Can your "Micro winery" be profitable?

This article was previously published in the summer issue of Grapes to Wine and has been reproduced with permission.

Recently, I have had the pleasure of sitting down with the owners of some very small estate wineries, with revenue from wine sales of $750,000 or less. Many people would look at a business that small and quickly dismiss it as nothing more than an incorporated job for the owner at best, or an expensive hobby, at worst.

The owners of these “micro-wineries” have a couple of things in common. First, they are not afraid of hard work. In some cases, they may be one of only a couple of individuals involved in the business on a full-time basis. Second, they are very passionate about their land, their business and their wine. And this passion can be a great competitive advantage if it is harnessed effectively.

Is it possible to make a profit operating on a small scale in an industry where the up-front investment is so high? Yes but it takes discipline and a focus on the right things. Here are some things that profitable small wineries do well:

They manage their initial investment and debt load to fit the size of their business

With hundreds of licensed wineries in Canada, there are lots of examples of owners who have spent millions of dollars on property and infrastructure to create pretty destination wineries that produce less than 3,000 cases per year. Usually these owners can afford the investment without having to borrow from a bank. They may enter the wine industry because they are attracted to the anticipated lifestyle and they can afford to lose some money in the short term while waiting for their investment to increase in value in the long term.

But many small winery owners are not so lucky. To make the required initial investment in land, buildings, equipment and inventory they have often had to borrow significant sums from a bank. They then need to create positive cashflow to pay back the bank and create equity in their business. In these situations, it is critical the amount invested be budgeted and phased in to allow a period of time for the business to produce positive cashflow. Spending too much, too early and borrowing to do it, is a death knell for any winery business, especially a small scale one.

They understand their production capacity and their maximum revenue

Owners of profitable small wineries clearly understand the parameters they need to work within. I spoke with one owner of a small, early stage estate winery recently. He commented that his planned maximum production in any given year was 1,500 cases. Based on his retail prices, he estimated that in a best-case scenario, his maximum annual revenue from wines sales would top out at about $500,000, if he could sell all his wine direct to consumer. Without realizing it, he had just set the parameters within which his business had to operate. This is valuable information when you are considering decisions like:

• Where to sell your wine
• Whether to hire a tasting room manager
• How much to spend on advertising
• How much to spend on bottles

Granted, many spending decisions have a period of benefit beyond one year and many other factors may come in to play. But in very simple terms, this owner had a frame of reference for each spending decision. Does this cost help me sell my wine for more money or through a more profitable sales channel? Does this cost help me to produce my wine for less money? Does it help to decrease other costs? Understanding the financial parameters in which you must operate helps you make decisions that are correctly scaled for your small winery business.

They look at the full cost (or benefit) of each decision

There are many different strategies to increase business profitability, but they can be boiled down to this:

1. Get more customers
2. Sell more to each customer
3. Increase the value of each sales transaction (by increasing price or selling through more profitable channels, or both)
4. Operate more efficiently (use less inputs to produce your outputs)

Small winery owners need to look at all these strategies but they also need to realize how they are interrelated. For example, a strategy might be to increase direct to consumer sales by focussing on building wine club membership. Costs for this might include:

• Cost of website and social media platform development and maintenance
• Training tasting room staff
• Delivery costs
• Packaging costs
• Cost to develop and produce related marketing collateral
• Cost of any discounts and incentives offered

The costs to develop materials and an online presence are incurred upfront but should benefit more than one year and require only limited annual maintenance. The anticipated benefit of this strategy is the ability to sell more wine through a sales channel that has a higher profit margin. But there is another potential cost to consider.

If you are already selling all the wine you produce, then there is a cost associated with selling more through your wine club. That wine needs to come from somewhere. We call this an opportunity cost and it comes in to play when you are already selling or producing at capacity. For each extra bottle you sell through your wine club, you will be losing a sale through a different channel. That channel may be less profitable than your wine club, but the opportunity is still a cost that must be considered together with all the other costs listed above in deciding whether the incremental costs of your decision outweigh the incremental benefits.

With such a small margin for error, each strategy and spending decision becomes more critical. Focus on incremental costs and incremental benefits. Anything that does not change as a result of your decision is not relevant to the decision analysis. In addition, don’t forget to consider opportunity costs. If one course of action requires you to forego something, there is an associated opportunity cost.

They invest their own time and talent strategically in their businesses

Successful small winery businesses usually have owners that take an active role and bring needed skills to their businesses. I talked to a couple one year after they had purchased a small winery business. One thing I took away from that conversation is that after one year, they were just starting to figure out what individual talents they brought to their business and how best to utilize those talents.

Trying to do everything yourself is a recipe for burnout and, more often than not, ends up in business failure. Successful owners of small scale wineries know where their talents fit best and carefully considering the costs and benefits of acquiring the right level of assistance in the other areas.

But a caution here – you are still the entrepreneur – you can’t hire away that responsibility. By that I mean that the business owner can’t be just a technician in their business. He or she must be the one articulating the specific vision of what they want their winery business to be, in the eyes of both the customer and the employee. If you don’t communicate your vision, your business will be like a ship without a rudder - reacting to whatever environmental influences are out there, instead of charting a well-planned course to get you where you want to go. Like it or not, that is what you signed up for when you started your own small winery business and invested your hard-earned capital.

Owning a small winery business is not for the faint of heart. The costs to get in the game are high and the margin for error is slim. You can improve your odds by ensuring you initial investment is consistent with a smaller level of production. Less reliance on debt means more breathing room while you work towards positive cash flow. If you take the time to understand the revenue parameters of your business and what it takes to make a profit, you will be able to make more informed spending decisions, taking in to account the full cost of each decision. If you also take care to invest your own time, energy and attention in the most effective area of your business and strategically investing in the right kind of help, you can ensure your path to profitability is a sustainable one.