I think that the average net income for a 1-3K case winery is a little low at $45,000, but then again a simple average doesn’t differentiate between many factors that can lead to a winery being more profitable than another.

Tomorrow is the last day of talks at OIV and will feature winery profiles of a host of Napa wineries including St. Supery. Check back then for a recap of the final day and the course as a whole.

I’ve got a lot of thoughts swimming through my mind right now as you can probably imagine, but the foremost is thankfulness for the health of both Jackson and Candace. Candace labored naturally, with no interventions or pain medication. She was a superstar, taking only 12 hours to pump out our little burrito, and because she and therefore Jackson weren’t numbed and medicated, little Jack was awake and alert. He was able to feed immediately and then bond with us and take in his surroundings. Born at 2:51am last night, we were home by 11:00am the same day. Simply amazing.

This same natural, non-interventionist approach is a big part of our winemaking at Capozzi by the way, and we think it will breed similar results!

Cheers!

In the meantime, here’s some more info on distributors we (and you if you are a small $25 plus a bottle producer) might actually consider using.

Brokers

Kimberly Brown, Owner of Terra Firma Wine Co. (contact info at the top of the page) is a broker and a distributor. Her company started out just as a broker at first due to the low overhead it provided (she didn’t need to actually buy the wine she was selling) and has since moved into distribution as well. From her perspective, here are the benefits of dealing with a wine broker:

• Motivated Seller – Because brokers only get paid when your wine is sold, brokers are very motivated to get your wine out there.
• Control – Typically, due to the smaller portfolio and the focused nature of hand selling to high end retail accounts that brokers provide, you can target your accounts better than with a distributor. Also, since you never sell the wine to the broker, you can veto any transaction.
• Generally more focused and knowledgeable
• Less expensive

The cons of going through a broker are that they really don’t move much volume, they can have trouble getting wine placements at the ultra-hip key accounts, and it can be hard to find a really good one. Also, because brokers are typically focused on a specific city or geographic area, you’ll need to seek out and establish relationships with quite a few to cover all the big markets in California.

When I asked her, Kimberly said that she didn’t have any trouble getting wine placements at the image maker accounts and restaurants. Yet when you consider that Southern and Young’s Market have a high end wine division with an expense account in the many thousands and that they are told to use it liberally at key accounts to help grease the wheels, it becomes easy to see how her job could become difficult. Still, for small luxury producers, a broker can be an effective part of the distribution mix due to the benefits listed above, with control over placement being the biggest.

Regional Distributors

Regal Wine Company is a regional distributor that began as an offshoot of Kendall-Jackson for their Stonestreet brand. Regal slowly built a distribution network from the ground up, and began adding more and more brands from the KJ portfolio. Recently they began distributing all of KJ’s product in California and have begun to take on other outside producers not affiliated with KJ.

The reason for Regal’s creation according to Richard Rossi, VP of Regal, is that national distributors want comfortable margins and steady growth across all brands. For instance, if Southern’s top 5 accounts don’t grow at roughly the same rate each year, the ones that were outpaced will call them up and demand growth in line with their competitors. This causes a headache for Southern and so they want to keep growth across all brands even, regardless of demand.

KJ also thought Southern and Young’s were operating on fatter margins than they needed to. KJ, with their clout in the market, felt that they deserved a better price. KJ asked for 18% margins, the big distributors said no, and so KJ went out and created a regional distributor (California only) to test out their theory that their wines were in higher demand than their yearly sales growth with the national distributors would indicate. They also wanted to test whether a regional distributor could function on 18% margins.

After close to a decade, KJ discovered that with better distribution in CA they could indeed grow faster than other distributors were allowing them, but they also discovered that 18% margins were just too lean to operate on profitably. Because Regal isn’t able to pad its bottom line with the more profitable spirits sales, Richard now says that 25% margins are more realistic.

All of this is interesting and it gives great insight into the inner workings of both national and regional distribution companies. From a small producer’s standpoint, the benefits of using a regional distributor like Regal are much the same as the benefits of going with a broker.

• Regionals are dealing with a smaller portfolio of wines, and can give your brand more attention.
• But they are also bigger than brokers and are able to use larger, but still limited expense accounts to help grease the wheels and help get you placed in the hip restaurants.
• Typically you only need to have one regional distributor per state instead of 5 or more brokers. This allows you to concentrate on just one relationship instead of many.

The cons are that regional distributors are typically wine only and don’t have economies of scale, so their costs are higher and their margins are lower. This means their sales force will be smaller and their focus will only be on the most profitable markets (think Southwest Airlines). Regionals have no leverage with on premise accounts (“If you want your Jim Beam you have to take a case of Geyser Peak buddy”) like the nationals do. They are also easily outspent by the nationals in key accounts (huge dinner parties in the hippest New York restaurants are very common among distributors). EDIT: I forgot perhaps the biggest drawback to using Regal, which is that the KJ brands they distribute will alwyas come first. No amount of programming or incentives will move you up their priority list past a certain point.

For the small luxury producer the first question you have to answer is what geographic areas and what markets do you want to be in? For producers of less than 5000 cases, the general consensus is to simply stay home (if you are in CA) to concentrate on direct and to use either brokers or a regional distributor to help you build brand awareness in your own backyard.

This is the general strategy we will be using, but success really depends on the particular tactics you use to pull it off. I’ll talk about some of ours in the coming weeks.

Thankfully there are other channels to get your wine to market. The best of which by far is direct.

Direct

Direct has much higher margins than going through a distributor since the consumer pays shipping and there are no middle men taking their cut. In reciprocal states, you can keep up to 100% of retail price when consumers buy your wine direct from you. But there are other (not so) hidden compliance and permit process costs that are a very real barrier to being able to tap into the direct market.

Kathleen Schumacher-Hoertkorn, President of New Vine Logistics, a wine Storage, Packing, Shipping and Compliance company, spoke to us yesterday about the mountains of paperwork that are required to remain complaint with all the various state governments that desperately want their sales tax dollars on the wine that you ship into their states. Here are some interesting facts.

• To obtain permits in all available states it will cost $3135.00
• NVL’s permits reporting service costs $250.00 a month
• To pick, pack and ship your wine through NVL will cost around $12 a case (around 2.5% of retail for a case of $45 wine)
• By automating the reporting process as well as the pick pack and ship process, NVL claims they can lower costs for direct shipping by 20-25% over doing it yourself.
• With their service you can legally ship to 45 states
• Using Sales Tax, Shipping, and Compliance databases, they claim that their order success rate is at 99.997% since 2001

Inertia Beverage Group is a partner with NVL and they help to create a seamless transition between customer orders placed on your website and the NVL fulfillment house. They also can help you manage orders placed from your tasting room which will allow you to leverage the monthly fee you are already paying NVL for compliance reporting. Finally, Inertia provides another new disintermediation service called Wine Trade that allows restaurateurs to order wine directly from you, cutting out the distributor middle man yet again.

While I don’t see Wine Trade as a way to improve margins, it will be a fantastic way to pass along the savings of subverting the distributor to consumers at fine dining establishments. By passing along these savings, your bottle price will be closer to the sweet spot of $50-60 and you should get more turnover and exposure on wine lists.

Yesterday Inertia released an online sales report aggregating 250 wine brands that they service. The data show tremendous growth in online wine shopping as well these other interesting findings:

• People are buying roughly equal amounts of red and white wine online
• Between 2005 and 2006 Pinot Noir went from 2% of online sales to 27%
• Chardonnay currently accounts for 80% of white wine sales online
• The online sweet spot is lower than in fine dining establishments, but not by much. 40% of sales are in the $30-$40 range, and 13% are in the $40-$50 range (up from 7% in 2005). Meanwhile the $50-$75 range has remained constant at around 10% of sales.
• People are buying more bottles per order online. 60% buy one or two bottles per order, but the number of people buying 6 bottles per order has nearly doubled from 7% to 13%.

With all this promising data and a new network of fulfillment partners like Inertia and NVL, the future for direct looks extremely bright. It would, however, be foolish to ignore the benefits of distribution done intelligently.

Tomorrow I’ll realte details from two talks given yesterday by Richard Rossi, Vice President of KJ subsidiary Regal Wine Co., on Regional Distributors, and Katie Brown, owner of Terra Firma Wine Co, on wine brokers.

His was an interesting talk because of all the presenters so far, his advice on brand positioning and tactics were greeted with the most outright skepticism from the class (and I was one of the skeptics). Hanzell, currently run by President Jean Arnold Sessions (nee Arnold), holds to a few core ideas that Arnold Sessions seems to have forged earlier in her career at Jordan, Chalk Hill and Williams Selyem. To successfully position an ultra premium brand you need to consider:

• Image
• Value
• Targeting the Customer
• Partnership with Distributor
• Communication
• Spend Money
• Press

Within the broad categories given above there was some very interesting information and advice given. For choosing the right distributor for instance, Armen suggested trying to be the biggest fish in a smaller pond by going with smaller high end distributors (if there are any left in your market) where you can be the only wine from your appellation, or the only wine made in a certain style in their portfolio. Other advice included sampling salespeople and wait staff often since luxury brands don’t normally do so (you’ll stand out), to partner with a good distributor that will split the costs with you on sampling at sales calls, and to always send personal handwritten notes to buyers after a call.

Where Armen started to lose the class, and quite frankly me, was when he started discussing the “Spend Money” portion of the brand positioning strategy. He passed around business cards and remarked that they were printed at a cost of $1 per card and that such excess was required in the high end market. He handed out allocation invitations that cost $17 per unit to produce and were sent to mailing list members to promote a limited 100 case old vine Pinot noir offered earlier this year. He talked of flying to Kapalua to attend $450 a plate dinner to be able to spend the evening schmoozing with industry insiders and trendy sommeliers. And while all the suggestions and materials were glorious and certainly appealing, when you are a 4000 case winery like they are it began to be extremely difficult to see how such extravagant expenses could be paid for, even at $87 a bottle.

And there’s the rub. The unvarnished truth is that Hanzell, one of the oldest wineries in Sonoma County – that in fact just celebrated its 52nd birthday – has never once in its history turned a profit.

Never. In 52 years.

This is not business as we know it, it’s aristocratic largess. Armen’s admonitions to “spend money” and “don’t be cheap!!” remind me of something a friend of mine’s mother once told him about finances and running a business. When he related it to me it was with a roll of the eyes and a knowing look. She said, “It was fine for your father to haggle over prices while he was making his fortune, but not for you. You are second generation money. To haggle over prices is inelegant.”

While it is interesting to hear stories about how “they” live and to poke fun at the thinking that is bred by proximity to great sums of money (and Hanzell is indeed owned by a very wealthy family), my main problem with advice like “spend money” and “don’t be cheap” is that unless you are truly, unquestionably, “more money than God” rich, such branding is insultingly inauthentic. Even for Hanzell, since they’ve made no profit, ever, such extravagance rings a little false. If your trappings of success aren’t actually doing their part to breed actual bottom line success, what damn good are they?

In the battle between elegance and authenticity for wine mindshare – retail space in the hedonistic corners of the consumer’s psyche – I’m willing to bet that authenticity wins every time.

A look at our bottom line in a few years will tell the tale.

Tomorrow: Channels of Distribution and a talk on direct shipping with Katie Hoertkorn, President of New Vine Logistics.

Tom’s focus is understandably on the luxury end of the market, with Joseph Phelps Insignia being chosen as wine of the year by Wine Spectator last year, but his suggestions can be applied to other price points. Tom was incredibly open with information and advice, and hearing his take on branding that works in the long run was extremely interesting.

Below is his list of marketing tactics, from least to most sustainable (and though he didn’t say so, I’ll go ahead and add the caveat that the list isn’t exhaustive – Also, the comments after each are my own).

• Bottle size – easily copied
• Varietal designation – everyone now does it
• Star winemaker – someone else can hire her, she could leave and start her own label, or she might be so expensive you never actually make any money. Moreover, using a star winemaker as a selling point is a good tactic but a very poor strategy according to Tom. You need to say something more compelling about your wine than simply “Helen Turley made this”.
• Image appellation (terroir). This is sustainable, but is something over which you have little control after you’ve purchased your land or contracted for your grapes. Still, having Napa or Russian River Valley on your label will add dollars to the price your wine will fetch in the marketplace.
• An Estate Designation. This will be “critical in the future” according to Tom. It assures the discriminating consumer that you had a hand in every aspect of the winemaking and grape growing, and that this should lead to higher quality. But, Tom argues, it is not enough. Others can call their wine Estate Bottled and many do. What you really need is…
• A proprietary Name. Reserve has become meaningless through overuse in the marketplace. Having a unique term is the best way around this problem. Insignia is one of the best examples. No one else can use it, it conveys the same quality information as “Reserve” once did, and it makes the product more memorable. Naming bottlings after vineyard blocks or after family members is a variation on this theme.

Some other interesting tidbits about Joseph Phelps are

• That they sell around 35% of their wine direct
• Sales of Insignia makes up around 80% of their revenue
• Their average consumer is over 35 and makes much more than 100K a year
• In any given year Insignia is blended with anywhere from 100% Cabernet Sauvignon to nearly 100% Merlot (a quote: “Consumers will drink Merlot, as long as they don’t know it’s Merlot”)
• Production of Insignia varies from 17,000 to 25,000 cases depending on the year.

Tomorrow: Brand Management with talks by Leslie Litwak, Senior VP of Icon Estates, among others.

One of the benefits of going to the OIV has been meeting and getting to know a bunch of very cool and interesting folks. One of the coolest is Morgan Peterson, a Masters of Wine candidate. His knowledge of wines from all over the world is phenomenal and I’ve enjoyed sitting at the back of the room talking with him about wines, winemakers and winemaking almost as much as the presentations. He has also done quite a bit of traveling when he fills in for his dad at sales calls and winemaker dinners (his dad is Joel Peterson, winemaker and co-founder of Ravenswood), so he has some interesting insight into the wine market in Texas for example.

Another classmate who I’ve only talked to briefly, but is also helping spearhead sales for a new winery is Andrew Firestone. Firestone is building a new production facility in Paso Robles and Andrew says they will producing about 6000 cases there with a focus on some special high end bottlings. Paso is a pretty tight knit community of wineries (Mary at Dover Canyon is one), grape prices are relatively low, and the area has been getting some good press from people like Robert Parker lately, so it sounds like a good plan to me. Plus the tasting room is going to be located right next to a water slide park, which is nice.

Next week will focus on Brand Establishment and Brand Management at OIV so subscribe to my RSS feed so you won’t miss a post.

• Why the US is a confusing system
• Understanding and working through the 3 tier system
• Goals and Alternative Strategies such as using Multiple Importers/Distributors, using brokers, and direct sales.

I’ll spare you all the 3 tier system talk, and why it is so confusing. Instead here are six slides that are a good reality check for prospective wine producers (like me). They are meant to help you take stock of your situation and to give you a realistic view of the market and how you’ll have to position yourself within it. While our strategy is focused on direct and the slides talk mainly about using wholesalers, we will be dealing with distributors as well – at least at the start. Whatever your strategy, the advice given below is valuable.

Take away: The world doesn’t need another brand. How are you going to make yours remarkable?

Tonight I’m just going to focus on the first presenter of the day, Matt Franklin, a partner at O’Dowd, Franklin, and Rabanal. A lot of traffic on pinotblogger comes from folks wanting to figure out how to start a winery. The very first thing I did was a back of the envelope calculation estimating how much we stood to make if things worked out (you can adjust your forecast downward later). Today Matt walked the class through how to do just that.

The basic process is made up of five steps.

1. Estimate your case production
2. Estimate your F.O.B. price/case
3. Determine your gross margin requirements
4. Estimate your COWS (Cost of Wine Sold)/case
5. Determine from there your cost structure

I’ll use the nice round numbers from Matt’s hypothetical Paso Robles winery example. Keep in mind though that if you are attempting to become a “boutique” high end winery you will want to start by estimating your Cost of Wine first, because that is where quality is determined. And as a boutique winery, quality is what you must have to survive.

1. Case production estimate. Take the # of acres you are farming/contracted to buy and multiply it by the number of tons per acre. 100 acres x 4 tons per acre = 400 tons. Then multiply the number of tons by 60 to get a rough estimate of the cases per ton. 400 x 60 = 24,000 cases. You can also multiply the tonnage by ~165 gallons per ton to get a gallon figure and work back from there since it allows for a little better (and higher) estimates.

2. Pick a price point (after taking a hard look at the market) and figure out your case price. If you will be selling through a distributor, lop 50% right off the top. That is your F.O.B. (Free On Board, the amount you will receive from your distributor) price. Ex: $30 per bottle x 12 bottles = $360 per case retail x 50% = $180 per case FOB. Distribution is quite expensive, as you can see.

3. Now figure out your margin requirements. Typically a new brand can expect to spend from 20% up to 45% of its COWS in marketing expenses the first few years just building the brand. So be generous here, or come up with a novel low cost marketing/PR campaign to create buzz and interest in your brand (my preference). I’ll stick with Matt’s numbers for the example.

Marketing: 25%

Next is administrative costs. We’ll just go with Matt’s estimate of 10%, but feel free to fudge around, especially if you are going to be small.

Admin 10%

Profit Margin is last, and you’ll want to make it a healthy one to account for all the risk inherent in the enterprise. Matt says 15%, so we’ll go with that.

Profit Margin: 15%

4. Gross margin per case 25% + 10% + 15% = 50% x 180 a case = $90.00. Subtract $90 from $180 to get how much revenue you will have left to actually pay for the cost of producing your wine ($90/case).

5. Cost of Wine Sold

• Grapes are the biggest cost. Quick math Ex: 2400 per ton / 60 cases per ton = $40 a case. Prices vary wildly based on appellation. Napa Hillside Cab goes for 10K a ton in certain areas, and central valley grapes can fetch as low as 150 a ton.
• Barrels are next. Depending on how much new and used oak you will be using, as well has how much French and American, your costs will vary wildly as well. Here Matt uses an a figure of $11.00 per case for this fictional Paso Robles Syrah producer.
• Bottling. Call up a mobile bottler and ask for their rates based on your case production to get an exact figure. EDIT: This also includes labeling, corks and foils. Here Matt uses $20 per case.
• Labor and overhead. Another extremely variable cost depending on the size of your operation etc. We’ll use $15 per case.

Add it all together and you get $40 + $11 + $20 + $15 = $86/case in costs.

$90 + $86 = $176/case, which is under $180, so we are ahead of the game. You can stick the remainder into profits or invest in the brand and buy better grapes.

So the plan passes the smell test, and that is really what you are looking for. Now all you have to do is actually build the winery, carry the costs of construction and inventory for 4 years without cash flow, produce the wine and then sell it all to make your dream come true!

The American Wine Consumer

Christian Miller, Owner, Full Glass Research

Synopsis: Wine consumers can be broken out into Occasional, Core, Bag-in-box and Aficionado categories based on price and frequency of consumption. Core buyers are where the action is, they are typically either Boomers or Millennials, and have high education and high income. Culture is also a big factor in what creates a core wine drinker. Influences include the gourmet revolution (higher priced, more intensely flavored and diverse foods) the luxury revolution, and “the key experience” (a memorable visit to the wine country or an extraordinary dinner of which wine was big part).

Take away: The key to growth is to grow the Core consumer segment.

Interesting tidbit (from some survey data on tasting room preferences Christian shared): 99% of people surveyed think it is very or somewhat important to be able to taste older or small production wines unavailable through retailers or restaurants. All those surveyed want to also be able to taste all new releases. 87% think it is important to be able to learn more about the wines and how the wines were produced, and 64% think it is important to be able to purchase large format bottles. However, only 25% think it is important to be able to buy wine related merchandise or winery branded clothing. In tasting rooms it’s all about the wine.

Wine Sales Trends in the US

Barbara Insel, Managing Director, MKF Research

Synopsis: There is consolidation in both wineries and in distribution as well as changing consumer behavior preferences. Consumers are moving up market in all consumption and they are demanding both premium quality and value. The strongest growth continues in the high end. Importantly (and this will sound familiar to Cluetrain kool aid drinkers – and I’m one of ‘em) consumers are seeking authenticity and experiences. They distrust advertising and conventional marketing noise. The implications for winery strategy are:

• Know your consumer’s lifestyle and preferences (mailing list segmentation)
• Understand the importance of word of mouth
• Have a coherent, distinctive and authentic (her emphasis) message.

Take away: Know your customer and build a real relationship with them.

Interesting tidbit: The growth of demand for high end wines has far outpaced the growth of the appropriate grape production. See graph, and feel the pinot love.

Expanding the Market

John Gillespie, Executive Director, The Wine Market Council

Synopsis: John’s talk was the highlight of the day. The US wine market is a large one, encompassing over 3700 wineries with 260 million cases of wine produced per year at a retail value of 25 billion dollars. Table wine consumption has increased every year since 1994, the longest sustained period of growth yet. John goes on to describe the Core/Marginal wine drinker segments already covered above, but John added a bunch of interesting data on their attitudes. Since the industry’s main goal should be to turn Marginals into Cores, the results are important. Here are some of his findings.

Both Core and Marginal wine drinkers think wine makes a good gift (something Paul at Inertia has been way out in front of – check out his comments here on the subject), that moderate use is good for you and that you can buy good wine without spending a lot. Where they differ is:

• Over the need to have a bottle on hand (89 Core to 67 Marginal).
• On whether an open bottle stays fresh for 2-3 days (62-50)
• Marginals don’t like the idea of opening a whole bottle of wine all to themselves, Cores don;t have as much of a problem (40% of cores don’t like to open vs. 59% of marginals).
• Marginals are more likely than Cores to think that wine is too complicated (15-26), but both groups are fairly comfortable buying wine.

Take away: See below

Interesting tidbit: John made the point that Marginals and Cores each buy wines at all price points (including the very high end), it is just that Marginals buy wine with much less frequency (less than once a week vs more than once a week). If the wine industry or some cultural event can tip those who are currently Marginals just one category over into twice a week drinkers, the industry would grow enormously.

One of the obvious areas to attack to bring about that change is the “bottle staying fresh” issue since it directly influences whether someone will open a bottle of wine when they are alone. John related that experiments have shown conclusively that consumers prefer wine that has been opened for three days better than two days, and wine open two days better than one day. It would be a good idea to get the message out there that wine can not only keep for more than one night, but that its taste will probably even improve.

Anyone want to do a blog post on that?