What's the Surest Way To Fail in Business?

This is my 50th post and I'm celebrating by taking a vacation and  am writing this morning from my hotel balcony on Waikiki. That was an unabashed I'm-having-more-fun-than-you comment..... and I'm clearly warped to be writing on vacation.... Anyway...

Going through graduate school I took a class in Organization Behavior. I liked the class because it was high-level and covered a number of important theories, and yet - the title of the course always bothered me. It seems like such a non sequitur. It's as if an organization has feelings or predictive behavior, and of course it doesn't. Organizations and wine producers for that matter are made of people with feelings, perspectives, insecurities, and values. While marketing, sales, production, viticulture, and administration are all important parts of running any wine company, in the end without an established business culture used as a touchstone for behavior and decision-making, the other disciplines will struggle or even fail no matter how awesome the product or strategy. Leaving a company's values unclear or believing everyone just knows what you stand for without talking about it is the surest way to fail.

The Question of Cultures

I was reminded of this on a trip to Hawaii yesterday. We got on a plane out of Oakland for a 5 hour trip to Honolulu Hawaii in coach. Its always a long flight but I try and sleep so I get there quicker. That's a trick I learned as a kid when we drove to Disneyland from Concord. CA. Sleeping wasn't an option this time because there were a group of six Persians in front of us with a beautiful young 5 year old boy. It was a party from the moment we took off. There was laughing, jumping and dancing in the isles, the beautiful child yelling at the top of his lungs participating in his family dynamics. They were going to Hawaii and they were HAPPY and didn't seem to mind if others around them wanted to sleep. The young boy was doing nothing more than participating in his family culture. He was emulating his family.

Then next to me there was a 25 year old graduate of San Jose State from Mumbai. She was second generation and it was her first trip to Hawaii and her longest plane flight ever... really nice girl. Her family of 8 people were all going out on a Norwegian cruise around the Islands. They too were happy and the parents were talking loudly behind us and unconsciously kicking our seats through the trip for some reason. The older folks got together in the isles and were laughing and dancing.... they seemed focused on themselves and didn't seem to mind if others around them were trying to sleep. When the plane stopped, they started to push their way through the isles past people trying to get up. I don't know if it was an cultural behavior or not, but they missed the rule most of us learned in Plane Flight 101 that you wait until the people in front of you get out of their seats before you do.

Some people would take that description as a flight from hell. While it sure wasn't the best, you deal with what is on your plate. You get what you get and you don't pitch a fit. For all I know, to others around me I might be thought of as rude for trying to sleep? Maybe I should have joined in their dance and forgot about sleep. Instead I turned to the drug of choice on flights to Hawaii: Mai Tai's. Everything seemed to be better and in my slightly inebriated state got me thinking about corporate cultures and values.

In this case, we had distinctive and separate cultures on our part of the plane all operating independently. Thank god we didn't have to operate in some sort of a team to get to some common goal, because there was a lack of commonality. How would we make decisions .... even the simplest like should we use the First Class bathroom if the other ones are full?

Organizational Behavior and Hospitality

How does that relate to wineries? We have become an international business. People come from far and near with wide ranging cultural norms and biases. We are their hosts and have to be ready to help them have a memorable time. Its our opportunity to help them leave with a brand positive perspective on your winery, and our Country. You can't judge their behavior by our standards but should be encouraged to understand the cultures of your guests and be long-suffering if needed.

Second and more important, the USA is an immigrant country and is made of diverse families with different norms and beliefs. To be successful in business, we have to establish our own work culture that emphasizes hospitality as a base value.

Some of My Culture Beliefs and Examples

At Silicon Valley Bank I'm very proud of our culture. Its one where everyone tries to do the right thing. Profitability is important, but not as much as our values. Profitability I argue follows BECAUSE of our values. Everyone's viewpoint is appreciated and we've developed accepted ways to behave and make decisions. Debate-decide-deliver. We talk about "the shadow of the leader;" a concept that means leaders of organizations can't take a "do what I say, and not what I do" model or take credit for the success of others in our team. We believe in recognizing others success and that we are not in competition internally. Its not a net-sum-zero game. There is much more to our Bank's culture and we are constantly talking about it and reviewing the fit.

On my specific lending team of 5 people, we have several rules that we adhere to that make behavior more palatable. I believe feedback is an everyday thing and that's what we do: give feedback on the fly when there is teachable moment. We believe that mistakes are tuition and that pretending mistakes don't happen stops continuous improvement on the team and waste that tuition. We are fine with making mistakes. They happen and don't show up in reviews in any material way because they were already covered. Reviews in fact are kept as low-key as possible because they are an administrative thing, not a tool for improvement. They are never motivating (Don't tell HR I said that please).

We believe that we need to be direct and respectful in the way we communicate with each other. That means we hold each other accountable for our failings and speak our mind instead of supporting some circular gossiping sophomoric culture. We support each other in what we do, and support our clients efforts. There is always someone on staff for our clients to reach. I believe I am responsible to my staff and each year ask in a safe manner, what things I need to do to improve and what they like. We believe we are in the hospitality business and our clients and their employees are our guests when they come to our offices.

All of those rules establish a culture within the Bank that is good for decision-making, respects individual beliefs and values, insists on team play, rewards success, inspires evolution and new approaches of doing things, and makes for one great place to work. Given time, the plane of people on my trip to Hawaii could come together develop mutual respect and trust if we started first with addressing The Surest Way to Fail in Business and developed shared values. Our Bank and team are great places to work.

What about you? What are the rules that your company lives by? What are the values that are not negotiable? How are you reinforcing your culture? How do you measure your culture and success in achieving change? What thoughts and experiences can you share with the community about your learnings in building healthy and successful cultures in business.

Please log in and participate in the discussion. Oh ...... by the way, as you can see in the first picture, I made it to Hawaii! Aloha!

Is Demand for Wine Dropping?

I saw the above video last week referencing demand for wine and the title got my attention. Is the demand for wine really falling? When you watch the video above many people might think so, but I don't really put a lot of faith in LiveEx as a measure of demand for fine wine. This might be speaking to Bordeaux largely and LiveEx might have use in other areas but not for overall consumer demand.

Last week we did a version of a Mid-Year State of the Industry Blog, but in it noted that its hard to do a State of Anything in a blog so we left out consumer demand. With this video clip from Bloomberg hitting the interwebs, I thought it might be worthwhile to debunk the above perspective.

In the 2013 SVB Annual Wine Report we predicted sales growth between 4% and 8% in the fine wine segment. One of the factors that we considered in the forecast was the expectation of a rough first part of the year as sequestration kicked in, pulling back the growth rate in demand. But we also believed the back half of the year would be better as we bottomed in the housing market and the consumer started loosening their purse strings.

It seems as though we were pretty close in the blue-print, but at this stage it appears sequestration didn't have the dire impact many in Washington predicted and in fact has improved the Debt to GDP ratio to the point where our Debt Rating was upgraded again to AAA. We have seen the bottom of the housing market and continue to see improvement in consumer and retail spending though it remains to be seen how we did predicting the back half of this year. That said, according to information provided from Wines & Vines in cooperation with IRI, off premise sales through July are up 7% for 12 months.

Moving to one more perspective, a compilation of data provided by Demeter Group shows continuing growth in overall US consumption, consistent with flat to declining hectares of production. That gap between what is planted and what is consumed is being met with imports. The 2012 harvest size at this point in the year has slowed down the continual march upward of the growth in market share for imported wines. That said, as of this writing and as mentioned last week, the harvest in the Southern Hemisphere appears good, and with the US Economy still seemingly recovering ahead of the rest of the world, one has to believe the dollar should strengthen against a basket of currencies thus favoring import growth.

Of course this is such a big topic and only a small top-of-mind commentary on where we sit today, but I don't want to lose my Blogger Credential that requires brevity in prose. Hopefully this is enough for you to agree with me the Bloomberg video above isn't properly representing the state of consumer demand in the US. Consumer demand for wine continues to rise by all measures and if our early year forecast proves out, should increase YOY through the end of 2013.

 

What are your thoughts? Please log in and offer your views about growth in wine sales and consumer demand at this point in the year.

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.