The Truth About Wine with Philip James, Founder & CEO Firstleaf

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March 4, 2021

Philip James is the Founder and CEO of Penrose Hill / Firstleaf, a wine club for the modern age that uses data science to match the perfect wine for each customer based on their personal preferences. They ship over 100k boxes of custom wine every month. The company is a behemoth.

This isn’t Philips first go around in the wine industry. Philip has been a dominant force in the space for the past 15 years. We chat about his previous endeavours and how that helped him get to where he is today.

Along with being one of the most successful wine entrepreneurs in the world, Philip is an adventurer. In 2003 he climbed Mt. Everest, which turned into a rescue mission when one of his climbing partners broke their leg and had to crawl down the mountain in order to survive.

Philip and I discuss how Firstleaf operates, the three tier alcohol system, what it means when a wine is “Estate Grown,” and his myriad of adventures that I would argue makes him a candidate for the most interesting person in the world.

Special thanks to Philip for joining the podcast.

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Transcript

MPD: Welcome Philip. Would you mind quickly running us through a couple of the companies you had started before this, just the headlines kind of how they played in the space, what different problems they were solving and then how you arrived at your current venture and what you do?

Philip James: [00:02:05] Uh, yeah, happy to. So, you know, I think so there's always a. When you tell the story with the benefit of hindsight that you like threaded as if it was a foregone conclusion and right before I give it to you, none of this was a foregone conclusion for me, but in hindsight, you can draw this thread that shows how.

In all cases, we, we stayed adjacent to the customer, but in all cases, we moved gradually up the value chain, as I figured out how to do the piece, the next piece behind the scenes. And so, so I had worked for somebody else. Uh, another company called wine messenger for a couple of years after business school.

Um, and what I realized there was how difficult it was to find out. There was no, there was no IMDP right. There was no standard database of wine information. And we were selling wine that were relatively unknown in the U S we were the sole importer, um, uh, the sole retailer in the United States. And. It was an immense amount of work to get these often not English speaking, small growers around Europe and around the rest of the world to give us high quality photography, to give us winemakers notes, right.

To tell us the acidity level and all of these things. And. My simple realization was, if it's difficult for us, it must be difficult for everybody else. And so the first company I left and started called sniff, it's still around today. Um, it's actually run by my, uh, my co-founder. So I was the original CEO.

He was the CTO, uh, and now he's CTO and CEO and, um, And really it was an information aggregator of wine content, wine reviews, um, pricing. Uh, we were ad supported to our ad supported as well as like lead generation for wineries and retailers. Um, but gradually what I realized there was we will only getting paid, you know, 30 cents a click or 50 cents a click and maybe the much and was selling the product for $150 for, you know, for a box of wine.

Um, But customers would blame us if there was an issue with the merchant, right. Because if you originate with us, but I would do that too. If I book through Expedia, I'm upset. I blame Expedia. Even if they have no control over

MPD: [00:04:24] it, didn't give him a score where you recommending them at some level.

Philip James: [00:04:27] Heard there was a, yeah, there was a ranking system for the

MPD: [00:04:30] right.

So if someone's got to do something and it sucks,

Philip James: [00:04:34] right. Would it be mad at you? And, and so one of the, so online wine has a number of challenges. So state regulations, you know, you, you get to the end of trying to check out and the store says we don't have it in stock, or we can't ship to your state or no problem, but there's a $50 shipping fee.

Right. So there's a lot of gotchas that can happen. Um, and so. So that was 2007 or 2006, till 2010. Uh, and then, uh, one of the, uh, advisory board members from Snoop and myself co-founded lot 18, uh, and, and lot 18 was we're like, okay, people need help finding the wine they want or finding a good one, or they need someone to help them understand which wines might be good for them.

And so lots, 18. Was a flash sale retailer, but we were still partnering with other wineries to make the wine. And we were often partnering, w w in some cases, those wineries would put that product in a central warehouse, but in a lot of cases, they wouldn't, and they would still do the shipping themselves.

And that business raised a lot of money and grew quickly. Um, we sold, you had big

MPD: [00:05:45] investors. Excel was in right.

Philip James: [00:05:51] Yeah, Excel in NEA. Uh, yeah, we'll go. I mean, we went from zero to $25 million in sales in 14 months. Um, yes, we grew quickly. Yeah. So we had, you know, the, I have learned that lesson and I've seen. Friends and other entrepreneurs kind of go through this too, that the hotter your company is on the way up. The more people want to like, uh, destroy it on the way down.

And so business insider love to write about us and, you know, everybody else did too. Um, but the moment that there was a layoff or a misstep, or we missed the forecast, then everybody enjoyed writing about it on the flip side too. Um, anyway. And so, so a lot of the teams had big investors. We grew quickly, um, and this was the era of Groupon and Gilt.

Right. And it was flash sale frenzy and you know, where a lot of those didn't end up very well. Right. And so Groupon went public, but I'm not actually sure. Now what happened to ideally or living social or, you know, and there were 700 others behind that too. Right? But lot 18 sold wine. We also sold some specialty food, um, some cooking equipment and, you know, a few adjacent categories, but wine was the core.

But again, I realize that. We, so we were the front end, right? We were the website, the email, the marketing, the customer service, the customer would interact through us, but we were still beholden to perhaps this boutique winery and their shipping capacity. And I remember one day we had a Bonanza sale. We sold.

I don't know a year's worth of this wineries inventory. They were so incredibly happy. And then the next day, the winemaker field owner phoned us up and said, FedEx cannot make it up. My bumpy driveway, I have to put the wine in the back of my pickup truck and I have to carry it down to the FedEx Depot.

However you sold, whatever 2000 cases. And I have an injured dog, so I can only make one trip a day. And so it's going to take me six weeks to get the wine down to the FedEx Depot. And we're like, hang on. We just spent tens of thousands of dollars on customer acquisition. And now we have to write to them and say, it's going to be up to two months for delivery.

Um, and so kind of step by step by step. I said, To build the business. I want, we have to take on yet another piece of the value chain. And so eventually we get to, uh, to Penrose Hill and to first leaf. And so we are, and this is my kind of, hopefully the only buzzword sentence buzzword laid in sentence. We are a direct to consumer asset light wine company.

And I say wine company because, well, we are a winery. We actually have more than one winery license. We have one in Napa. We have one in Sonoma, but we're also an importer and we import wine, the all wine makers blend and make, and we make that wine now across more than a dozen countries, 75 different brands that we've created a 250 different skews.

And. And what we do well, uh, is how we incorporate all the user feedback into that product creation. Uh, and it's allowed us to get, I think something like 1,700 awards for our wines now, uh, and kind of nobody believes us. So we publish them all on the website. Um, Uh, but ultimately it's a, you know, it's a vertically integrated business, which means we do the work of the importer.

We do the work of certainly the winery and ultimately retailing. It direct to consumer. Um, we own the margin of those people, uh, of those, you know, of those tiers. Uh, and it means that we can. Pass a lot of that value back to the consumer, right? So, so at the price we charge the customer is getting a great wine, a great value, but also kind of incorporated in that very data, uh, you know, sort of data first a model is, is just how personalized the service can be.

And so it is a version of a wine club. I think it's a very 21st century version. Um, we have, uh, now we have a data science team. We have multiple. Granted patents and pending patents. Uh, now 20 years later, my master's thesis in mass spectroscopy's are useful. We have a, we have a six figure spectroscopy machine in our lab.

Um, and, and, you know, I think the algorithm runs on. Without joke. It's a number that I don't even understand how many zeros are in it. I believe it runs on more than a septillion data points. Right. Which is 21 zeros or 24 zeros. It says sounds impressive. Piece of AI machine learning. And it says the core of what we do, but it means that every single person is in a unique track.

Right? Like, like, like, yeah.

MPD: [00:10:37] So explain that. So someone comes onto the service and they say they want wine. How do you figure out what's the ride for them? And can you take me through the journey?

Philip James: [00:10:47] Yes. Sure. So we, so we, we asked people a relatively simple set of questions at first and, and so. You do, do you know any of these wine brands?

Do you know if you like the styles of wine? Um, the, we asked them some questions to help us figure out, you know, what your sensitivity to sugar or tan. It might be so nuts, have a lot of tannin in them. Uh, if you have your coffee, black is different than if you have it like a unicorn frappuccino. Um, and so it helps us understand at least like the guardrails of what you might like and.

The, and I think that's 12 questions and I don't know, there's some billions of combinations that would just automatically come out of that. We'll make a recommendation for your first box. We sell the first box at a very, you know, attractive introductory price. Um, but thereafter we incorporate everything that we can, you know, either the customer's review the ratings, whether they're buying, swapping, reordering, and so on.

Um, but we also, we now get, I think it's. 85,000 inbound phone calls and emails a week from customers. It's like some massive number. Um, and people will, the long tail of people's tastes is just miraculous. Right. And so, yes, a lot of people like red wine. Yes. A lot of people like California wine, but you get past that and you get to people that are like, I don't want French wine because 10 years ago, the us and France had an argument and freedom fries, and someone will say, I need to know how much alcohol is in the wine.

And we're thinking low alcohol. And they say, no, I want higher alcohol because I want good bang for my buck. And then someone might say, I just don't want a wine with an animal on the front because I'm an adult and I'm going to serve it to guests. And I want it to at least look sophisticated, um, and all kinds of things in between.

Right? It's burnt my throat, upset my stomach and, and we all have our customer service. Uh, annex reps are professionally trained, you know, wine and spirits, education, trust representatives, and. And it's easy for me. If you drink, if I see you tastes half a dozen wines and you talk about them, I can translate that back into, into what chemistry is you like?

And don't like, right. Is it tannin? Is it glycerol? Is it emollients? Is it alcohol content? Right? Is it acidity? Um, But nobody is really normal. People are not trained to do that. Right? Like we see blue, but a designer we'll see turquoise or Ceridian or whatever those colors are, I'm color blind. So I can't see any of them.

Um, but anyway, and so there is clearly a, you know, like lingua franca in the wine industry and only trained wine people would know it. And so what we do is we help. Did you use that for the customer? Um, and it means ultimately that every single person, uh, gets a unique track. Right? So the wines that go into that box are unique for that customer and.

And I think it's easy for companies to say it's personalized because what does that mean? Right. It might mean you can pick red, white or mixed, I guess that's personalized. But for us, we sent out over 120,000 boxes of wine last month. And more than a hundred thousand of those were entirely unique combinations to that person.

That's a nightmare of packing in the warehouse. Um, but huge in terms of customer satisfaction and retention.

MPD: [00:14:14] So it's a wine club using data science to completely customize what

Philip James: [00:14:19] people get. Well, yes, but that data science also goes back to the winemakers. So they, so they know how to source and make a wine, uh, for the various kind of clusters of consumer tastes.

MPD: [00:14:32] But you're not, you're not doing the agriculture, you're not growing the grapes and everything. You're you're sourcing and putting it all together.

Philip James: [00:14:38] Yeah. So we, we will sometimes buy grapes and, and crush them ferment. Um, but in general, we're partnering with other vineyards. Uh, and remember we make wine in 12 countries, right?

So that is cross Europe, South America, South. Do you

MPD: [00:14:55] own those vineyards or are

Philip James: [00:14:57] they so no, those are, those are partner wineries, right? Yeah. And, and they could be some of them, a large companies, some of them are multi-generational family businesses, um, and all wine makers. We have three wine makers that are, that work in our lab every day.

Um, we have our own, our own tank storage, like is a winery in Napa. It doesn't have a tasting room. So customers don't really visit. Um, but all wine makers will work with the growers. Right. And so something that a lot of people don't realize is the wine industry is. Is a lot more like dis-aggregated than you think.

Because if I say winery, you're imagining an estate, you're imagining a house on a Hill with bring it out front, but very little wine is what is called a state grown. And if it is a state grown, you would know because it would say a state on the label and it's a protected term. Um, and so you said people are showing

MPD: [00:15:51] up at the winery and what they're tasting was not grown on the property.

Philip James: [00:15:56] If it's a state, they will tell you, right. If you go

MPD: [00:16:00] pick her off to the, not the tourists are coming through and it, or what they drink is what they're drinking. Something that wasn't made. They're usually holding

Philip James: [00:16:10] that here on some shirts. No, no, no. So actually in two dimensions, Across two totally different dimensions.

It probably wasn't made there. First of all, it probably was not grown there. And secondly, it was probably not made there. Now there are exceptions and if your wine says estate on it, right, because it's a legally defined term estate means the, the. Fermentation facility, the vineyard have to be contiguous, right?

That's a very clear definition. All right. The grapes in here in the factory or whatever you wanna call it, the bottom line of tanks is there. And, and there are, there are a state wines, but they would usually say a state grown or something on the front label, because it's a very rare, I don't know the percentage, but I.

I think it's single digit percent of wine sold in America as a state. Um, now I think if you go to the tasting room, Those are usually more boutique boutique wineries, and some of those will be estate. But remember that most people who buy wine would buy it in a liquor store or a grocery store, right?

Most are not going to Napa and drinking wine. And also then average Napa wine is $50 will $75 and they might be estate. A lot of them still are not. Um, but if you pick up a bottle of, you know, pick your brand, if you pick up a bottle of anything in a grocery store, If it is a state drone, it's going to tell you because it's a powerful piece of marketing.

So why would you admit it? Um, and so, so most, so generally what happens is there are growers. Those are farmers, right? They farm grapes instead of almonds or something else. And then most wineries are not big enough to own their own facility. And so there are, we work type shared facilities, which we would, I would call a custom crush.

And so often the grower will sell to, uh, the custom crush who will make the wine to spec for the winery, which is in many cases, kind of a marketing and branding company and understand. And that's how a lot of wine is made. And the one industry doesn't want to talk about that, right. Because it's, it doesn't sound very romantic.

That there seems

MPD: [00:18:29] to be some mystique, right? There's folks out there who take a, quite a lot of pride in being one kind of source and being able to put on a show at dinner, how much of that is real versus that they're the victims of marketing, right? Is there, you know, you're, you're creating customized alcohol for people's completely different pallets.

Is there a good wine? Is there a bad wine? Are people getting ripped off on some pricing? How do you, when you look at this as a guy who's inside of the industry, is that a joke when you see the guy putting his nose super deep in the glass in the middle of the restaurant, is that real?

Philip James: [00:19:13] It's, it's all of the above.

Right? And so I, if you, I'm trying to think of what the right analogy is. Well, let's think of music, right. There are manufactured, pop bands, right. The, they audition and they put the participants together and they didn't know each other until they started singing together. Right. Right. I guess, I guess that's fake, I guess.

Right. But the music might be nice. Um, it's just probably not written by the people who sing it and clearly the other extreme, there are. There are singer songwriters who tore on their own and there is authentic as they come and there's everything in the middle. And so the wine industry has that too.

They will absolutely estate wineries. They'll probably say on the label, they're all there are. Possibly still wineries where they squash the grapes by feet, maybe. Um, but on the other extreme, there are four or five large conglomerate wine alcohol businesses in America, giant public companies typically, and they control three quarters of the revenue of the wine category.

And so there were a bunch of different

MPD: [00:20:22] brands, right? Different labels

Philip James: [00:20:25] buying from the same guy. Hundreds of brands thousand skews. And so, I don't know. Yes. I know a lot of fancy wine collectors and you're right. They, they bury their nose in the glass and, and I think some of them are genuinely buying wine.

That's, multi-generational, that's organic, that's, that's terroir from the place that's estate grown and traditional and all those are true, but it's a very small percentage of the industry. And don't forget that. Wine is sold in grocery stores. Right. And so right. For every collector, there are 99 consumers.

Right. And, and for a lot of people, yes, I'll warn you have vegetables and aisle four, you have Pringles and in all seven you have wine and. And we, we all like wine, but wine is, is only an art form to some people. Right? Like it shouldn't be an art form to everybody. And that's, I think that's totally okay.

Like I like wine. I like how it tastes. I I'd like the sociability of it. There's a lot, I like about wine, but I'm not a wine collector and, and. I like that I'm not a wine collector. Um, and I think it helps, you know, me and my team are generally not. And I think it helps kind of remind us to be real, to a lot of consumers.

It's not a collectible product either. So a lot of people, they buy a bottle and then they drink a bottle and then they buy a second bottle and later they'll drink the second bottle. Right. That's different than having to drink two separate issue, but that's different than having 4,000 bottles in a seller and building an election.

I dunno, you can use STEM to send mail, or you can use STEM to put in a book and look at right.

MPD: [00:22:01] Thank you. That is very helpful. Uh, talking about the complexity you talked about in the Snoop days earlier in this discussion about dealing with selling across state lines. I think a lot of people don't have a lot of familiarity with the three tier alcohol system.

Would you mind giving kind of the, the quick one-on-one on that and. Um, I'd love to hear your take on whether you think that should remain, it should be changed,

Philip James: [00:22:29] et cetera. Yeah. It's hard to give a quick take, but so it's because the problem is I have to begin this with, we have to go all the way back to prohibition.

So. The repeal of prohibition. I think this is kind of an as a, as an American. Now I think this is a very interesting stat. The repeal of prohibition is the only time when an amendment has repealed a prior amendment, or actually I think is very interesting amendments. Amanda's right. They adjust, but the repeal of prohibition removed or struck down entirely a former amendment.

And anyway, and that happened. Oh, man, I'm so bad with my dates, but let's say 70 years ago or something, right? Like 1913, 1914 was that 90 years ago. So it was a long time ago. And, and the, you get into like, why, why was that prohibition? What was the point of it? It was, there was organized crime. There were all of these, this is Al Capone, right?

There were, there was a lot of. Challenges that prohibition was trying to solve and in the repeal of prohibition itself. But what it meant was that the States get to choose how they regulate the flow of alcohol within their own borders. And the States then created the three tier system produces, sell to distributors who sell to retailers and.

In jail. Now I have to compress 70 years, right? There's 70 years and two or more, at least two Supreme court case rulings in here. And one of them was in 2019. So this is happening like right now, or this is still changing. Uh, and in fact it was yesterday, uh, that we began to ship direct to consumer, Kentucky, and.

Six months ago, if we ship to the consumer in Kentucky, it's, what's called a felony state, right? That like, not only are we not allowed to that, it would directly be a felony for me as an officer of the company to have allowed it to occur. But now Kentucky has a license and we're one of the first, you know, 10 or 20 wineries to be actively.

And legally of course, selling to consumers in Kentucky. And so the repeal of prohibition has created this. Patchwork of federal laws and state laws, and none of them agree with each other. It's incredibly complicated. We we've had a full-time compliance, uh, employee, um, for years. And I was thinking about this earlier.

I'm sure we spend millions of dollars a year on compliance costs and. Barrier. I feel like barriers to entry, a moat, right? Where if you're crossing the modes and nightmare, but when you've crossed the moat, you're, you know, you're like, wow, it's, it's a, it's a defense now against competition, but it definitely adds cost and complexity to the consumer.

And I think that's, what's unfair, right? It's if a consumer finds a wine, they like, and they go online and they see a store. Like you just assume you can order it. Right. And you don't realize that that store may not legally be allowed to sell it to you. Uh, even though that store may only be 50 miles away, right.

You could be in New York, they could be in New Jersey and they may not depending on their license, be allowed to ship it to you. Uh, and, and I think that's very, very difficult. Now that so many of the sales online, right? Where that geographic distance isn't relevant to the consumer. Right. In, in a, in a real world, it didn't massive because you went to the store, right.

And you pick it up in person. Um, but yeah, I think people don't realize if you, if you buy a bottle of wine in one state and you drive across the state line in some States that's illegal. Right. And obviously it's very difficult to enforce and so on. But the three tier system, which does have these protections, I think it does it at a cost of like consumer accessibility.

MPD: [00:26:09] What's the benefit of it. Why, why do we need the, at this point? We're Capone's long gone. I don't know all the rationale back then. Is there any benefit to the three tier system at this point in the game

Philip James: [00:26:22] there that is a complicated ended, much debated question. Um, the, the Supreme court on down. I agree with the legitimacy of the three tier system.

And they say that very clearly, but what they don't agree with and what I find particularly unfair. Is is when the anti anti-consumer is when there are laws that treat, um, an in and out of state entity differently. So some States will say wineries within the state can ship, but wineries from out of state cannot ship.

And those protectionist laws are the ones that are being struck down. At the moment, very, very, very quickly. Um, and so since, since the starting of Penrose Hill, Pennsylvania, Oklahoma, and now Kentucky have all been made legal, right? I mean, that's, that's three States in four years. Right. That's meaningful.

Um, and at the same time, many dozens of other laws have relaxed, somewhat. Right. Uh, maybe there was a quantity limit. There are States that say, you can only buy one case of wine every three months, if you buy it online. Right. And you're like, okay, Really like, that's the limit, like that's one bottle of wine a week.

Like what does, if you live in a house with more than one person or enjoy wine more than once a week, it's not like it's a case a day. Right. And so how can the limit be justifiably set there? When in a liquor store I can fill up a shopping cart, a vodka, and nobody would stop me. And, and so there are definitely protectionist laws and those are getting struck down.

But I think generally the three tier system. Will always exist, but hopefully it will exist where the remaining laws.

MPD: [00:28:07] Okay. So can you take us through the story of how you landed doing wine? I've heard a narrative of this where you weave together your education and it just makes sense on the outside. Is that actually the story?

How did you end up being in the, you know, the wine

Philip James: [00:28:23] guy? So how do I get into the wine industry? So I. I grew up in England. I worked in London. I worked for an American investment bank and at least for those who did it right, three years in banking or three is in consultancy. And then the bank says we're an American company.

You should go to an American business school. Um, and, and, um, I was lucky enough to be accepted to, uh, to Columbia business school. Um, Actually a little known fact is I can't remember now if I applied to five or six schools, but I was, I was immediately rejected from all of them, but one, um, and Columbia put me on their wait list.

Um, and then I was smart one that took you. Well, I was on Everest at the time and I was like, I don't, if I don't get into one school, I'm not sure what I'm going to do next. Right, right. At least. The I'm going to business school next is a way to defer, having to look for a job for two years. And so on a satellite phone from 24,000 feet, you know, I took the oxygen mask off and I phoned the admissions office.

And I said, please let me in, you know, I'm on Everest and I will absolutely accept. Um, and I know business schools, they like to keep the, whatever that ratio between. Offers extended and offers accepted. And so at least, Hey, I have no alternatives, right?

MPD: [00:29:48] I'm desperate. Let me in. You're a

Philip James: [00:29:49] good candidate for them.

So at least that worked, um, Anyway. And so certainly by the time I went to business school, I knew I wanted to start a business, but I felt like that's the wrong, the wrong way to become an entrepreneur, right? The entrepreneur with no good ideas is not a very good entrepreneur. And, and. Off the back of the traveling and adventures.

Um, the no surprise. I thought, why don't I have an adventure travel company that is not a very scalable idea. Uh, if I have to go lead the trips myself, um, but back then, me and a friend had an idea and began to, to create this company. Um, we didn't get very far. We didn't raise money. Um, uh, for me, ultimately my immigration lawyer said.

You just, it's not credible that you self sponsor for a visa, right? Like that just looks too, too sneaky. It's just you and your buddy, you don't have investors,

MPD: [00:30:46] right.

Philip James: [00:30:47] It was like that, that doesn't sound like something that's going to work. Um, and at the same time, a friend of mine from business school, um, his father ran a.

A wine, importer and wine on online catalog retailer. And my friend's father was sick. He actually, um, uh, had early onset Alzheimer's. Um, and so the family, yeah, I think he was mid sixties. So, you know, still pretty early. Um, and so the family was trying to transition him out of the business. It was family owned company that my friend, the son was, was taking over and my friend knew wine and didn't know business by the way.

Not that I knew business, but at least I knew how to do a financial model and those kinds of things. And so. My friend said, come work here. We'll get you the visa. And then when you've helped me stabilize and turn the business around, you can go do whatever you want. Um, And, you know, that absolutely was a trial by fire for me.

And it's a huge change from, you know, no matter how good your Xcel modeling skills are, right. You can build a financial model for a business, but then you show up and you're in like, you know, a dusty warehouse in Yonkers. And, um, and, and, and the guys who have packing the boxes. Have like flick knives in their pocket.

Right. And I walk in and I'm like, hi, I'm the guy from England. And you know, let's talk about, you know, on time shipping percentage. And so all of that kind of fell with a thud and very, very quickly, I had to realize that, you know, this, this line on the PNL actually was me phoning up Xerox to ge