In many cases; vineyard practices, winemaking process, sources for distribution, etc., the small wine owner does have the information they need to run their business. But often there is a black hole when it comes to real industry metrics and benchmarks. So what do they do? Road trip! Its a visit to a neighbor that gives them something to go on in the absence of any other solid data.
The wine business is really quite amazing from the perspective of what is shared between neighbors. There isn’t the sense that your neighbor is a rival or competitor. Its more of a club feel in many ways. If you need something, its quite normal to check in with your neighbor. Need a tractor because yours went kerput? No problemo. Need a little welding and custom fabrication on a pump? I’ll be right over with a welding rig. But there is a competitive ego that abounds in the business too. So when it comes to sharing financial information and customer lists, good luck! Ask a winemaker neighbor how its going financially, and you’ll get a mixture of liars dice, false bravado, partial truths and ….. well ….. the following video is the best explanation of how that game is played…….
It’s no wonder our winery and vineyard clients at Silicon Valley Bank are drawn to our Benchmarking Database. Its not a guess or inflated bravado. The data in the set are composed of thousands of reviewed and audited financial statements and they go back to 1990. We can group peers by region, varietals produced, business model and many other factors. You might be able to fool your neighbor on your cost of goods sold per case, or make a little white lie on your growth rate last year but as a banker, we get the real information so we are a little harder to fool. Our clients get free access to the averages and information produced, so they benefit by sharing. That kind of data doesn’t exist anywhere else.
So back to the title question: How much do wineries really make? At 8.2% pretax, that is a lot less than the dreamy consumers imagine.
This chart is one that I present each year in the State of the Industry report and use in most of my speeches. If you click on it, you can get a larger view. Its a summation of the financial performance of the wine business since the 2002 calendar year. The red bars are gross margin (sales minus the cost of sales), and the green line is pretax profit. The blue line is industry sales growth. You can back into SG&A if you are interested by adding pretax profit and gross margin, and subtracting the sum from 100%.
What you notice is gross margin is far from consistent. Even if grape sales were constant, trade discounts and pricing opportunity will vary year to year changing the gross margin. But the reality is purchased grapes run through cycles and estate wineries have higher and lower costs of goods based on farming costs and yield. As you can see though, gross margin and then profit do move in waves.
What’s happening right now? We are seeing producers starting an era in which their gross margins are and will be squeezed. You can see the impact of price discounts from 2007 to 2009 where we found bottom out of the recession. Then in 2010 and 2011 we saw improved conditions as grape costs fell off their pre-crash levels. Today we are experiencing the higher costs of light yields in the past two years. Though we might see some fluctuation in margins throughout 2012 with lessening discounts and promotions, starting next year we will start to see the impact of higher grape costs combined with the inability to pass those costs on to the consumer. Those pre-tax profit margins you see are likely to fall a bit in the next several years, at least on average.
There will always be some neighbors who do better than others. I’ll bet our imaginary neighbor didn’t know what was happening with the industry benchmarks …. or did he?
This is the appropriate time to add …. the preceeding “film” contains statements and opinions which are fictional in nature. Any similarities to real people or wineries are purely coincidental and unintentional. And besides, no winery owner I know would be caught dead in that red sweatsuit looking like you were wearing a diaper. I’ve never met anyone like that.
Anyway – those are the facts on winery profitability and the bottom line. Wineries are being squeezed and in our opinion are likely to see more of that in the next few years, being unable to pass pricing increases to consumers.
Those are our thoughts. I can make some arguments about the next few years opportunities based on who gets elected next for President, but I’ll save that for another day. What opportunity do you think the next few years will present the wine business?