This is final blog in this series: Three Ways to Produce Positive ROI in Half the Time or Less.
We previously broke down how a traditional winery is actually three separate businesses – growing grapes, making wine and retailing. Using this traditional model, you invest in all three businesses in a series and that it typically takes 6 or more years to produce positive cash flow, and 10 or more years to make a positive return on your investment.
In the second blog, Choose One Business and Produce Positive ROI Faster: Grape Growing, we chose to grow grapes only and reached a positive ROI by year 6. We also learned that one of the common mistakes to reaching a positive ROI in agriculture is not having enough production acreage to cover fixed costs. Strategic planning will make a big difference in your business.
In the third blog, Create Positive Cash Flow Faster: Alternative Winery Model, we talked about sourcing wine until you reach full production in the vineyard. Start out and build all three businesses at once – vineyard, production and retailing. It’s tough, but with the right team, you can reach cash flow faster.
Today, we’ll discuss the merits of using a custom crush facility instead of building your own winery. What is custom crush and how could it work for you? You may be interested in creating a brand and selling wine, but are not interested or able to build your own winery just yet. For this example, we will assume Years 1-3 are the same as the Traditional Model.
Buy your land, vines, tractor, trellis, irrigation, fertilizers, etc and plant your vineyard. A good rule of thumb for vineyard establishment is a cost of $10,000 – 15,000 per acre, not including the cost of the land. For our discussion, let’s say a 25 acre vineyard and a loan of $300,000.
Vineyard is growing. It costs about $3,000 per acre each year to maintain and grow the non-producing vines. You need to pay yourself minimum living expenses at $40k, so if you are doing the work in the vineyard, that is part of the $3,000 per acre per year mentioned above.
You have invested so far:
$300,000 for land & vineyard
$225,000 for 36 months at $3k/acre maintenance
That brings us to Year 4:
You harvest 1/3 of your full potential crop.
This is sent off to be crushed & bottled at a custom crush facility and will produce aproimately 1750 cases of wine.
Note: It will cost you more to bottle it this way than on your own, but you only have to pay for the wine you have made.
There is no additional investment this year.
Costs for bottling:
$35/case for custom crush & bottling. We estimated $25/case for bottling our own wines previously, but now you are using someone else’s equipment and paying them to make the wine for you. But remember, you also have no major overhead – no employees, no buildings, no big equipment.
Total cost for crush, winemaking and bottling: $35 * 1750 cases = $61,250
How are you going to sell this wine without a tasting room or retail outlet? It will have to be sold through channels and distribution. If you are going through a 3-tier distribution system, you will need to assume 50% of the retail cost of your wine will go to the distributor and retailer. Also, most distributors will not even take on your wine unless it’s at or below $10/bottle. That is a key price point for most wine buyers purchasing at the grocery store.
Spending more per bottle is the exception. Constellation Brands did some heavy research into wine buyers’ habits, personalities, and thinking processes. To simplify some of their findings, they came up with 4 types of wine buyers, two of which make up the majority of sales in a retail environment.
The #1 customer is what they call the Satisfied Sipper. He/She buys two bottles per week of what they like, and isn’t looking for a new wine.
The #2 customer is what they call the Confused Masses. They don’t know much about wine and prefer to purchase safe since they don’t buy often. Typically they are buying for dinner guests or entertainment. They want to be sure the guest is satisfied.
What does this mean to your branding and distribution? Assume your customer needs to know they will like it or will feel like it’s a safe choice. They will feel more at ease if they recognize the grape, the location and seeing a friendly label. Think YellowTail, Cupcake, Red Truck. These customers are not likely to buy an expensive French wine or something called Fat Bastard!
The point here for you is:
1. You have to be good at marketing. Get out to the stores and do tastings. Pour your wine for people. Tell them your story. Getting to know you and your wine first hand can impact your wine sales greatly.
2. Have a plan that a distributor can support and make sure he understand how people will want to buy your wine. You’ll have to “sell” to your distributor first to even get your wine on the shelf.
Another option for selling your wine is to “self distribute”. Visit local restaurants where you have a connection and show them why they should be selling your wine. I’ve talked about this several times before -you’ve got to have a story you can tell that will help the restaurants promote your wine. Having them excited and interested in your wine is important. You can sell to restaurants at the wholesale price, rather than distributor price and capture a higher margin. It adds up!
Today we will assume the use of normal distribution. In this way,your bottle of wine retails at $10. The distributor pays you half. You get $5/bottle.
Less $60/case goes to the distributor
Less $35/case production case
Gross Margin: $25/case ($2 margin per bottle)
Annual revenue/expense (same as traditional):
$50,000 capital investment
$100,000 vineyard maintenance and harvest expenses
Total expenses = $150,000
You sell the 1750 cases of you made in Year 4 at $60/case = $105,000 revenue, or $43,750 Gross Profit
At this point, it is not enough to cover the cost of your grapes and running your vineyard.
You made $43,750 by custom crush (25 tons) which is $1750/ton
Compared to just selling your grapes at $1250/ton
In trade, you have to do the extra work of marketing and selling. There is the cost of time and effort in exchange.
But the idea is that you will increase your margins down the road.
In Year 5 you also harvest 2/3 of a full harvest from our vineyard. This is sent off to the custom crush facility and reaps you 9000 gallons of wine (about 3500 cases).
Vineyard costs are the same as in the traditional model.
Vineyard maintenance/harvest expenses $100,000
Wine Sales from Year 4 fruit $105,000
Custom Crush cost for year 4 fruit $61,250
Total cash Investment to date $741,250
This year you have some restaurant deals and selling 10% of your wine to them at 70% margin.
You sell the remaining 90% of Year 5′s 3500 cases through your distributor at 50% of retail.
Production costs are still at $35/case
350 cases @ $7.50/bottle = $31,500
3150 cases @ $5/bottle = $189,000
Less production costs of $35/case = $122,500
Net Revenue: $98,000
Vineyard maintenance/harvest = $100,000
Total cash Investment to date = $743,250
Also in Year 6, you produce a full crop and this year you make some premium wines. Now that you are making sales, you can convince the distributors to let you sell some $15/$20 bottles.
At full production, you have made 5500 cases of wine
20% of that is premium wine – same brand – now at $17/bottle.
Costs to produce increases. It’s barrel aged. You’re using better bottles, etc. Production costs increase to $45/case for these premium wines. Selling through the distributor you make $8.50/bottle revenue.
You sell 4000 cases this year
70% (2800 cases) are the $10/bottle ($2/bottle margin) = $60/cs * 2800 cs = $168,000
10% (400 cases) are direct restaurant sales at $7.50/bottle ($2.50/bottle margin) = $90/cs * 400 cs = $36,000
Less production costs of $35/case = $112,000
20% (800 cases) are premium wine at ($3.50/bottle margin) = $102/cs * 800 cs = $81,600
Less production costs of $60/case = $48,000
Net Revenue: $125,100
Vineyard Maintenance/harvest = $100,000
Now you are promoting heavily. Doing pourings, going to festivals or farmers markets. You will have to pay someone. You can’t do it all. Estimate $50k/year.
As you can see you have invested only 1/3 of the traditional method investment. You are trading off the extra more lucrative margin by not having to run 3 businesses. You have a vineyard and brand, but you don’t have to run a winery, tasting room, have employees, etc.
Your focus is on the vineyard, growing great grapes. After that your focus is on marketing and sales. That’s it!
Who has done this and done it well? Remember when Bogle was about $7/bottle? This was 7-8 years ago. They took their time and built their brand. They ran promotions for their distributors and retailers, giving them an incentive to promote and sell Bogle. Now that bottle of wine is more than $12. They increased their margins significantly by building their brand. That’s the GAME HERE! INCREASE MARGINS so we bring in more money than we could have sold the fruit for. And having our winery name on the label only helps us later if we want to sell off some fruit. People will know the name. You are building the vineyard brand as well.
Let’s talk logistics.
On the west coast there are several complete custom crush facilities that do it all from crush & pressing, fermenting, barrel aging, bottling and more. One of these is Central Coast Wine Services who does not produce any of their own branded wines – all are for clients.
However, in the Other 46, you are not likely to find a facility dedicated to custom crush because most areas are too small to support this, so you will need to make a deal with a local winery that has extra capacity. From there, you can work with them to have be your custom crush facility. Most often, you will need to be very hands on to insure you are getting the wine that you want from them.
This is where Premier Wine Blends can assist. We can find that winery that has capacity and is willing to handle custom crush operations. We can also assist you in selling your bulk wine or sourcing other wine for blending. We will consult on winemaking procedures and assist the custom crush facility in making the wine you want. This is what we do – help grape growers, winemakers and wineries get what they need and sell what they want.
Custom solutions for your winery.
Finely crafted wine blends and consulting
(because you’re not a Napa winery!)
Premier Wine Blends
Tags: Advice for winery owner, bill skrapits, blenders blog, branding wine, branding your winery, bulk wine, crush, premier wine blends, premium bulk wine, starting a winery, wine distribution, wine making, winery owner