Saturday, July 7, 2018

How Much Did Wineries Really Make in 2017?

      The Wine Industry Shares Information


Unlike most of the business world, there's a sense in the wine business that sharing is part of community, and 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 your wine club 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.......

    

      Sales Growth in Premium Wine is Slowing



In the 2018 SVB State of the Industry Report released in January of this year, we said the US Wine Industry is at the tail-end of the largest growth period in its history.  In the Premium Wine Segment we've gotten used to sales growth rates averaging 13% since 2000, and in the wine industry as a whole, 3-4% sales growth and 2% case growth was the norm. 



Going back, the upturn started in 1994 with premium wine sales growth in the 1990's typically above 20%, and even that was stunted by short supply. 

Starting in the early 2000's traditional three-tier wholesale distribution started to fail for the small producer, leading to a scramble to push direct sales. That move to direct sales progressed very well until the past five years when tasting room visitation started slowing. 

Wine sales are still growing today but as you can see in the above graph, the volume growth rate is flattening, and sales growth for the first time in a non-recessionary year has fallen to 2.7% at the end of 2017. It's growth to be sure, but it's uncomfortably low and outside of the 2008 and 2009 recession years, hasn't been seen since before 1994.


      Major Trends Impacting Performance


3 years ago in the SVB Annual State of the Industry Report I forecast a decline in per capita wine consumption; the result of flattening volume and a slightly larger population. That was a directionally correct call but slightly premature. We are getting close to that today however.




The issue the industry, and in fact the Luxury Goods industry faces in the US is shifting demographics. The boomers who have driven the growth in premium wine are moving to retirement age. In 4 more years the median Boomer will hit the full-benefit Social Security Retirement age of 66. 

With over 50% of the country's net wealth and a dominant share of discretionary income, there is no question the head-wind of boomers moving to a fixed income will continue to impact spending on premium wine. And that ignores the reality that boomers will also be buying less volume as they age. 

While it would be natural to think the slightly larger millennial cohort should replace the spending of the boomers, the Indulgence Gap; an economic confluence of the Great Recession's echo, reduced financial opportunity for millennials compared to generations past, and burdensome college debt - those factors make those younger consumers an uneven consumer trade out for retiring boomers. 

Approaching 40 today, the millennial cohort represents only about 20% of the average spend in premium wine as noted in the chart following. 



On the cost side, winery owners have seen labor availability and grape costs escalate markedly in the past five years. They are finding increases difficult to pass on to new consumers who are signaling they have a lower indulgence ceiling. Those higher grape costs are all embedded in inventory waiting to sell.

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.



The chart above is one I present each year in the State of the Industry Report and use in many of my speeches and represents a benchmark of performance for the average winery in the US.

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 percentage), 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%. 

When the statements were all collected and input this year, wineries ended up having a flat year compared to the prior period, with the exception of sales growth which I discussed above, came in uncomfortably low at 2.7% versus 9.6% in the prior year. 



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 because Nielsen data are dominated by wholesale and SVB data is 60% direct, but for the second year running there was almost perfect alignment as you can see in the above graph.

    Shoveling out Tanks


I don't have all the answers, but the business is changing rapidly, that much we can all see. The wine business is not something you do as a gracious retirement anymore which was the case in the 80's and 90's. The business like all of life is churning faster and those changes will require a little bravery to face change and adapt.

I encourage you to read the Annual SVB Wine Report and dig in deeper to this discussion, or help create the dialogue below.



What are your thoughts? Are you feeling the sales slowdown? How are you passing on higher grape costs? What strategies are you using to operate in the evolving consumer environment

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    12 comments:

    1. I am only a wine collector, but I do know I'm becoming increasingly off put by the prices being charged for Napa wines. Before I would buy the wine if I liked it. Now I am passing on several due to the price increases of late. I am a boomer and I can say the members of the younger generations (X and Millennials) in our extended family have no interest in paying what I pay for a good Napa wine.

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      Replies
      1. Unknown 9:01. It's a fair comment but I expand it to wine in general, in the face of an increasingly frugal consumer - both boomer and millennial. As an analyst, I'm more concerned about any business model that is too small to scale and save costs, and too big to produce the wines consumers want today. Versus when you and I came up in the business, wine is a lot better and the economic opportunity less.

        Specific to Napa/Sonoma - we'll always have the upper 5% of wage earners and those brands that are established at high prices over a long period should do well. Brands that aren't established in those segments, even if they are making great wine, will have a harder time holding their average price.

        In the same way, those brands overproducing on quality in the $12-$25 price range, and can make substantial quantities AND be in the 3-tier will do well.

        There are a lot of models that aren't in either of those general quadrants of brand strength versus price. We'll see how that plays out over the next decade.

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    2. Large wineries that were consistently buyers are now selling bulk wines. The mid-size wineries with growth potential have been buying to take advantage of this recession in larger wineries. Many mid-size growers in the Pacific Northwest are struggling as a result. Brands that can sell wine and innovate with packaging and winemaking techniques more interesting to younger consumers will see great market share increases over the next ten years. The next 5-7 years should be de-stabilizing, but may create greater economic health for growers and suppliers over time.

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      Replies
      1. Unknown 9:35- thanks for the comments.

        With volume flattening and vineyard acreage still increasing, there are bound to be turbulent times in pockets. Today there is a bit of a gulf between sellers of Napa Cabernet and buyers. That's creating a little logjam of juice.

        I agree with your comments on destabilizing. It doesn't always start with the consumer, but this time it is. That will back up on suppliers as juice costs settle out and match up with what consumers will buy.

        IMHO - the innovation for tomorrow will be in direct sales. All of marketing including packaging plays a role, but the greatest opportunities for most small brands is selling more wine direct to customers that are thus far out of their normal marketing path.

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      2. Thanks for the great information. It's greatly helpful to all of us in the wine industry.

        Delete
      3. Unknown 8:59,
        I feel like I've known you much longer than I have ... maybe since 8:29. You are welcome old friend.

        Delete
    3. As a grower in Sonoma and Mendocino counties there has always been a disconnect between what we are paid per ton and where wineries can price their wines. Some years favored the growers and some years favored the wineries. It all seemed to work out in the wash. Over the course of the last 30 years I've seen grape pricing go both ways. The divide between growers costs and profitability and winery costs and profitability is growing and more out of sync than ever.. The trend is less profit for both grower and winery. Our costs to produce can and do increase during the course of one season. The timing on a growers cost increases are not in sync with our contracts and the wineries ability to raise bottle prices based on those contracts. More brands , more competition and fewer consumers equal some sort of shake out. Established growers and wineries with low or no debt will survive. Growers and Wineries with "other " sources of cash will hang in only as long as they remain interested in the lifestyle. Changing times for sure.

      ReplyDelete
      Replies
      1. Paul R. - Thanks for logging in and the salient comments.

        I have to say, looking at what I see over the horizon, I would be nervous for a real shakeout, but I believe the small winery and grower are going to find ways to collaborate because it's in their interest. Second, I believe the winery is going to have new tools to reach more consumers they don't have today.

        If everything that I'm looking continues in the current path, there is a shakeout coming, What worked before will fail in short order with the underlying consumer changes that are obvious. So, it's time to change the path because necessity is here. I have great faith in the business finding the next and best ways to survive and thrive.

        Delete
    4. (Above comment removed due to a typo. Replaced below.)

      "The wine business is not something you do as a gracious retirement anymore which was the case in the 80's and 90's."

      Nor is it something one retires from graciously today. Rather, quite actively to find the next owner.

      Excerpt from Wine Spectator Online
      (November 12, 2013):

      "West Coast Wineries Are Up for Sale -- Quietly”

      (A wave of recent deals show investors see opportunities in wine, while owners see an exit strategy.)

      URL: http://www.winespectator.com/webfeature/show/id/49221#.UoI_yAMMzG8

      By Tim Fish
      Senior Editor

      “. . . While small wineries can succeed by selling most of their inventory direct to consumers and large producers have muscle with wholesalers, those in the middle -- annual production of 5,000 to 15,000 cases, for example -- can’t get much attention from distributors unless the brand is hot.”

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      Replies
      1. Thanks Bob. All good points.

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      2. Mom and dad's mid-life crisis "dream venture" to abandon urban life and move to the more bucolic "wine country" isn't necessarily shared by the kids. The second and third generation have their own professional ambitions . . . and rarely does it involve being a farmer.

        Succession planning issues come into play for these wineries seeking an "exit strategy."

        American family-founded businesses rarely make it to third-generation ownership.

        As Rob can attest, there aren't that many in the California wine industry.

        Quoting the Los Angeles Times “Business Section” from 1989:

        "Only about 10% of family-owned and -operated businesses make it to the third generation."

        [ Link: http://articles.latimes.com/print/1989-11-12/business/fi-1992_1_family-business ]

        Quoting the Los Angeles Times “Business Section” from 1996:

        “Only one-third of these companies are likely to survive the second generation, and far less, about 10%, the third generation.”

        [ Link: http://articles.latimes.com/print/1996-10-22/business/fi-56544_1_family-business ]

        Quoting the Los Angeles Times “Business Section” from 2006:

        "Only about 10% of family-owned and -operated businesses make it to the third generation, experts say. About 30% of family businesses survive each generational transition."

        [ Link: http://articles.latimes.com/print/2006/mar/22/business/fi-smallbiz22 ]

        Quoting the Los Angeles Times “Business Section” from 2016:

        “Only 30% of family-run companies make it as far as . . . handing off a business from the first generation to the second. Only 12% make it to third generation and less than 5% make it to the fourth generation.”

        [ Link: http://www.latimes.com/business/la-fi-portos-20160422-story.html ]

        Napa Valley vintner Bill Harlan aspires to create a wine dynasty that will last for generations (taking as his role model the Rothschild family of France, and the Frescobaldi and Antinori families of Italy who have been making wine for hundreds of years).

        See this Wall Street Journal article from 2006:

        “A Successful Vintner Pours His Passion Into Dynastic Dream;
        Europe's Wine Clans Inspire Mr. Harlan's Grand Plan;
        Grooming a Teenage Son”

        [ Link: https://www.wsj.com/articles/SB115172140824696135 ]

        Delete
    5. your post clear the best growing industry in the world.

      Thanks
      Heathcote Wines

      ReplyDelete

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