The Wine Business is Simple, Yet So Easy to Screw Up

First, I want to apologize in advance - this post may hurt some feelings.  This is not intentional, it is just time we have an open and honest conversation about the financial realities of the wine business.

At the most basic level, the wine business is simple.  A producer makes wine, then sells it to a consumer.  The product itself can be a function of artistic expression at a very small scale, or it can be a formulaic production of mass quantity... either way, it is just a beverage to be consumed.

Note to readers - I personally much prefer the small production artistry of specially made wines, but unfortunately that approach does not have a positive correlation with financial success in this business.

There are a multitude of nuances and small decisions to go from vine to glass, but there are three key aspects to the wine business that, while obvious to everyone in it, seem to get ignored when it comes to the financial management of the business.

1. The wine business is extremely capital intensive.  Of course, you say.  So why then do so many companies get caught in this trap?  

As a wine producer, you are often paying for fruit (or farming costs) several years before you can monetize the product.  Then you have the investment costs of fermenters, tanks, barrels and other equipment - this stuff is not cheap.  Then there is the facility.  And taxes.  Oh yeah, and payroll.  

Most producers are sitting on one vintage in the vineyard, one to two vintages in tank and barrel, then another one to three partial vintages in bottle.  This adds up quickly.  Unless you are adequately capitalized, before you know it, you need more cash for the next vintage.

It is a lot easier to make wine than to sell wine.

As a wine importer and/or distributor, you are buying wine in bulk and selling it off in smaller parts for typically a 25-35% gross margin.  Importers and distributors typically get 30 to 90 day terms, and depending on the state, will often get paid either COD or within 30 days from retailers.  

This "working capital float" has been the demise of so many small importers and distributors. It is too easy to buy large amounts of wine on terms under the assumption that enough will be sold in time to pay the bill.  But in such a highly competitive market, the loss of a key salesperson or just a downturn in the market is all it takes to run out of capital.

2. The wine business is super competitive.  Again, you say "duh" - I know that.  But everyone believes their wine is better than other similar priced wine in the market and therefore it can sell.  Unfortunately, not true (for most).

Just like a poll amongst adult drivers, something like 90% believe they are above average.  The problem is, only 50% can be above average.  The same is true with wine.  

I’ve never heard a winemaker, importer or distributor describe any of their wines as “below average” or even “average” for the price point.

Here's the reality - there are something like 100,000+ unique wines available in the US market. Even in a small state like South Carolina, there are about 25,000 wines registered on SevenFifty, and that does not even cover the distributors not yet on the platform.  

With so many wines available to the retail buyer and consumer, you need to understand the magnitude of alternatives to your products.

3. It is easy to start a wine business.  That's right, in most states all you have to do is fill out some paperwork and, with a little cash, you can slap some labels on shiners and be in business as a wine brand, or start knocking on doors as an importer / distributor.  Want to buy wine to re-sell? No problem.

With such low barriers to entry and such an romantic business (in theory), wine tends to entice the naive business owner.  While the intentions of a new wine entrepreneur may be of the highest order, that does not necessarily mean the wine world needs another new entrant.

Now that we've established these basic fundamentals of the wine business - lots of capital required and the supply of both wines and competition is seemingly endless - it is easy to see why so many companies struggle.  

While these market dynamics are unlikely to go away anytime soon, there are a few things that a wine business owner can do to improve the odds of financial success.

  1. Develop and use a financial planning model.  We're not talking Wall St complexity here, but it does need to allow for scenario planning and the "what ifs" that seem to always happen.  While you may not like the numbers that it spits out, it is at least better to plan in advance so you are not caught off guard when capital becomes tight and options are limited.
  2. Align your strategy with market reality.  If your goal is to grow 50% next year, and we all know the market tends to grow in the 2-6% range at the national level, then you need to have a strategy that is based on taking a lot of share from the competition.  This is not as easy as it sounds, so you have to link the financial model to the sales model to the operations to figure out how to make this a reality.
  3. Really assess your capabilities to execute.  A strategy without execution is just a hallucination.  I never hear of wine business owners talk about "scaling down" the business - it is always about growing.  In that case, execution is everything.  In addition to strong demand for the wine, execution requires a strong team and the right technology.

In most of my conversations, I tend to see some evidence of a financial model (although usually not to the level it needs to be), a strategy that is difficult to articulate beyond lofty aspirations, and no structured emphasis on assessing and improving the execution.

However, this should be good news for those in the business.  If this is how most companies operate in this highly competitive industry, then simply addressing these points can put you a step above everyone else.