Discussed previously in the first blog of this series, Three Ways to Produce Positive ROI in Half the Time or Less, we broke down that 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 series and that it takes 10+ 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.
Today, we’re going to see how you can have your winery and cash flow too by sourcing wine and grapes until you reach full production. You can look back at the last two blogs for comparisons year to year. As stated before, these numbers are approximations, and may not match your scenario, I encourage you to go through an exercise like this using approximations that are based on your situation.

I realize this is a long analysis. At the end I summarize it for those who just want to jump to the chase. Here we go:

Year 1: Buy your land*, vines, tractor, trellis, irrigation, fertilizers, etc and plant your vineyard. It’s the same as we have discussed previously – 25 acre vineyard and a loan of $300,000. ($10k-$15k/acre to establish the vineyard).

In this model you also invest $400,000 in establishing a tasting room and a small production facility. You will use the same estimated payroll expense for the winery as the traditional model at $200,000 (production & tasting room). You source wine and buy supplies for 2400 gallons of wine (1000 cases) at $50,000. You plan and do sell 1000 cases in year 1 (12,000 bottles @ $20/bottle) for $240,000 in revenue.

From a cost perspective, it’s a little more expensive with sourced wine because you don’t have vertical integration, plus, you need to blend and bottle. You’ll still have good margins, especially if you are a boutique winery. The trade off is delaying investment in equipment and shortening the time to sales from 1 or 2 years to immediately.

Now let’s look forward to Year 2. You buy 25 tons of grapes from an established vineyard in Year 1. It’s a mix of white and red based on your winery’s profile. At $1250/ton, that’s $31,250 in grapes, which will make 1500 cases you can sell in Year 2-3 (assuming some reds need to age at least 16 – 24 months).

The goal here is to ramp up sales and production in Year 1, rather than waiting until Years 4-5 with the traditional method.

Expenses and Revenue:
$250,000 expenses (payroll and sourced wine)
$31,250 for grapes
$240,000 revenue
Net revenue = -$41,250

Investment:
$700,000 investments (vineyard and tasting room)

Year 2: You plan to sell 2500 cases in Year 2
Of that, 1750 cases come from sourced wine and 750 cases come from the grapes we bought and crushed in Year 1 for a total of 2500 cases.

We will need to source 4200 gallons of wine to make 1750 cases, which you estimate costs $50/case for a total of $87,500 for the sourced wine.

To finish bottling and labeling the wine, assume it will cost $25/case. You have 750 cases from the fruit we crushed last year x $25/case = $18,750

Plus, you’ll want to crush more grapes for Years 3-4. You sold only 750 cases of the grapes you crushed, leaving 750 more cases for sale in Year 3. You project 4000 cases will sell in Year 3, so you will buy enough grapes to produce 3000 cases (50 tons @$1250) = $62,500.

Expenses for Year 2:
$87,500 in sourced wine
$18,750 for bottling the 750 cases from the crushed fruit
$200,000 payroll
$62,500 for 3000 cases from sourced grapes
$75,000 vineyard maintenance ($3k/acre)
Total: $443,750 expenses for Year 2
PLUS
$500,000 in Revenue: 2500 cases @ $20/bottle

The winery is now producing a positive net revenue of $56,250, which you reinvest.

You will also invest $600,000 to build out the winery and buy some additional equipment.

Year 3: You project that you will sell 4000 cases of wine this year. You still don’t have any fruit from your vineyard, but you do have 750 cases from Year 1 crush and 1500 cases from what you crushed in Year 2 (half the total crushed), for a total of 2250 cases. That means, you need to source 1750 cases of wine to meet your projections of 4000 cases.

Sourced wine at $87,500, plus finishing the wine from sourced grapes at $57,500 is a total of $145,000.

Looking ahead, you need to have enough wine in Year 4 for 5500 cases (which is full production). You source grapes for 4500 cases or 60 tons of fruit @ $1250/ton which is $90,000.

More investments this year too. Remember, in the traditional model you would invest $2,000,000 to build the winery this year. However, in this model, you have already invested $1,000,000 in your winery. This year you spend the other $1,000,000 to expand storage, buy larger tanks, more equipment, etc. because now you are at full production.

Our expenses this year:
$57,500 in operation & packaging costs for wine from previous years grapes
$90,000 for crushed grapes
$87,500 in sourced wine
$200,000 payroll
$75,000 for vineyard maintenance (25 acres @ $3000/acre)
Total of $510,000 in expenses

Investments:
$1,000,000 for building out winery

Year 3 Revenue: 4000 cases @ $20/bottle = $960,000, net revenue (not including investment) of $450,000 when you take out the expenses. The revenue will be used as part of the investment made this year.

Year 4: Project that you sell 5500 cases
You have 1500 cases left from Year 2 (1/2 of the 3000) and 2250 cases from Year 3 (half of the 4500). That’s 3750 cases from previous years grapes that need to be bottled and sold. You use 1750 cases of sourced wine for a total of 5500 cases.

This is also your first harvest from the vineyard. It is only producing at ⅓ capacity of a full harvest at this point, so anticipate a crop of 30 tons, which is enough for 1875 cases.

You need 5500 cases to fulfill on your projected sales, so now you have a choice. Either buy grapes to make up the difference or buy sourced wine and buy fewer grapes. It’s cheaper to buy grapes than sourced wine. And you have the facility to make wine yourself. So buy grapes.

You need enough grapes to make 3625 cases to add to the 1875 cases. That will be $72,500 for grapes. These grapes will be used to make wine to sell in years 5 and 6.

In addition, you have some capital investment and additional costs in the vineyard.

$50,000 capital investment in equipment for harvesting and fruit related needs (bird netting, picking bins, etc.)
$100,000 in vineyard expenses ($4000/acre includes maintenance and harvest costs)

Revenue Year 4: 5500 cases = $1,000,000 (@ $15/bottle). Now that you are at full capacity and volume is greater, you can anticipate that the average sales price per bottle have dropped some.

Expenses:
$72,500 sourced grapes
$93,750 finishing an bottling of 3750 cases from sourced grapes
$87,500 in sourced wine
$200,000 payroll
$100,000 vineyard expenses

Revenue:
$1,000,000 wine sales

Investment of $50,000 in vineyard

Net revenue = about $445k left over to pay down investments.

Year 5: Projecting sales of 5500 cases
You have 2000 cases of wine from Year 3 and 2750 cases from Year 4 (1/2 of the 5500 cases made from sourced wine/grapes) for a total of 4750 in production from previous years grapes. You only need to source 750 cases this year

Looking forward to Year 6:
Vineyard will produce ⅔ capacity of full production, which is 3750 cases, so you only have to buy enough grapes for 1750 cases, which is $35,000.

Year 5 expenses:
$120,000 for bottling and packaging 4750 cases
$37,500 for sourced wine
$200,000 payroll
$100,000 for the vineyard
Revenue = $1,000,000 (same as year 4)

Net Revenue: $542,500

No further investment

Year 6: Finally – this year, all of our wine is from fruit we crushed.

$137,500 finishing and bottling 5500 cases
$200,000 payroll
$100,000 vineyard maintenance
$437,500 Total Expenses

No further investment

Revenue = $1,000,000
Net Revenue: $562,500

At this point, we have recaptured all but $300,000 of the cash invested in both ventures combined. Remember in the traditional model, at the end of Year 6 there is still $3,500,000 in investment that has not yet been recaptured.

Years 7-10: Relax and enjoy the winery you built rather than busting your butt just to survive! You got here by accelerating the winery. You do this by putting into place all 3 of the businesses: vineyard, winery production and retail sales, AND you do it all simultaneously.

Summary:

By using this model you can be profitable by the second year, and pay back your investment by Year 7. In a traditional model we end up investing nearly $3m total. In this model, the maximum cash investment is $1,800,000, which peaks in Year 3, and begins to be paid back in Year 4 because we are reinvesting earnings and have cash flow in Year 1 vs Year 5. Accelerating cash flow and reinvesting earnings makes the business more profitable and less stressful. The trade off is that you start out on Day 1 building three businesses rather than just one – which means you have to have a TEAM. This cannot be an individual effort.

Obviously, this is a very simplistic cocktail napkin version of this model. We know fruit is not perfect, marketing expenses are often greater than anticipated. There are fruit surpluses/shortages, payroll increases, etc. Growing from 1000-5500 cases in 5 years is very aggressive.

Your winery needs to be in the right location. You need to hire the right people for marketing. And definitely not least, your WINE HAS TO BE GOOD!

Actually, this is one of the positives about buying sourced wine – you know what you are buying and you know it’s good if you know your source. By buying sourced wine at the beginning, you ease into making all of your own wine. Doing it this way, you manage your risks. You can plan for the risk and turn it to your advantage.

Building your winery and starting all three parts of it simultaneously requires much more than just you. You need to find good people to operate each business for you. They should be highly skilled in their specific area. Often we think we can do everything, but really NO ONE is good at all three!

KEY: HIRE GOOD PEOPLE IN EACH AREA. WORK WITH EXPERTS. DON’T DO IT ALL YOURSELF.

The point is that you can be a highly profitable cash flow machine and achieve it much faster than the traditional model has shown through the years. (Note: This model uses the same #’s for costs as in the traditional method. We are not leaving anything out.)

So why don’t people do this more often? People love tradition, especially in the wine business. Breaking rules and creating new models are not easily accepted. And most often, people own a winery for the romance, not for the business aspect. But, it can be romantic and profitable! Just plan for it.

We love this stuff and have been working with wineries for years on how to build their winery up to capacity, blending masterful wines, and doing it all so that you aren’t loaded down in debt or so stressed and tired to enjoy the fun of being a winery owner.  This is what we do!  We would love to talk with you about whatever challenges you’re facing or hear how you built your winery up.

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