As the case mentions, both companies had a lot of support. Amazon invested $30M in WineShopper and many of the top VCs at the time, including KPCB, New Millenium Partners, and ThomasLee.Putnam Internet Partners invested in both.
As noted, WineShopper in particular had a lot of early wins. Chief among them was the development of a nationwide wine inventory database for the Wine & Spirit Wholesalers Association of America. In return, WineShopper could use the system for online wine sales, allowing them to navigate the extremely complex regulatory environment.
So what went wrong?
Underestimating the system complexity: It turns out computerizing the nation’s wine inventory in 1999 was a very complex task. At the time, there were 20,000 shop keeping units to track. In addition to this, it seems that most of the liquor wholesalers were not sufficiently tech savvy (many did not have computer systems at all). The end result was that WineShopper had to integrate a vast number of ancient systems to build the database. Both WineShopper and its investors were working towards a tight deadline – the 1999 Christmas selling season. Multiple delays and postponements meant that this milestone was missed. It seems like there was just too much to do in too short a timeframe.
Escalating costs: This was the height of the dot com boom and ambitions regularly outpaced reality.
Many internet companies thought the key to winning was getting the right URL. Virtual Vineyards (who went on to become wine.com) purchased the wine.com URL for $3M, the largest URL purchase at the time. In hindsight this may not have been the best use of cash.
Inventory and marketing costs sky rocketed as Wine.com tried to expand quickly. In spite of this investment, they failed to see any meaningful efficiencies of scale or reductions in customer acquisition costs
Clash of cultures: Finally, it seems that when both WineShopper and Wine.com were forced to merge a difference in beliefs prevented any benefits from being realized. An example of this was the fact that WineShopper based its marketing on the ratings by Wine Spectator magazine, while Wine.com was firmly against using elaborate ranking systems to drive marketing.
This failure to create a coherent single organization meant that the new company couldn’t agree on cost reductions. For much of its short existence it had two major warehouses in the same building in Napa and numerous staff duplications across all functions.
Eventually the money dried up. Less than a year after the merger the bankers pulled the plug on a $15M loan The merged entity filed for Chapter 7 bankruptcy shortly thereafter.
Source: https://www.bloomberg.com/news/articles/2001-04-16/wine-online-it-doesnt-have-to-be-this-bitter
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