollars to get a higher quality product.
Underground Cellar, the new wine start-up founded by technology entrepreneur Jeffrey Shaw, has reconstructed an innovative solution to a problem plaguing the $1.4 billion direct-to-consumer wine industry: deep-discount websites. Underground Cellar’s solution is expected to save wineries millions of dollars by steering them away from the deep-discount players like Lot18, Wine.Woot, Wines Til Sold Out, Invino, and WineAccess
October 9, 2013
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