Berger on wine: Wine business growing more difficult
There's an old, well-known saying: “If you wanna make a small fortune in the wine business, start with a large one.”
The statement, which now is a cliché, has never been truer - except for families that got into wine 50 or 100 years ago, never intending to make more than a hard-won living or feeding a passel of kids. They face fewer headaches.
In the past three decades, wine has become a deep-pockets game. Just how deep is often a shock, even to very wealthy people. If they look into the real costs of making fine wine on even a modest basis, they'll quickly realize it could be a lot worse.
Imagine investing huge sums on land, buildings, vineyard development, staff personnel, marketing, equipment and sales strategies, then realizing it will be about six years before you have anything to sell.
That's why wine industry business plans are hard to understand, notably if someone assumes they can be analyzed by traditional Wall Street formulae.
How do traditional business plans (and income tax returns) for firms specializing in shoes, tax services, software and vegetables compare to plans for products that start out life making zero profits for six years?
Except for startup pharmaceutical houses and a few other “long lead-time” companies, wine is like few others. Imagine trying to depreciate a press that may be nonfunctional before the first wine is ready for sale.
And just try to predict what the next hot item will be. Almost a decade ago, virtually no one saw that sweet, sparkling Muscat was a fad so hot it would shock all the industry “visionaries.”
No one was prepared for the demand for this “pop” product that led to many dozens of “moscato” knockoffs and to an instant shortage of the once-disparaged Muscat grape. The tipping point? Rap artists commenting on moscato in their “songs,” of all things!
And about as fast as it developed, the “moscato” fad ended, leaving an array of problems for many wineries (unsold inventories) as well as growers.
A recent (193-page) issue of Wine Business Monthly was dedicated to a review of the industry, with a fine introduction to the subject by editor Cyril Penn.
The article has lots of facts, new data and expertise on current trends in wine marketing straight from the lips of industry leaders. Much is based on demographic analysis.
One major point: U.S. wine sales grew only 1.2 percent last year, which would be good news except for the fact that in the last three decades growth has averaged more than 3.5 percent annually. This poses headaches for many medium-sized wineries that were planning ahead 18 months ago.
Assume a winery had small increases in production in the last decade and in planning for 2020, it made more wine in 2018 than in 2017, projecting at least 3.5 percent growth.
With 4 percent more wineries in 2017 than in 2016, the additional wine made by existing wineries in 2019 faces greater competition at home, not to mention from imports, which now represent more overseas wine here than ever before.
Will all this erode retail prices? Are any price reductions sustainable at wineries that now are stretched to the breaking point by other market forces (such the costs of sales, escalating salaries and benefits, and smaller margins)?
To be sure, some winery owners got into the wine business for reasons other than profit. Such as lifestyle.
But how long is the “fun” of making wine going to last when profits are so slim - or nonexistent, and it costs so much to sell the product?
It's no wonder that many wineries throughout the state are considering selling to well-financed larger companies who can make use of economies of scale and existing marketing strategies.
New startups continue to pop up here and there, of course, because there is something alluring about the lifestyle of living in wine country, rubbing shoulders with icons of the business and participating in social events that could well replace the corporate backstabbing that might have been part of a social scene in a prior life.
The difficulty may be summed up by a winemaker friend decades ago, who said, “I love making wine. The hard part is selling it.”
He retired early and has never regretted it.
Discovery of the Week: 2016 Two Angels Petite Sirah, Red Hills, Lake County ($24): A relatively dark red wine with a lot of character, but the wine is fairly refined and not as rustic as many in the past. Best in two to four years.
Sonoma County resident Dan Berger publishes “Vintage Experiences,” a subscription-only wine newsletter. Write to him at email@example.com. He is also co-host of California Wine Country with Steve Jaxon on KSRO Radio, 1350 am.