First and foremost, let me quickly comment on this ridiculous direct shipping bill introduced to Congress last week.  A lot has been said about the so-called HR 5034 “CARE” bill (good overview/analysis here), but this bill, if passed, will effectively cripple the wine industry, destroying virtually every small winery that relies heavily on its direct-to-consumer business.  Throw in the fact that the wine industry is already an extremely difficult business to operate in and we are looking at potentially thousands of wineries closing up shop for good.  Not to mention it would eliminate consumer wine choices, stunt economic growth and provides further proof of something the American public largely already knows; that with enough money, power and influence, anything is possible.  Conspiracy theorists would quickly agree and bring up the JFK assassination and the second shooter (or spitter), the “Frozen Envelope” rigging the Knicks’ selection of Patrick Ewing in the 1985 NBA draft, etc.  But I digress.  I truly believe this bill will decimate the wine industry (particularly California) and is the second most laughable idea currently being discussed politically (I’ll leave this up to your imagination). 

Moving on, I had the opportunity to attend the Napa Valley Grapegrowers “Ahead of the Curve” seminar at Solage in Calistoga, CA.  I won’t reiterate everything discussed there as it was one of the more gloomy seminars I’ve been to, but I want to highlight some of the takeaways regarding key success factors for the future of the US wine industry, California specifically.  I have listed them below. 

• Wineries need to brand themselves better.  In an increasingly competitive and global marketplace, the use of the internet and social media to market and better disseminate key information to potential customers is critical.
  • Napa Valley in particular needs better brand recognition outside of the U.S.  Most Americans equate Napa Valley to great wine, but internationally, Napa is just one of many great wine regions.  Bordeaux has done this quite successfully – better than any other wine region in the world.
• US wineries need to be more cognizant of the increased globalization of the wine industry and the overall impact on its constituents.  Wineries may want to consider spending more time focusing on exporting wine (or at leat planning for it), particularly to countries like China that are showing increased interest in making and consuming wine.  Currently, China only consumes rougly .7 liters of wine annually per adult, as opposed to the US where we consume approximately 10 liters per adult, or 3 liters per person (#3 globally behind France and Italy).
  • Additionally, the current exchange rate works out favorably in terms of international demand as the Euro represents approximately 30% more purchasing power when buying American products like wine. 
• More winery owners need to run their wineries as professional businesses, as opposed to hobbies.  I mentioned this in a previous post and it still amazes me that many wineries do not operate with maximum economic returns as one of their primary goals.  Of course, I’m a finance guy first and wine guy second, so that probably explains my ignorance here.
  • The wine industry is uber-competitive (there are over 7,000 wineries in North America alone).  If that is something winery owners or grape growers do not want to do or cannot do, then achieving success is probably going to be quite difficult. 
  • In order to effectively compete, especially on an international scale, there needs to be a certain amount of cooperation with fellow competitors to successfully penetrate new markets (See:  Silicon Valley, Bordeaux, the music industry).  It will be interesting to see if the wine industry ever comes around to this fact. 
• Keep investing in R&D and innovation.  Innovation breeds success.  Things like solar panels, sustainable farming practices, oak alternatives and winery CRM software have all benefitted the industry.  This kind of forward-thinking approach to continually improving quality and overall processes can consequently lead to lower costs and carbon footprints as well.
• Last, and probably the most important point: wineries need to not lose sight of what they do best.  That is, keep making great wine and focusing on quality.  These days, if you do not have a quality product, you will not even get invited to the party, let alone have a seat at the table.

These ideas are by no means all-inclusive or the end all be all, but other winery owners I have spoken with recently seem to more or less agree.  Now, if we can just get them to agree on who makes the best wine!

Can it really be true?  Is it finally time for non-accelerated filers to comply with the Sarbanes-Oxley Act?

So far, there has been no further extension for SOX from the SEC or Congress and the current bill from Senator Dodd doesn’t even mention an exemption from the SOX Act.  There is still a chance for amendments to be made to the current Senate bill but will that happen before the June 2010 deadline, it’s doubtful.  Keep a close eye on the Dodd bill for updates, which is summarized on Senator Dodd’s website.

To be honest, I think every company should employ good internal controls.

I have seen the affects of well controlled companies getting rewarded, starting early in my career.  I worked during college at a VC backed start-up company and in typical fashion I wore many hats – receptionist, office manager, accountant, and executive assistant.  I distinctly remember the breaking point when the company grew big enough to require more structure and my role focused on accounting only.  A CFO was hired and I was trained by him to implement controls.  Oh, the drama of telling people they needed approval for purchases. Gone were the days of yelling across the hall for verbal approval of a $10,000 check (works fine when there are 10 employees, not so good when there are 100 employees). Adding these procedures while the company was growing was not a huge additional expense and controls quickly became embedded in the culture of the company and now the company was ready for an exit – be it IPO or acquisition.  In the end, the company was acquired by a Fortune 500 company.  Would this have happened without the strong control environment—maybe.  But was the acquisition process easier, was the value of the company higher, was the buyer more confident—definitely!

 So what’s all the fuss about Sarbanes-Oxley, good controls have been around for a long time?  The SOX requirement to document and test the controls takes time, and auditor review of those controls causes companies big headaches, the end result is increased costs.  But believe it or not, control documentation can be done efficiently.  Start early with control optimization and use the right people and the right compliance tool, and the process is painless!  Experience really counts when documenting controls since experts are familiar with 1) focusing on the risk of misstatement; 2) documenting controls succinctly; 3) using a tool for testing, workflow, and reporting; and most importantly, 4) interacting with auditors. 

Whether you’re public or private, get started now on a good control environment – just do it!

I would like to talk about a topic that has been given more publicity recently, but is definitely not a new concept: the “virtual winery.”  As many of you probably know, virtual wineries have been around for a while now, but they are becoming more and more in vogue due to some of the unique features they have relative to more traditional bonded wineries.  To cut to the chase, it can be substantially quicker, less riskier and cheaper to start a virtual winery and still compete/sell effectively.  In fact, some of the best known wineries in Napa and Sonoma Valley started out originally as virtual wineries.

First, it would help to define what I mean by a virtual winery.  Depending on who you ask, the definition may vary, but my take is that virtual wineries are those that do not actually own any vineyards or grapes and have no tasting room.  Instead, they typically source grapes or juice from other wineries or grapegrowers, sometimes locking in contracts if they are fortunate enough. 

There are several reasons why these types of wineries are becoming more popular, but the most appealing is that they offer a much more affordable alternative to starting a fully licensed and bonded winery.  Those require a substantial amount of start-up capital for vineyards and equipment and a business plan that, depending upon the varietal, can take five to seven years from unplanted land to first revenue dollar.  Essentially one can start a virtual winery by simply writing a check to the production facility and ensuring it is properly licensed and permitted to sell and market wine by the ABC and TTB. Virtual wineries often have little overhead, little to no vineyard ownership/maintenance and (potentially) no production equipment. They frequently start out using custom crush facilities to make their first vintage(s). 

What is interesting about virtual wineries is that not only can they be created quickly and sell wine effectively, there is legitimate value (mostly in the form of brand and direct to consumer wine club member lists) that can be created as the winery grow and establish themselves in the industry.  Generally, there are three key stages of development for virtual wineries.

Stage 1:  New winery created with very little start-up money.  There are likely no production facilities as wine is often made at a custom crush facility from “bin to bottle” with little revenue, no initial brand presence and probably only one or two varietals.  The greatest challenge for these wineries is taking the next step from a small hobby to a sustainable and profitable business.  Examples include wineries like Three Rights Left (early stage) and Athair (later stage). 

Stage 2:  Expansion of an existing brand or wine label, where market presence is established and sizeable revenues are generated.  These wineries likely have a few varietals with potential contracts with vineyard sources and possibly leased/owned production facilities.  It is at this point where these wineries will start to ramp up production significantly and expand margins (or become profitable) by leveraging economies of scale.  Creating a meaningful wine club or mailing list is a strong possibility and often the winery’s majority source of revenue.  Carefully managing grape sources is critical to ensuring consistent and exceptional quality grapes.  This challenge is usually handled by the head winemaker who is often the sole or majority owner.  It is quite possible additional capital may be needed to fund the growth needed to build the brand.  Successful examples include Auteur, Wind Gap Wines and Carlisle.

Stage 3: Significant revenue generation, brand recognition and a well-established wine club/mailing list have created significant value as production is thousands of cases by this point.  It is at this stage where wineries often consider a potential sale of the brand or look to achieve liquidity for its owners and original investors by carving out equity for new investors.  There are few great examples of wineries that have truly succeeded in building significant enough brand equity to sell a winery without any vineyards, but the most obvious and glowing example is that of Kosta Browne, who recently sold a majority of its winery to Vincraft after building it from scratch just over ten years earlier. 

We will continue to see more of these kinds of wineries for the reasons discussed above, particularly in this tough economic environment.  It remains an attractive option for people looking to build their own brand on the cheap and evolve to either a more traditional model or later stage virtual winery.  The “I could do that” mentality is actually feasible as companies like Crushpad have created a user-friendly blueprint for making wine and creating your own brand.  This business model has now been replicated by other companies across the U.S. (Judd’s Hill in Napa and City Winery in New York to name a few), marking an increased interest in this kind of winemaking process.  Who knows, the next great cult wine may be getting made right now…