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…