An honest conversation about making money in wine

An Honest Conversation About Making Money in Wine

Areni Global’s latest roundtable tackled the important topic of financial sustainability in the wine industry. It attracted fine wine producers from top regions in France, the USA and South Africa, who took the opportunity to have a frank discussion.

To look around the Zoom faces was to wonder why some of the participants had agreed to speak openly about money. All of them represented some of the most famous names in wine—meaning it’s hard to imagine that profitability was an issue for them.

But, it turned out, it truly is, and the full and frank discussion of money turned into one of the most intensive and engaged discussions that Areni Global has been privileged to host in recent months.

The roundtable was conducted under the Chatham House rule, which means everything that was said is unattributed. The only person whose quotes are attributed was the guest of honour, Mike Ratcliffe. He’s not just the co-founder and managing partner of the US/South African venture Vilafonté, but also the founder of Wine Business Advisors, an international advisory service that has helped more than 50 wine clients with everything from tourism and hospitality to sales and mergers and acquisitions.

First and most important

Ratcliffe began by saying that “lack of financial sustainability usually runs parallel with lack of strategy and, more often than not, runs parallel with a lack of focus.”

People who know what they want to achieve have a greater likelihood of achieving it, he said. “You all know the wine industry. Everybody tries to do everything. Everybody wants to be in the tourism business.” And everybody wants to make red wine, white wine, sparkling wine and sweet wine. But “there seems to be a common denominator of financial success amongst the people who have identified at least some form of specialty.”

Unfortunately, too many wine businesses take a scattergun approach. “Something I see way too often is where everybody’s just doing everything. There seems to be an unwritten rule that if you have a winery, you have to have a restaurant, and you need to be selling an entire range and three tiers, That works well for big companies,” he went on, “but in general it’s just fragmentation and it takes you in the opposite direction. You lose economies of scale and your sustainability becomes affected.”

“Something I see way too often is where everybody’s just doing everything. There seems to be an unwritten rule that if you have a winery, you have to have a restaurant, and you need to be selling an entire range and three tiers.”

Mike Ratcliffe, Vilafonté

For most businesses, it’s easier to market a few products than many. It’s also easier to sell a known brand. “Brands are powerful. Brands tend to get bigger and have economies of scale,” he said. Instead, said Ratcliffe, he often saw producers adding new wines to their portfolio, without having a strategy to sell that wine.

Some of the Bordelais on the call agreed that they found it easier to produce just one or two wines per winery. “That’s one of our strengths,” said one producer. “Every winery builds its own individual identity, independent from the appellation.”

But one French producer had a different point of view, saying “a small range of products is not a terribly good idea for us because we have a top wine which is very expensive—if we didn’t have other wines that were less expensive, we would have trouble selling the top wine.”

And, of course, diversification of income is a good strategy provided all the parts of the business are properly resourced and managed. “Almost half of our turnover is the restaurant, guest rooms and wine bar,” said the producer. “The New World is far ahead of us in that respect.”

The Old World is ahead in other ways

According to one US producer, “the realities are pretty harsh at the moment. Most wineries in the US are under 5,000 cases—most producers are tiny. That’s a different reality set. Profitability is almost unheard of.”

In the past, many US founders were able to simply write cheques to cover the winery’s needs, because their real income was drawn from some other enterprise; their wine business was more of a passion project. The issue now is the younger people taking over those businesses need the winery to work as a business in its own right. “They’re not thinking about writing cheques to other people to do the work.”

He said that it’s normal in France or Italy for the entire family to be working in the winery. “That’s really rare here on the West coast of America. But the young people are kind of getting it—they’re looking to Europe for those types of models. That’s a really strong trend I’m seeing.”

Desirability is a form of power

Sometimes the goal of a winery owner isn’t to build profitability but reputation. “For us, image is more important than profitability in the short term,” said a French producer. “The question of what money we need to make is secondary—who do we want to be? Which markets do we want to be seen in?”

The producer was clear that money was still an important goal, but in the service of building the prestige and position of the brand. One reason it’s important to build brands is because having a strong and desirable name offers some protection against being undercut on price. Unfortunately, as many ruefully agreed, very few producers are able to dictate the price of their wine.

“For us, image is more important than profitability in the short term. The question of what money we need to make is secondary—who do we want to be? Which markets do we want to be seen in?”

Areni Member

“The wine world is full of very powerful gatekeepers,” said one producer. “There are 90 producers right behind us who would be very willing to sell their wares if we were to have an issue with price.”

In other words, most producers don’t have a say in the price at which their wines will be sold. In this case, the winery needs to know exactly where its wine sits in the marketplace, so they can work out how much it will be sold for and calculate all the costs properly.

Keep on top of the numbers

What is striking about financially sustainable businesses, said Ratcliffe, is that they tend to have a solid understanding of numbers. “Profitability is an outcome of financial sustainability.”

Ratcliffe added that it’s important to keep people inside the company informed of the financial position. “If you have a meeting with your management team, show them everything.” And if one department is overspending, other members of the team should be able to say something about it.

Everyone on the call agreed with Ratcliffe that it’s extremely important to stay on top of the numbers—and to react immediately when people don’t pay their bills.

“Don’t work with people who are not able to pay,” said a producer, who said he insists on being paid upfront when working with new customers. After that, he allows payment terms of up to 60 days. If the customer’s payment is ever late, he stops working with them immediately, though he said he had made special arrangements during Covid.

Ratcliffe agreed that the first signal of business distress is generally delayed payments, and to take unpaid bills seriously.

He added that good customers should always be rewarded. “When somebody does something good for you, always give them a gift. A bottle of wine. There will come a time when you need them,” especially when times are tough. “There have been times when I’ve had to call one of my suppliers and say, ‘can you give me three or four extra days to pay?’ and because there’s a good working relationship, they’re always fine.”

Relationships are everything

“Try and do business with people that you like,” said Ratcliffe. “The other one is try to do business in places that you like.”

As one of the Bordelais said, it’s important to build value throughout the chain, so that distributors and merchants can make a good margin on the wine, which helps build loyalty. “Everyone’s been talking about sharing value up the chain, but there’s an important concept of sharing value down the chain,” said another producer. “Paying the people that work in your winery more than just a living wage.”

“We’re a tiny winery, but we export to 30 countries. It means that during difficult times, we have activity.”

– Areni Member

And while diversification is important, don’t overlook the power of selling more products to fewer people. “If you’ve got 50 customers, the chances are that if you developed 10 of them, they could probably take your entire production,” said one producer.

One French producer had a different view. “We’re a tiny winery, but we export to 30 countries,” he said. “It means that during difficult times, we have activity,” in at least some markets. An increasing challenge for his winery, he said, was being able to produce enough wine because drought and water shortages were having a major impact.

Costs are increasing

Participants agreed that the costs of managing climate change are rising rapidly.

As one producer said, the wine industry is unique in the world of consumer goods, because as an agricultural product, it is subject to the whims of nature. “That requires a certain level of agility and foresight to weather the storm of production variability year after year,” she said. “Profitability does not look like profitability in a lot of industries.” Instead, financial sustainability isn’t just about making a profit, but also about being able to cover costs over an unpredictable agricultural cycle.

Unfortunately, wineries can expect even more costs in future.

‘I think visibility is careening towards the industry like a giant freight liner,” said one of the French producers, referring to upcoming ingredients labelling, as well as ever more demands for transparency around farming methods.

There was a lot more said over the session, from the frustration of dealing with financial institutions that have no understanding of the wine sector, to wry observations about billionaire owners who care more about the winery architecture than the balance sheet. The opportunity to talk about money, finance and profitability among peers was, it seemed, something that participants relished.

Pauline Vicard, CEO of Areni Global, ended the session by saying, “we don’t speak enough about money in the wine world, but there’s a lot to be gained in sharing.” 

After all, as everyone agreed, if a winery doesn’t work financially, it has no future.

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