The Highest Return on Your Time Invested

Each year I get to write a State of the Industry report that's pretty well received in the wine business. Its even used as part of the curriculum in several U.S. Colleges and Universities which my mom thinks is really cool. She thinks I should be given an honorary PhD by one of the Universities but I haven't been able to donate enough money to a place of higher learning so as to receive that kind of recognition. Der Weinerschnitzel is considering offering me a fellowship, but thats still in early discussions.

Anyway ... this year we will be releasing the 2014 Annual Wine Industry Report in January. Before I can write the report, there's a lot of research that has to be done. That process starts with the Annual Wine Conditions Survey. The survey gets us very interesting observations such as the chart to the left that shows Millennials really don't move the needle on fine wine purchases, but Gen X'ers do. 

Or how about the one one at the top of this piece that showed the wineries themselves thought that they could take some small price increases during this past year. Of course that doesn't mean prices would increase because its just the additive opinion of over 450 wineries, and in fact we predicted price increases would be hard to come by in 2013, and they were. What it does tell you is the market participants intentions, and that has to be a factor in considering predictions. 

I would like to ask your winery to participate in the 2014 Wine Conditions Survey. It takes less than 10 minutes. The survey opened last Friday and was sent to 5,000 wineries throughout the US with very good initial participation thus far. There are just 15 survey questions, 4 of which are identifiers such as the region where you produce wine. The remaining 11 core survey questions are geared at understanding vintners' challenges in the present operating environment. We condense the results and those comments then return results, charts, and detail in a non-identifiable manner so winery owners and operators can get a better feeling for what your peers see.  To get a better sense of what you get for your participation, here is a link to what we delivered last year: [LINK]. 

Many of the AVA's encourage their memberships to participate since they receive their own gratis bench marking reports. You might see an email in the next few days from your own association so don't think we are spamming you. If you are on the mailing list, you will get one 'last chance reminder' from us and that's it. We never add people to mailing lists, and never use the survey as a tool for marketing.

 

While the survey is a Nationwide one, our East Coast brethren and sistern in the business haven't been quite as active as I'd like, so this year we are reaching out to some new AVA's particularly in NY and VA and hoping for a better sample from which we can deliver better regional bench marking. If you are able to help your AVA along those lines, we would appreciate it if you directed them my way.

The 2014 survey will be open through the end of business Friday, November 8th. If you would like to participate this year and receive the free results, you can do so by starting here: [LINK]

If you would like to permanently add your winery to the list for the survey and our State of the Industry publication that follows, please email me at rmcmillan@svb.com.

Feel free to offer any other thoughts you might have in the comments section which follows.

Is Your Tasting Room Successful?



It's your fault!

The other day I  stopped in at Wal-Mart to get some things. While checking out, a very large woman in very tight clothes came up from just outside the store and angrily told my cashier she lost her debit card after she paid. While I looked around the floor for the card the cashier said, "Yes, I remember you putting it back in an envelope" to which the woman replied, "Its not in there. I put it in the envelope but you rushed me to get out of line. You rushed me. I want to see your manager!"  ..... Are you kidding me? I had to work at holding my tongue.

What is it about the human condition that makes it so hard to accept personal responsibility? A similar version of that is the medical condition known as ....

Headinthesanditosis.

Quite sometime ago I had a client come in the office to talk. Already three vintages behind the market and unable to meet financial obligations, it was time to have a direct discussion about viable solutions. She was really quite an intelligent person but before we could even get to the part where we discussed alternatives in her control like sales strategy, ranking distributors success, branding, market presence, pricing strategy, proper cost allocations, ways to use inventory to raise cash, etc., I was offered the following:

"Its not like I'm the only one with financial problems. The whole industry is suffering and not current with releases. The only problem I have is you wont give me more money."

I had to tell her the view she held of the market was askew. We didn't have any other clients who were three vintages behind and in fact because of our financial benchmarking database, I was able to show her just how far out of the norm she was. She was so shocked at the information (see her in shock in the picture ----> ), that rather than accept what was in front of her, she instead tried to poke holes in the database. "Wait, are there foreign wineries in there?"

What is it about the human condition that makes us stretch the bounds of credulity rather than accept it when we aren't measuring up?

Tasting Room Success

That gets us to the point of this blog. Is your tasting room successful? How do you know? What are you measuring success against? Is the tasting room making enough money? What is enough money for the tasting room? Are your staff salaries in line with the market or are you overpaying? Is your club retention long or short of average? What's your conversion rate of visitors into club members?

Hopefully unlike the woman I ran into in Wal-Mart, you understand if it's someone else's fault, your destiny is in someone else's control. So you instead are an enlightened person and crave metrics from which you can diagnose where there are opportunities to succeed, and when you are operating within or below tolerances. Hopefully you want to find as many measurements as you can, and then rank where you can get the best returns  by investing your time and money in those. and moving past or eliminating things that give you minimal or negative returns.

 

You probably measure club membership length and your results are better than what is portrayed on the slide above (click on it for a larger view). On average, club memberships last just a little over 2 years. That means someone probably came into your tasting room, they signed up, and got their first shipment. When they got their second shipment the next year, they decided to leave the club. That is horrible performance in my view. It cost so much money to get the first sale in the door when you fully burden that sale with the overhead and salaries of the tasting room staff. You probably didn't really make money on that first sale. Then you shipped a second case the following year and they quit the club.

 

If you want to make money out of the tasting room, this is one metric that has to be improved upon. Furthermore, about those people that left - why did they leave? If I have to presume, I'd guess they didn't like what you shipped, but when I ask that question of some, I can get answers that reflect they really don't know why people left the club. Its not uncommon to start in with... it was probably the economy... maybe they lost their jobs ... they could have lost their house and there was no forwarding address ....or maybe the dog ate my homework? 

 

What is it about the human condition that makes it so hard to want to dig out facts that could point to someone dissatisfied with our product and services? Shouldn't we know why they left so we can address any issues?

 

On Tuesday morning of this week, Wine Business Monthly and Silicon Valley Bank will be hosting a live video conference on Tasting Rooms, CRM, Direct Sales, and Wine Clubs. We've had over 500 wineries participate in the survey and found some really interesting information that you can use to benchmark your own winery's performance. Its being offered gratis and I hope you can join in.

 

Videocast

May 21, 2013

 

 

What do you think? Why do people not benchmark their performance? Why is it so difficult at times to ask someone how we can improve? Why are wine club customers turning over every 2 years in the wine business? Log in and offer your thoughts below.

How Much Do Wineries Really Make?

Our most popular post from last year is brought current with the 2012 financial information. The question at hand is: "How much do wineries really make?

The answer of course is ......(drum roll please ....) Not enough. Finding the facts is almost as hard as chasing unicorns in this business because the wine business is private. Its a family owned industry with even the largest; Gallo a family owned company. But its really quite amazing from the perspective of what is shared between neighbors in the wine business. 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.

There is a competitive side that abounds in the business too of course. 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? 6.9% pretax at the 2012 year end. That's a lot less than 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. (You can see a larger view with by clicking on it.) Its a summation of the financial performance of the wine business since the 2004 calendar year. The tan-ish bars represent gross margin (sales minus the cost of sales), and the darker line is pretax profit. The lighter line is industry sales growth. You can back into total operating expenses as an expense if you are interested, by adding pretax profit and gross margin, and subtracting the sum from 100%.

What you notice from the chart 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 into 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 and . Today we are experiencing the higher costs of light yields in 2010 and 2011 which in 2012 were offset by reigning in promotions and discounts.

In 2013, we will start to see the higher grape costs from 2012 entering the income statements. Those costs aren't fully passed on to the consumer which means 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 preceding "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 they 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 near term being unable to pass pricing increases to consumers. Economically, we may start to see improvement in the back half of 2013 and that may help somewhat.

Those are our thoughts. Feel free to weigh-in and offer your thoughts and comments below.