Man, I’m tired. What with the long drives to and from Davis and the evening childbirth classes, I’m getting great at operating at less than optimum. Baby lifestyle practice I guess.
Tonight I’m just going to focus on the first presenter of the day, Matt Franklin, a partner at O’Dowd, Franklin, and Rabanal. A lot of traffic on pinotblogger comes from folks wanting to figure out how to start a winery. The very first thing I did was a back of the envelope calculation estimating how much we stood to make if things worked out (you can adjust your forecast downward later). Today Matt walked the class through how to do just that.
The basic process is made up of five steps.
1. Estimate your case production
2. Estimate your F.O.B. price/case
3. Determine your gross margin requirements
4. Estimate your COWS (Cost of Wine Sold)/case
5. Determine from there your cost structure
I’ll use the nice round numbers from Matt’s hypothetical Paso Robles winery example. Keep in mind though that if you are attempting to become a “boutique” high end winery you will want to start by estimating your Cost of Wine first, because that is where quality is determined. And as a boutique winery, quality is what you must have to survive.
1. Case production estimate. Take the # of acres you are farming/contracted to buy and multiply it by the number of tons per acre. 100 acres x 4 tons per acre = 400 tons. Then multiply the number of tons by 60 to get a rough estimate of the cases per ton. 400 x 60 = 24,000 cases. You can also multiply the tonnage by ~165 gallons per ton to get a gallon figure and work back from there since it allows for a little better (and higher) estimates.
2. Pick a price point (after taking a hard look at the market) and figure out your case price. If you will be selling through a distributor, lop 50% right off the top. That is your F.O.B. (Free On Board, the amount you will receive from your distributor) price. Ex: $30 per bottle x 12 bottles = $360 per case retail x 50% = $180 per case FOB. Distribution is quite expensive, as you can see.
3. Now figure out your margin requirements. Typically a new brand can expect to spend from 20% up to 45% of its COWS in marketing expenses the first few years just building the brand. So be generous here, or come up with a novel low cost marketing/PR campaign to create buzz and interest in your brand (my preference). I’ll stick with Matt’s numbers for the example.
Marketing: 25%
Next is administrative costs. We’ll just go with Matt’s estimate of 10%, but feel free to fudge around, especially if you are going to be small.
Admin 10%
Profit Margin is last, and you’ll want to make it a healthy one to account for all the risk inherent in the enterprise. Matt says 15%, so we’ll go with that.
Profit Margin: 15%
4. Gross margin per case 25% + 10% + 15% = 50% x 180 a case = $90.00. Subtract $90 from $180 to get how much revenue you will have left to actually pay for the cost of producing your wine ($90/case).
5. Cost of Wine Sold
- Grapes are the biggest cost. Quick math Ex: 2400 per ton / 60 cases per ton = $40 a case. Prices vary wildly based on appellation. Napa Hillside Cab goes for 10K a ton in certain areas, and central valley grapes can fetch as low as 150 a ton.
- Barrels are next. Depending on how much new and used oak you will be using, as well has how much French and American, your costs will vary wildly as well. Here Matt uses an a figure of $11.00 per case for this fictional Paso Robles Syrah producer.
- Bottling. Call up a mobile bottler and ask for their rates based on your case production to get an exact figure. EDIT: This also includes labeling, corks and foils. Here Matt uses $20 per case.
- Labor and overhead. Another extremely variable cost depending on the size of your operation etc. We’ll use $15 per case.
Add it all together and you get $40 + $11 + $20 + $15 = $86/case in costs.
$90 + $86 = $176/case, which is under $180, so we are ahead of the game. You can stick the remainder into profits or invest in the brand and buy better grapes.
So the plan passes the smell test, and that is really what you are looking for. Now all you have to do is actually build the winery, carry the costs of construction and inventory for 4 years without cash flow, produce the wine and then sell it all to make your dream come true!
4 years without positive cash flow? That is being pretty optimistic. I know a few people who own wineries and have met and spoken to the owners of Testarossa (in Los Gatos CA) and they all are unanimous in saying - a winery is WAY more work and expense then they ever estimated and take forever to make money if they ever do!
I think its a bit romanticized (I mean what wine lover wouldn’t want their own label!).
BTW - don’t you have to knock something off for spoilage/waste?
Joel,
Heh, I never said *positive* cash flow, any old cash will do!
Four years is just a general figure that should alert you to the fact that you won’t be actually generating revenue for quite a while. And if a winery never makes any money, well, you had better have a lucrative primary/second job to subsidise it indefinately (and some wineries do).
Most brands that stick around for many years however do make a profit (gross margins on the high end Napa and Sonoma wines are 75%), and those that sell mostly direct can make very decent returns. IF you can market and sell the wine. There is nothing romantic about the hard work involved there!
Spoilage and waste are factored into the 60 cases per ton figure (or the 165 gallon per ton). But these are really really rough estimates. Quality decisions will also drive how many cases you actualy get from a ton of grapes. If you want only the best press fractions like us, you will leave a sizeable amount of juice in the press (or sell it as bulk wine).
Thanks for the comments!
Yes, I think the longevity and maketing is the key as well as new direct to consumer laws. The challenge with any consumer product/commodity is to establish a brand that gains traction and creates a little pull through. PR helps there of course.
the owners that I know/have talked to for the most part had a bunch of money from somewhere else (Testarossa is an Internet millionaire) and therefore have the resources to stick it out and gain traction. Gaining the following and community is definitely key….getting a 90+ in Wine Dictator doesn’t hurt either
Josh,
Great sharing (and congrats on the upcoming baby, my wife is having ours on Sept 10). People who choose to start a winery have no idea the committment they are making. It is quite the challenge in this ever competitive market. The oldest saying in the industry is that it takes a large fortune to make a small fortune in the wine industry. All I can recommend to add to this is SELL DIRECT (both consumer direct and direct to trade). Wineries analyzed by MKF and SVB noted that the ones that were the most stable and profitable were wineries that focued on direct sales.
Inertia - Powering the WIne Revolution
—Paul Mabray - CEO
BTW: Congrats to you both on your upcoming additions. Speaking of dispelling myths and not know what you’re getting into if this is your first get ready - its not all peaches and cream!
My first is 8 months now and I can say that NOW she’s really getting to be fun. The first few month was cry, s**t, sleep, eat…thats it. It takes 2-3 months for even a real “thats funny” smile….
But I wouldn’t trade the experience for anything…
Thanks to both of you (and congrats Paul!). I’m much more scared of this little boy than I am of anything winery related
Try this - take your 4 tons and reduce that to 2 tons per acre and leave all your other costs the same. That’s the Oregon profit picture.
Craig,
Only 2400 a ton up there in grape costs? When we factor in next best use (sparkling wine production at ~6 ton/acre) our opportunity costs are closer to 6K per ton.
As for yield, we\’ve been able to get \”high quality\” from 2.5 tons an acre with moderately aggressive vine densities and canopy management.
We leave the 1 ton per acre to the hard core fellas on the coast.
I thought your yields would be lower than 4 tons, after all your not growing cabernet! Farming costs are about $3600 on 1 acre planted at a density of 2000 or so vines, which gives us two tons if we’re lucky.
What to you define as “opportunity costs” and how do you calculate it?
Our actual farming costs are very similar to yours (right around 3500).
Our opportunity cost is the next best use of the grapes. In this case it is selling them to Gloria Ferrer for their sparkling wine program. Pinot for sparkling is harvested early at around 18 brix and we are encouraged to crop up the vines as high as they will go. It’s a great way to finance a new vineyard as the vines mature (ours are 9 years old now).
To match the income lost from not selling, we charge ourselves 6000/ton. It’s an accounting fiction, but it’s important to view the forgone next best use as a real cost.
For our calculation we just multiply the price per ton on contract with the tonnage we’re able to get (around 6 tons/acre) farming for sparkling. Then take that total per acre and divide it by the tonnage we’ve identified as crucial to producing great pinot (around 2.5 tons/acre) and out falls the “true” cost of grapes.
Looking forward to a post on how the Pinot dinner went later this month!