Archive for the ‘Wine Business Services’ Category.

Wine as an Economic Indicator?

Here we are, back again after a very long and extended break from writing here.  To say my colleagues and I in the valuation and wine business services groups have been busy this past year would be an understatement.  That being said, people all over the country and even the world continue to struggle with low real estate prices, high unemployment and huge amounts of debt.  And in spite of all that, I do see some pockets of optimism.  Despite an uncertain and volatile economy, there are signs that the worst is behind us.  The wine industry appears to be one of those industries that is getting back on track.  The following are my personal observations:

1. Local tasting rooms have been packed on weekends, even in February!  Several I visited in Napa and Sonoma had no tours or tasting appointments available over the weekend.

2. Restaurants are busier – Sante in Sonoma and Bottega in Yountville both had no open reservations for dinner throughout the weekend (I tried making them on Thursday and Friday, but still…).

3. People seem to be starting to trade up in wine price – I even saw a guy buy a bottle of Cristal at Bottega a few weeks ago on a Sunday night.  On a Sunday night!

  1. I have also seen fewer people in general bring their own wines into restaurants in recent months, which may indicate people are starting to feel comfortable spending money on wine again (as opposed to the past few years).  If that is the case, I have a wine for you!

4. Value wine sales also appear to be increasing as Sutter Home, Gallo and The Wine Group’s sales are all reaching or at all-time highs, the majority of which come from wines under $10 per bottle.

5. Americans continue to drink more wine, consuming more than 3.7 billion bottles of vino in 2011, more than any other country in the world (according to Vinexpo and International Wine and Spirit Research).  Sales of wine over $10 per bottle grew 15% in 2011.

6. According to the recent USDA’s grape crush report California grape prices rose to a record high of $588.96 per ton for all varieties, up 9.5% year-over-year (YoY) from 2010.  Red wine grape prices increased 12% YoY while white wine grapes rose 8%.

  1. Grapes from Napa County, with the state’s highest grape prices, had an average price of $3,407.56 per ton, up 5% YoY.
  2. Part of the increase in overall grape pricing is likely due to lower yields; however, it also shows that wineries are back to buying grapes from growers and out on the spot market.  That would seem to indicate that wineries are starting to get more optimistic about the future demand for wine.

7. U.S. GDP grew 2.8% in Q4 2011, the 10th consecutive positive quarter-over-quarter (QoQ) increase and the largest since Q2 2010.

8. Wine auction prices appear to have recovered and have trended upward in recent months as well.  The Liv-ex Fine Wine 100 Index closed January with a rise of 1.4% QoQ (the majority of which were First Growth Bordeaux wines), its first increase since June 2011.  The Liv-ex Fine Wine 100 Index is the industry’s leading benchmark.  It represents the price movement of 100 of the most sought-after fine wines for which there is a strong secondary market and is calculated monthly.

9. Relative to 2008-2010, winery valuations and multiples increased in 2011, primarily for those wineries with strong operating margins and a solid tasting room/direct to consumer presence.

Now I’m not saying everything is all roses (except for today maybe), but from a somewhat basic quantitative and qualitative standpoint it seems like there are some strong tailwinds in the wine industry, which should continue driving increased wine sales.

Selling Wine Direct to Customers – Harder Then It Sounds

Wow, I can’t believe how quickly the summer flew by.  Alas, summer is over, both fall and crush are here and it’s time for some more of my unsolicited thoughts on the wine industry.  There is a lot to discuss so I’m planning to split up some of my thoughts on several meetings and conferences I attended recently over multiple entries.  Initially though, I would like to focus on selling wine direct.  In case you have been stuck in a wine cave somewhere, the ironically-named HR 5034 “C.A.R.E.” bill is still being considered by Congress and its potential impact on destroying direct wine sales has not improved.  If anything, the bill has gained some momentum in garnering support within Congress and is best described in up-to-date detail on the Stop H.R. 5034 website.  I urge all wineries and wine lovers alike to join the movement to stop the passage of this bill.

Ok, politics aside, let’s get to the meeting I took part in a while back with several ultra-premium Napa and Sonoma winery owners and operators.  The topic du jour was selling direct, specifically to consumers and also trade.  To sum it up, everyone obviously wants to sell more direct because of the financial merits, but many wineries are finding it is not as easy as it sounds (or to simply model out).  Due to these tough economic times wineries are being forced to get creative and come up with different marketing programs other than the usual case/price discounting and free shipping to generate increased direct sales.  More wineries are becoming (and need to become) more involved with their current and prospective customers.  Exclusive events like winemaker dinners and wine club soirées are more popular, but also new programs like concierge services and VIP referrals are being used.  The bottom line though seemed to be that everyone I talked to was basically trying to get more involved in the customer experience and more closely track what programs and channels are working.

Increasing the number of customer touch points seems to be everyone’s modus operandi.  Or at least it needs to be.  Wineries need to continue furthering their brand image and the easiest way to do that is keep doing what they do best and stay consistent.  Consistency in communication, winemaking, customer service — in everything.  Consumers want to feel special.  We want to feel like we are important and at the same time get that warm fuzzy feeling of finding a great deal or talking directly to the owner or winemaker.  We need to be drawn in and trust that you will give us a great bottle of wine and possibly even a great experience, either on-premise at the winery or tasting room, or just at home with your wine.  As one person put it, “if you don’t have a value exchange, you have nothing.”  This lends itself to more interactive experiences such as special consumer events, VIP programs, phone calls, pouring at public wine events, by-the-glass programs and not surprisingly, an increase in social media outreach.

It seems that practically every winery is on Facebook or Twitter these days, but the reality is that many are not effective in their use of social media.  Several of the owners I heard from mentioned they either “don’t get it” or “don’t believe it’s a good use of their time.”  The underutilization and misuse of social media is only one reason some wineries are struggling to generate increased sales in this uber-competitive market where consumers are constantly bombarded with new labels and new wines.  One big allure of wine is this notion of romanticism and the opportunity for a consumer to get to really know a winery and its wines on a more personal level.  People want to share in this wonderful wine country lifestyle that combines beautiful surroundings, great food, terrific people and of course, superb wine.  Social media is one easy way to accomplish this.

The biggest disconnect I see though is that many wineries don’t embrace the concept of the “aspirational consumer.”  Using social media is widely viewed “a kid’s activity” and “not important for my target demographic.”  However, the fact that slips by many owners is that these younger social media users in their twenties (Millennials) are the same people that are not only driving increased wine consumption in the US but are going to be the target demographic in the future if you are an ultra-premium winery selling expensive wine.  Wineries would be wise in spending more time reaching out to these consumers that are maybe drinking cheaper wines right now and building brand equity in anticipation of these individuals moving up in economic and social status.  It is comparable to sports teams scouting young athletes at an early age when there is a lot of unrealized potential there.  They are making a bet that these athletes will continue to develop and reach a point of maximum utility, where there will be many more suitors and more opportunities for them.  The best minute one can spend is the one you invest in people.  What better people to spend time with than people who love wine?!

Effective Winery Business Plans

I was fortunate enough to take part in a great discussion recently about business plans in the wine industry and what constitutes a good one (or doesn’t for that matter).  Keep in mind I was in a room with well-seasoned wine industry professionals, many of which own or operate as executives at a winery.  I am highlighting the key points of our discourse below.

  • The finance contingent of the group, representing commercial banks and private equity and debt investors, all agreed that they don’t often see a complete, detailed business plan in the wine industry.  When they do, these plans usually do not include an analysis of the industry or market or contain detailed marketing and development/production plans.  While most of the winery executives represented have a budget or financial plan, rarely do these forecast beyond two to three years in a detailed, financial model that addresses income statement or balance sheet metrics, such as a proper calculation of cost of wine sold. 
  • The process of creating a detailed, written business plan is an onerous one, especially in light of the need for integrated marketing, production and financial plans.  However, future success is often associated with the work and thought considered during the business planning process. 
  • The discussion of long-term forecasts centered on the discipline and intellectual exercise of the process rather than the success of meeting long-term targets.  This discipline presents the winery owner with the opportunity to understand key revenue drivers, optimal cost structures and financial levers when managing their business over time.
    • This understanding of key business metrics in the current economic downturn and constant revisiting of the plan on an annual basis will allow a winery to capitalize on its successes.  Simultaneously, the winery can learn from its failures, identify opportunities and avoid overreaction to market gyrations.
  • There is significant value in creating a 5-year (at a minimum) financial forecast model because it forces the winery to consider the effects of the industry’s multi-year operating cycles and make decisions now that will affect its business 3-5 years in the future.
    • Similar to writing a comprehensive business plan, the discipline and process of Management analyzing their business can help identify key issues and quickly serve as a warning in case anything goes wrong.  This could be the difference between surviving (or thriving in) the current economic downturn in the wine industry and possible dissolution.
  • Successful financial models incorporate the following characteristics:
    • Done on both a cash and accrual accounting basis
    • Tracked against a budget and updated on a consistent basis, but not changed entirely to continually start over (to always hit your budgets)
    • Includes all facets of your business (accounting policies, revenues, costs, inventory, financing, sales channels, etc.)
      • Need to consider how sales grow and where customers will come from as well as incorporating a marketing plan or strategy into your model
      • Don’t plan on borrowing more than a projected borrowing base will allow
    • Show your model to others – CPAs, consultants, bankers
    • Plan for a worst case scenario – maybe an obvious statement now, but not so obvious two years ago
  • It’s never too early to think about or plan for a potential exit, whether that is a sale, cashing out current investors or a generational transfer.  Successful transactions often involve wineries that started the transaction readiness process sooner rather than later, ultimately maximizing value or at a minimum, achieving liquidity.

For your benefit, this link provides a list of some very helpful resources for writing/updating winery business plans.  In terms of financial forecast models, we develop those for many winery clients at Frank, Rimerman + Co. so please contact me directly at dgroff@frankrimerman.com with any questions or requests for our assistance.

Succeeding in the Wine Industry

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!

Virtual Wineries

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…

Making the Case for Stock Option Plans in the Wine Industry

First and foremost, let me start by saying that I love wine.  I love everything about it:  the vibrant colors, the tantalizing aromas, and the “it opened a whole new world to me” impact of trying a previously undiscovered wine.  I love how there are so many different varietals to enjoy with each offering something special to anyone with a few minutes and an open mind.  And then there’s the food…pairing an Alsatian Riesling with fresh crab, a zesty Zin with some BBQ or a vintage Port with some hazelnut gelato?!  It is all good.  Most importantly though, I love how wine continues to evolve – in the barrel, in the bottle, in your mouth.  It never ceases to amaze me how different the same wine can be depending on when, where and how you drink it.  To me, that experience is what the wine industry is all about.  We need to remember that change is a good thing and if we are not moving forward, we are moving backward.

I mention the concept of change and evolution because it is one aspect of the wine industry that will define its future success.  This belief has recently become more important than ever with different winemaking and grape growing methods and the emergence of both social media and technology (Wine Library TV).  So I wonder why the capital structures of wineries can’t ride that wave of change in the 21st century and beyond.  How come almost all wineries continue to be owned by a small group of family members and a few key executives, but they rely on so many more to ensure the company succeeds?  It would seem to me that motivation breeds success and there is no greater motivation than potential financial gain in the form of annual cash flows or the eventual sale to the next “generation” of owners.  For proof, look up capitalism and the rise of the United States or listen to Gordon Gekko’s speech in Wall Street

Let me step back for a second and add a disclaimer that may help you understand where I’m coming from.  I was trained as an investment banker out of college and currently focus most of my time on fundamentally valuing companies, several of which are technology companies located in Silicon Valley.  I constantly work with companies backed by venture capitalists that often have complex capital structures involving preferred shares, warrants and stock options.  And honestly, this approach seems to work out pretty well for the technology industry in terms of creating a desire to succeed and continually innovate.  I do not see why a simpler version of that structure could not work in the wine industry.

Let’s take a hypothetical situation where a seasoned executive or well-trained professional in another industry is considering taking a new position at a winery and has two separate job offers.  Both wineries are successful family-run businesses with a long history in the industry.  Let’s say the only difference between the two is that one offers a stock option, employee ownership or profit sharing plan where current and prospective employees are granted or otherwise given the opportunity to purchase a small piece of ownership of the winery.  If the wineries are virtually identical, the candidate would likely take the offer from the winery with the option/ownership plan nine times out of ten, even if it included a salary lower than the competing offer.  With this assumption in mind, the option plan then becomes a key differentiator in terms of recruitment at only a marginal cost to the winery itself (depending on how many shares offered versus how many shares are outstanding).  With a structure like this in place, a winery essentially increases its chances of hiring the best and brightest among the candidates available.  Furthermore, it incents the new employees to work harder by giving them an ownership stake.  It is true that employees would likely only realize an eventual return upon a specific liquidity event, but I’m sure if you asked people whether they’d love to own a piece of a business that could be worth some money one day (in return for work they are already doing or going to do), the answer almost unanimously would be yes.  Finally, it is a fact that many wineries are actually created as a result of winemakers not having any upside or financial interest in the success of a previous winery where they worked.  As a result, they start their own winery and often compete directly with their former employer.  I know for a fact that several of these enterprising winemakers would have stayed with their former wineries had they been offered stock or profit ownership.

Now, let’s dig a little deeper into this concept of recruiting and differentiation.  It seems pretty apparent to me that one of the things that separate the wine industry from most other industries is that it largely continues to be operated and embraced here in the US as a family-run, cottage industry despite its overall size and vast number of competitors.  While Northern California is home to some of the best wineries in the world, the majority are purchased as lifestyle choices, third or fourth careers or inherited or purchased from a prior generation.  They are operated professionally with dedicated winemaking and operational staff but in most cases run as a small business.  While most businesses are created and designed to maximize profits, the “return” to an owner (or family members) are salaries and annual distributions.  If profitable, capital is not usually “retained” and is reinvested in the business.

If wineries want to grow and build a financial (or family) legacy they will need to realize that there comes a point of inflection where they need to open up the opportunity of growth and share the success with their investors and employees.  Equity ownership and stock option plans facilitate this end game and as mentioned earlier, you only have to drive around Silicon Valley to see that the model works.

In light of today’s global recession, now, more than ever, it is important for every business (wineries especially) to begin thinking of new ways to spur growth, creativity and continue paving the way for future success.  As Ralph Waldo Emerson once said, “Do not go where the path may lead, go instead where there is no path and leave a trail.