3rd of 4 part series on the Wine Industry Supply Chain
Passion to Profit: Understanding Wine Production
By Tim Hanni, MW
co-authored & edited by NVWA staff
Anyone who has taken a wine course is taught the basics of how wine is made. Yet many production models remain misunderstood by top wine professionals, largely due to stigmas or stereotypes. For example, did you know that exceptionally high quality wines are being sold as bulk wine? From first-growth Bordeaux to top Napa wines, there is a global marketplace that few outsiders even know exists.
Many innovative brands such as Screaming Eagle and Pahlmayer started at custom crush facilities and worked their way up. Today, they have evolved to their own production facilities and vineyards, with some of their wines selling for thousands of dollars.
This is really good news if you want to launch a label and don’t have several million dollars to spare. But it’s helpful for anyone working in the wine industry to understand the logistics, quality and value decisions that must be made in production. Wine students in higher level certifications who understand these strategies have an added depth of knowledge and critical thinking for writing thorough production essays.
Savvy producers generally follow this model:
- Create a brand FIRST
- Allocate money toward marketing and creating an exceptional product
- Establish demand
- Develop a sales and distribution network
- Take on more risk and expense, such as a full production facility and/or vineyards, as you grow
Below are the six most common production models. Discover the pros and cons of each, as well as some lesser-known ways wineries can mitigate risk or add to their bottom line.
1. Estate Winery
When you think of a winery, this is the one that comes to mind. A stately stone building surrounded by acres of vines terraced on rolling green hills. While estate wineries have cinematic quality, they can be a nightmare if you don’t fully understand what you’re doing.
The “estate bottled” designation means that the wine produced and bottled onsite is made exclusively from grapes on the estate, hence the name. It’s the most prestigious designation, but also the most expensive business model. You not only tie up a lot of capital to purchase the land, you must also buy or lease farming equipment and pay staff to manage the vineyard. That’s all before you invest in the equipment to crush, press, age and bottle the wine.
It can take 5 to 8 years before you have wine you can sell as estate bottled, which is an incredibly long time to tie up capital. And there are quality control issues to navigate. Some estate wineries start with buying grapes until their vineyard matures, only to find the quality of their estate grapes isn’t as high as the ones they were buying. Or, they find that fluctuating yields from their vineyards severely limit their growth opportunities.
Make sure that you understand how to allocate your time, effort, and money. The vision most people have in a business plan is NOT being tied down by contracts, red tape, and bureaucratic compliance paperwork. Operating and managing a combination of vineyards, winery, tasting room, and then the sales and marketing necessary to support a brand can be a tall order!
An estate bottled wine is the most prestigious on the market and can demand a higher price, giving you a potentially higher profit margin. If you thrive in chaos, love multi-tasking and have the access to long-term capital to have your own dream estate, this could be the perfect option for you.
Even though you are growing your own grapes, you still need to understand the wholesale grape market and how to negotiate grape contracts. If you have surplus one year, you can market and sell the excess. If you have unforeseen crop failure or shortage, you can buy from other growers to make sure you hit your production volume numbers (but at the risk of losing your ‘estate bottled’ status.)
2. Full Production Winery
Essentially the only difference between full production and estate wineries is the absence of a vineyard. Full production facilities buy their grapes from reputable sources, then crush and process onsite.
This method is often used by small production wineries, also known as boutique wineries or micro-wineries. However, wine regions in Washington state have embraced it. Enormous vineyards — 2,000 acres or more — focus solely on viticulture, which the state’s 1,000+ wineries buy from. It’s worth noting Washington is the second-largest producer of premium wine in the country, and exports worldwide.
It can take 1 to 4 years before you take any product to market, and you must invest upfront in expensive production equipment. It’s also easy to get burned on the wholesale grape market, so make sure you have your grape sources and contracts in order.
Focusing solely on production allows many producers to put more care and attention into winemaking. They can capitalize on a certain trend faster, and often produce more interesting wines.
Consider offering custom crush services for another revenue stream (if your winery permit allows for greater production than you can sell). For example, if your permit allows you to produce 50,000 gallons, but your business model is to only produce 30,000, you can offer custom crush services to clients for the additional 20,000 cases your permit allows. This can be highly profitable and leverages the investment in the equipment and facilities. You can phase out this service if you are able to grow your sales to the full volume you are permitted to produce.
3. Alternating Proprietorship
Alternating Proprietorships (AP) are becoming a popular alternative to a traditional stand-alone winery. An AP is a single production facility with partners who each have their own production license and share the cost of the equipment and overhead. Each licensee can then use “produced and bottled by” verbiage on their label along with the name of their brand. Many new facilities are opening around the world that are complete facilities that offer partnerships (almost like a condo association) and lease space to “tenant” partners for their purpose-built AP facilities. The tenants must have their own production licenses and permits for their brand.
The benefit of being an AP “partner” is that you are still licensed as a winery and are able to sell direct-to-consumer in almost all states, operate one or more tasting rooms, and can produce or blend other types of alcohol. You can also feature products from all of your partners in your tasting room.
Alternating Proprietorships can become a collaborative and high-energy environment OR a dysfunctional bickering mess. Choose your partners wisely.
You can launch and operate your winery for less money. You have more control over the winemaking process than at a custom crush facility, but not as much capital investment as a full production winery.
Search out APs to visit on your next trip to wine country and talk to the partners about the pros and cons. Look for partners with a collaborative, entrepreneurial spirit to help each other with information, expertise and a willingness to jump in and lend a hand.
A custom crush facility is a bonded winery that can crush grapes and often make the wine for you. As a custom crush contractor, you are legally not the producer. Instead you hold a wholesale license to take possession of, and then resell, the product made by the custom crush facility.
Each custom crush contract can be different. You can work with grapes you’ve contracted for or the facility may provide the grapes. In any account, the winery must make the actual purchase to meet legal requirements.
Another option is to work with wines sourced in the bulk wine market or with already pressed juice, and use the facility to ferment, age and bottle the wine. You can control the entire process by providing specific work orders, or have a consulting winemaker that works with the facility on your behalf. However you structure the arrangement, remember that the licensed winery you contract with is the producer of record.
Hidden or excessive fees can ruin your bottom line. It is imperative to know what fees are included in your production contract — from fermentation and aging to cellaring and storing.
Another winery focuses on production, allowing you to focus on marketing, sales and building your brand.
Know what it really costs to crush and process grapes so you can negotiate better terms. A student in the Business of Wine course was paying a ridiculous sum of money to her custom crush facility. Once she found out the true costs she was able to renegotiate her contract and lowered her costs of goods sold by almost half, literally saving her business.
Bulk Wine Market
The bulk wine market allows a licensed winery to buy finished, unbottled wine from another producer and sell it under their own label. There are incredible growth opportunities in the bulk market. In 2020, the US imported 383 million liters of bulk wine — up 62 percent in the past decade.
Using a high volume/low cost model, Yellow Tail wines from Australia is the most successful brand in the history of wine, and was launched when there was a veritable ocean of product available for pennies on the dollar. At the other end of the quality spectrum is Cameron & Hughes, a luxury wine club that was built and thrives on leveraging product available through the bulk wine market.
The opportunities in the bulk wine market can be amazing but also highly subject to macro (and micro) supply and demand issues. When there is an abundance of product and stagnant or low consumption trends, millions of gallons of product may be available. A few short vintages and/or increase in consumer trends and all of the sudden the market dries up. Building a long-term and financially sustainable business is an art of its own.
Bulk wine satisfies consumer demand for a variety of wine products at an attractive price point. It’s also relatively easy to produce and environmentally sustainable. Bottling at the destination allows suppliers to ship wine in large containers from one country to another, providing a smaller carbon footprint than shipping in bottles. (source: vinepair.com)
If you’re a full-production winery, selling bulk wines and/or shiners (see below) can be low-risk ways to off-load some of your product offerings and generate some quick cash flow.
Shiners are wines that are finished (in the bottle with a closure) but not labeled. All you see is the “shiney” bottle, also referred to as “cleanskins” in Australia. Shiners are sold to people looking for immediate opportunities or building a brand based on fast-to-market products. You can be ready to go to market in as little as 30 days.
Like bulk wine, shiners range in quality from super-inexpensive to very high end. In Champagne, France, buying finished primary wine that is in bottle, or sur latte, is a time-honored tradition.
Many vineyard operators have learned that in vintages where demand and prices are depressed, they can vertically integrate by contracting to have their grapes turned into bulk wine or shiners, potentially getting a better return on investment for their crop.
High-end wineries may reserve a certain amount of production as shiners to label and sell through their normal channels if demand warrants it later. In favorable vintages, some wineries buy grapes on the spot market and produce shiners for short-term, specialty opportunities. There are also wineries that smartly leverage the grape and bulk wine market to exclusively produce shiners (and usually bulk wine) on the open market and/or on a contract basis.
Availability and price can be very spotty, so building a long-term and profitable brand using shiners can be challenging.
Often selling for pennies on the dollar, a savvy wine business person can scope the shiner inventories, market the wines without heavy investment, then sell to resellers who can move large quantities yet do not care about having the same product over the long term. This includes big-box stores, restaurants, retail, online, cruise ships, airlines…even the military! You can even offer a range of labels they can choose from or offer custom labels with the buyer’s choice of art and logo.
If you want to source high-quality shiners, you’ll need to learn where to find them, including learning about the “Whisper Market” — the word-of-mouth network of brokers who sell these wines without advertising them (also covered in the course).
There are challenges and opportunities at every point in the wine industry, with many production routes to consider when thinking of how to create a profitable wine business. The key to success is having a solid business (or career) plan, executing the plan, smartly revising the plan as you go, and being aware of and ready to jump on opportunities that come your way.
Understanding all of the wine production models can help winemakers mitigate risk and pivot in unforeseen circumstances…like, say, a worldwide pandemic?
<<< See the first article in our Passion to Profits series here.