Saturday, September 30, 2017

How Much Did Wineries Really Make in 2016?

One Big Happy Family

Unlike most of the business world, there's a sense in the wine business that your neighbor is part of your support mechanism. They are not a rival nor are they a competitor. Everyone freely offers support in the form of information and time. If you need a tractor because yours is mired in a soggy field, no problemo! Need a little welding and custom fabrication on a pump? I'll be right over with a welding rig. Stuck fermentation? I'll send over a portable heating unit.

That kind of sharing happens all the time. But ask your neighbor for a customer list, or ask "Can you show me a copy of your financial performance so I can compare my winery to yours?" The answer is always just < ..... crickets ..... >. 

When it comes to that question you'll just get a mixture of liars dice, false bravado, partial truths and ..... well ..... the following video I put together is the best explanation of how that game is played with your neighbors in wine country.......


Nielsen Scan Data: One Source of Sales Growth Information

In the 2017 SVB State of the Industry Report released in January of this year, we said there was blood in the water, using the Jaws theme to paint the picture. The sharks; those large production level wineries and companies who often set the market tone, are moving on up the price chain as premiumization continues. Consumers are permanently vacating lower price segments in favor of higher quality and higher priced wine. That change impacts every decision you make today.

Click on Picture for Enhanced View

In the above Nielsen graph, you can see how the below $9 segment continues collapsing in case growth. It's a little odd in that there is a single growth segment in the $3-5.99 segment but that ends up being premium box wine, not really cased bottles. When you divide a 3L box to put it into 750ml terms for comparison it shows up in the $3-$6 bucket. Take the box wine out of the segment, and all sub $9.00 categories are shrinking.

How is the consumer shift impacting the wineries bottom line?

    How Much Do Wineries Really Make?

It's easy to see growth rates and profits from public companies, but there aren't many public companies in the wine business. How do you get consistent financial benchmarking? 

SVB collects financial information every day and at any given time is able to present many different views of winery performance using our own proprietary database of actual winery financial statements. Our database now goes back decades which is pretty helpful for trending.

Click On Picture for Better View

The chart above is one I present each year in the State of the Industry Report and use in many of my speeches. In the chart, the red bars represent gross margin (total sales minus the cost of goods sold, divided by total sales and expressed as a precentage), and the green line is the pretax profit margin. Pretax profit margin is calculated after deducting interest and all other expenses, except tax. The blue line is the industry sales growth rate. You can back into total operating expenses if you are interested, by adding pretax profit  margin and the gross margin and subtracting the sum from 100%. The scales for each point of information are on the right and left vertical axes.

It's important to understand the data are not weighted by case size. Had we weighted the results by case size, the largest volume producers which grow by about 2% - 4% annually would dominate the data, making the benchmarks useless for most wineries as a comparison. The "average" winery is quite small by case production measures, but higher in sales growth rates compared to the largest wineries.
When the statements were all collected and input this year, wineries ended up having a better year in 2016 compared to the prior period. Sales growth was slightly better, gross margin was a little stronger, and pretax profit was a little bit improved as well.
In January of 2016 in the State of the Industry Report, we forecast a sales growth range of 9%-13%, so with 9.6% growth realized in the headline slide, our crystal ball apparently was again on target.

What is also interesting to note is the sales growth from the financials we collect from smaller wineries ended up almost identical to the growth in the $20+ category from Nielsen data. That isn't always the case but this past year there was almost perfect alignment.

Some of our Other Predictions from the 2016 Year
▸ Growing local regulations around tourism will continue
to damage opportunities for small wineries to sell direct.
▸ Mergers and acquisitions (M&A) will remain
active throughout the year.
▸ Tens of thousands of additional grape acres will be permanently
removed from the California Central Valley.
▸ The narrowing supply of arable land suitable for
higher-end wine production will drive vineyard prices
▸ Oregon and Washington will continue to see high interest
for vineyard acquisition for premium and luxury
wine production.
▸ We expect to see bottle prices rise by 4–8 percent
above the $10 price point, and see both volume and
price drop below $8 bottle price.
▸ Today, millennials are beginning to impact the lower
price of premium sales. They are most visible in the
$8–$14 red blend category but will trend higher as
their income allows.
I don't have all the answers, but the business is changing rapidly. It's not something you do as a gracious retirement anymore. The business like all of life is churning faster. 

So now you know how much wineries really made in 2016 and you got a few more facts about the past year as well. I think my predictions were largely pretty good but I always have someone in the crowd who gets worked up over something - like the guy in the handsome sweatsuit below. 




  1. The chart showing the shrinking under-$9 wine volumes covers three years, so be careful about thinking that's a long-term chart.

    The growth in $3 to $6 wines -- was that all Barefoot? The article says that range is box wines calculated to 750 ml "bottles," but we know Barefoot has been growing fast!

    Yes, under-$10 may be declining, but it's a huge piece of the business. Some shifting of pricing from under-$3 to $3-to-$6 is probably happening as well as from under-$10 to over-$10.

    In the marketplace, it seems prices are still quite stable.

    1. Mike - sincerely appreciate the comments and logging in.

      When I researched the Wine Report earlier this year, I did take a look at that $3-$6 segment. It was an outlier and I needed to dig deeper to understand. Turned out it was 100% due to the growth in premium box wine, which makes sense in the narrative of a frugal consumer trading up. It wasn't just BlackBox though, it was BotaBox, Bandit and others. Without the box category, volumes in the segment were lower.

  2. Rob, Jim Lapsley here. You define Gross Margin as "sales minus cost of sales." Did you mean "sales minus cost of goods" (i.e. grapes, bottles, cost of wine production etc.). I usually think of "cost of sales" as the marketing expenses.

    1. Jim - Yes that's the right read. Cost of Goods and Cost of Sales are synonymous terms.

    2. From Business Dictionary


      Gross income expressed as a percentage of net sales. Formula: (Sales revenue minus Cost of sales) times 100 divided by Sales revenue.

    3. Jim Lapsley - I see what you are talking about now. I gave the definition for gross profit, but the chart shows gross margin. I stand corrected and will make the edit above so I appear smart to everyone else.


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