Here’s some really awesome info for those of you who are seriously looking into starting up a vineyard or winery someday. The following wine metrics are tools you can use to judge the strength of your business – and more importantly, they will give you insight into how banks and prospective/current investors will view your venture in terms of risk assessment and return on investment.
In the talk I attended the metrics were broken into 4 semi-logical categories and I’ve preserved the format below. Use each of them in whatever way you choose and know that the wine industry norms quoted below are not set in stone nor is the list of ratios below comprehensive. Timing is also important when doing any analysis. Doing so on a year over year basis gives the most accurate picture. All that said, the following are great for getting a sense of the strength of your operation.
Anyway, on to the metrics!
FINACIAL STRENGTH
- Current Ratio (2:1 = optimal) == Current Assets/Current Liabilities
- Quick Ratio (.50:1 = norm) == Current Assets – Inventory/Current Liabilities
- Long-Term Debt to Equity (1:1 optimal) == Long term debt/Long term debt + Equity
PROFITABILITY RATIOS
- Gross Margin (55% = norm) == Sales – Cost of Wine Sold (COWS)/Sales
- Operating Margin (20% = norm) == Sales – COWS – Operating Expenses/Sales
- Net Profit Margin (10% = norm) == Net Income After Tax/Sales
MANAGEMENT EFFECTIVENESS
- Return on Assets (10% = norm) == Net Income/((Assets as of 1/1/YY + Assets as of 12/31/YY)/2) - basically an average over the entire year
- Return on Equity (35% = norm) == Net Income/((Equity 1/1/YY + Equity 12/31/YY)/2) - ditto
and my favorite,
COST ANALYSIS
- Average Cost of Sales per Case (45% = norm)
- Marketing Costs as a Percentage of Sales (20% = norm) -this can be much higher for a startup to build sales, up to 40%
- Gen and Admin as a Percentage of Sales (10% = norm)
Danny
4 years ago
Curious if you are spending 40% of your take on advertising this would indicate that you have losses early on. How long do you think it will take to turn the corner? When does the full 10% of administrative kick in? Year one? Generally speaking that cost is probably higher than 10% early on as well. If for no other reason than lack of sales volume. Those metrics that you list are pretty boilerplate for any business. Are there any that are specific to the Wine Business?
Josh
4 years ago
Danny,
Yes you are correct that these metrics are boilerplate, but the norms are specific to the wine industry. The only one that is unique to the wine industry that I listed is COWS, which is of course COGS or cost of goods sold in every other business.
As far as advertising spending, yeah, having a marketing budget of 40% would certainly lead to a loss the first year. Generally wineries take 4 or 5 years to turn a profit (you start counting after your first crush, and wine generally has to age a year to three years depending on the varietal). We’d like to cut that down to 3 years.
The cost analysis metrics depend on at least a year of mature sales data to have any real meaning.
Thanks for the comment.