While the Internet is not lacking in places to buy wines online, a new Y Combinator-backed startup called Underground Cellar has come up with an interesting new concept for wine sales, where its customers are able purchase package deals that include random, free upgrades to premium, rare, and private-stash bottles from a number of wineries. These wines can then be shipped immediately to the consumer, or they can stored in Underground Cellar’s own climate and temperature-controlled wine cellar for on-demand shipping.
The idea for the startup’s unique business model comes from Jeffrey Shaw, a University of Arizona alumni who, after college, sold his ID badge printing business and began working on what would become Underground Cellar, financing it with the funds from that sale.
Founded in 2013, the website first launched into beta that fall and ran in an invite-only mode until March 2014. During that time, 30,000 members joined Underground Cellar to discover wines and purchase deals.
Now the site is “officially” launching, ahead of Y Combinator’s Demo Day.
The way the service works is that every day, there are anywhere from three to six offers on the site featuring a selection of wines – perhaps a grouping from one winery, or a collection where all the bottles are the same type of wine (e.g. Pinot Noir, Zinfandel, etc.). Consumers can purchase as little as one bottle, or as many as they want. However, the more they purchase, the more “upgrades” they receive.
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.
For consumers, the draw is that you’re able to access expensive, premium wines without having to pay the higher pricing, but for the wineries themselves, being promoted as an “upgrade” allows them to protect their brand image and current pricing structure.
To date, Underground Cellar has worked with over 300 wineries since its debut, many of which are located in the Napa Valley area. The company has featured over 1,000 different wines on the site, and has sold “seven digits” worth of wine to date. The site also now has over 100,000 community members.
What’s interesting about Underground Cellar’s business model is that it turned shipping and fulfillment into a profit driver, not a loss leader. Wineries give Underground Cellar 20% of the offer’s revenue, plus $3 per bottle sold and $3 per order. This gives the company a profit margin on the fulfillment side, explains Shaw.
“Wineries are making more wine every year than they can sell…or even store,” he says.
They may choose to unload it by marketing it at deep discounts, but that can tarnish the brand’s image while also training consumers to wait to purchase until the wine goes on sale. While wineries are generally earning around the same on their excess inventory when selling through Underground Cellar, they like that it helps keep their reputation intact. Plus, the way the deals are marketed – sometimes even including additional photos and videos from their winery – gives them exposure, Shaw notes.
(Pictured, left-to-right: Brandan Zaucha, Jeffrey Shaw, Brian Gallagher)
A “Cloud Cellar” For Wine Storage
Underground Cellar’s customer can also choose to store up to 500 bottles of wine for free in the company’s climate-controlled “cloud cellar,” and then ship it to their home as needed. (They don’t pay for shipping until they bring the wine home.) The site motivates them to ship in bulk, too, offering $5 shipping for 6 bottles, and free shipping for 12.
The company is now a team of ten in San Francisco, including co-founders Brandan Zaucha, Brian Gallagher and Benjamin Herila. They’ve raised $1.3 million in seed funding from Y Combinator and Shark Tank’s Barbara Corcoran through her AngelList syndicate.
They’re planning to raise an additional $5 million following Y Combinator’s Demo Day, where they will also pitch their larger vision which involves taking the “upgrades” concept to different verticals, including gourmet items,gift cards, cigars, sporting event tickets, fashion and jewelry.
“Our ultimate goal is to be a competitor to Gilt or maybe an ‘upscale Groupon,'” says Shaw.