Behind the Wine

How much money do wineries make?

Our friendly neighborhood banker has just written about exactly how little profit wineries make. Readers recently asked how much money winemakers earn, and I alluded to the fact that independent winemakers don’t make very much money at all.

There’s a lot of bravado in wine country as displayed in the youtube video he made — people aren’t always willing to admit that their sales are down, costs are up, and their large fortune has become a small fortune.

So it’s nice to have some hard numbers from a regional bank with lots of winery clients.

Wineries score 3.9% pretax profit in 2013 <yuck>

Rob McMillan (the aforementioned banker) crunches the numbers and the results are grim. “The data in the set are composed of  thousands of reviewed and audited financial statements going back to 1990.” The short of it is that looking at the past several years, there were times when wineries looked like decent businesses but these days the margins are slim. And the worst part: gross margin bounces around as erratically as a Mexican jumping bean.

Things were okay until 2008

wine report svb silicon valley bank winery margins
from SVB Wine Report

The reason the margins go from healthy to anemic in 2008-09 is pretty easy to spot. The economy tanked and one of the first things to go when Silicon Valley tightens its belt is that expensive little Cult Cab habit.  So wineries raise the price because they can or because their neighbors do and their wine isn’t any better than ours (I know because I used to be one of these fools who based his price on the neighbors’ price).

Then the winery grows a big sales/marketing budget to sell the wine at that elevated price. When the world is full of rich, gullible consumers, that’s fine. But the second people start showing a little austerity, uhoh. Your price drops. And you’ve got a marketing machine built to sell $100 bottles (not $40 bottles).

…of course, I think there’s a better way. A recession-proof way.

Nowadays, I don’t base my prices on what I could get away with. Or what the neighbor charges for his wine.

My prices are based on cost of production and there is virtually no margin for cost of sales. How can that be? My customers fund the winemaking. By using Angel funding, I know that I’ll never need to attend a trade show to meet a distributor. I’ll never have to cold call restaurants, cafes, hotels and bars trying to hawk my wines one case at a time. All my wines are enjoyed by Angels and so I can focus on making great wine and selling it at cost (with a fair margin for Naked operations).

It’s interesting to note that Naked Wines was founded in the UK just after Lehman went bust. They say the best businesses are born in the heart of the worst economic times because they have to be fit to survive.