In a closed and largely privately held industry like Wine it can be hard to find solid financial numbers to judge your performance against. One of the very best sources of information on the profit picture for northern CA wineries comes from Silicon Valley Bank’s Wine Division. SVB has been lending to Sonoma and Napa Valley Wineries since 1994 and has amassed a tremendous amount of financial data in the process. One of the very cool things they do for clients is to break out average industry numbers specifically for your size and niche, so that you can evaluate your projections or performace against that of your peers.
In a recent presentation at Sonoma State’s Wine Entrepreneurship seminar, a representative from SVB shared some aggregate data with the class. Behold:
Data removed at the request of Silicon Valley Bank.
There are a couple of interesting things to note. The first is the oft-cited phenomenon that folks in the wine industry are prepared to accept a much lower return on investment than would seem rational given the risk and initial capital outlays. Clearly there is an emotional element that comes into play regarding lifestyle, the romance of farming or the glamourous nature of wine in general. Or perhaps it’s something else entirely. Like mass insanity. Or alcoholism.
The second thing to notice is that the 20-50K case segment appears at first glance to be the sweet spot in terms of size. The ROE (Return on Equity) is twice that of any other segment and is actually competitive with other, more rational investment vehicles. Also it looks like all the SG&A (Sales, General and Administrative expenses) effiecencies have already been squeezed out at this production level. The SG&A % actually rises for the larger wineries in the 50-120K case range.
But what to make of the 3-10K case segment? This will be Capozzi Winery’s production level, and it looks rather bleak. ROE of 2%? Bleh. Return on Assets of .8%? I just threw up in my mouth a little.
I think that the numbers are a bit misleading though. First of all, much of the reason for the poor return is probably due to the fact that owners, who had most likely not been taking a salary at lower levels of production, finally started seeing some real cash and decided to start paying themselves. Also looking at the fixed assets figure it is obvious that folks at this level either own their own wineries, vineyards, or both (like we will) which is both a marketing and quality advantage at the luxury level.
Finally looking at the average value of cases sold, it is only slightly down from the very high levels attained at the <3K case level. This means that folks in the 3-10K case segment are successfully marketing and selling direct, maintaining their high margins. This is not the case at the 20-50K level, where average value of cases sold drops 36%.
If the brands at the 3-10K case level reinvest profits (rather than raping the company) and aggressively pay down debt, eventually they will be able to capitalize on their vertical integration via Estate bottlings and increased quality without sacrificing margins. For a family that already owns vineyard land, this is an attractive segment to be in for the long run.
Or maybe I’m just insane.
[...] post by Josh and plugin by Elliott Back [...]
It is not mass insanity; it is alcoholism and a total lack of business sense. Those are the ingredients to make great wine. Gravity feed and only put 60%of the crush in the barrel – make grappa with the rest. The grappa will keep you going until the next after crush party!
Prune back your vines to the nib; and never accept a yield of more than 1.5 tons an acre. Then sell all your wine to all your friends at fantastic margins, but spend the money on new oak. Legs and oak makes the wine God (who only talks to Parker) happy!
When there is no more cash – sell the winery at a fantastic profit to the next guy with stars in his eyes and return to the valley (that is Silicon Valley!).
That is the wine biz
I love it.
Thanks Alan!
Are these averages (means) or medians? It’s more useful to know the point where half of the wineries are above/below it.
The hit clearly comes when you take on financing to grow.
A very useful and interesting post. Thank you, Josh.
Hi Mike,
These are means. I do know that for profitablity, generally 2/3 of wineries in each category are profitable, with the majority only slightly profitable. The graph is an S curve, with some folks at the very high and low ends. The rep from SVB guesstimated that around 15% of their clients were of they sort that run their wineries like hobby farms and don’t really need to show a profit. Those in the unprofitable third that aren’t showing a profit include some of those hobby farms as well as wineries in various stages of start up.
The hit comes not just from growth, which is absolutely right, but even more so from owning your own land/winery. In general, the advice is to avoid building a winery at all costs.
So naturally I’m ignoring it. :p
hi Josh – You would be wise to believe the data, and then be pleasantly surprised when you do better (and I hope you do.) I’m observing that all wineries have a “big hump” to get over after a few years of existence – something about having to ramp up production and then actually sell it two years later. Your hump is coming, I’m in mine!
El Jefe,
I sure hope we do better, and thanks for the heads up.
Good luck managing your hump (I promised myself wouldn’t drag this one into the gutter like last time)! With your marketing, high quality and recent success in various tastings I’m confident you guys will make it through and prosper.
Thanks
On the other hand, you should see some of the search terms that are finding my blog these days….!
Wineries certainly run on slim margins, but there is hope. Thanks to technology, and falling legal barriers, a serious opportunity exists for wineries to improve their channel mix. By that I mean selling through a direct sales force, rather than wholesalers. Selling direct, as Josh mentions, is the key to improving margins (especially for smaller wineries).
I know wineries are cognizant of this opportunity, as they have invested in software, logistics, and working capital (look at the inventory common size) to accommodate the direct model. Now it’s time for the marketing side of selling direct to take hold.
These numbers are from 2005 (e.g. prior to the Supreme Court ruling). I’m certain we will see some margin expansion in the future.