Our most popular post is brought current with the most recent 2013 CPA prepared and SVB agglomerated 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 are almost as hard as chasing unicorns in this business because the wine business is private and they don't publicize their financial statements. Its a family owned industry with even the largest; Gallo a family owned company. But it's 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 kaput? No problemo. Need a little welding and custom fabrication on a pump? I'll be right over with a welding rig.
Of course there is also a competitive side that abounds in the business as well. But when it comes to sharing financial information, metrics, and customer lists, good luck! Ask a winemaker neighbor how it's 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 going 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 put your marketing hat on and round up on your growth rate last year but as bankers, we get the real information. We're a little harder to fool but really, the benefit is in helping our clients pinpoint places they might be able to improve.
So back to the title question: How much do wineries really make? 3.9% pretax at the 2013 year end. That's a lot less than dreamy consumers imagine who have visions of the wine business being the lifestyles of the rich and famous.
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 2005 calendar year. The red bars represent 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 total operating expenses 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. 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 flowing from that profit, do move in waves.
What's happening right now? We can't see it this year because grape costs are held in inventory until they are sold a year or two after harvest, but producers are seeing higher costs of production. That wouldn't matter if those costs could be passed on to consumers but thus far, that hasn't been easy to do. While today consumers are trading up again to higher priced wines, we are moving into an era in gross margins are and will be squeezed until the economy and consumer spending really recover.
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. In 2013 however, we have seen a greater investment in general expenses as wineries catch up on deferred initiatives through the recession, and make investments in their sales forces and their retail and direct business. That's led to slightly lower profit overall in the past fiscal year.
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 sweat suit 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 going into 2015.
Those are our thoughts. Feel free to weigh-in and add to or offer your thoughts and comments below.