For example, in the Napa Valley, the Save the Family Farms group of grape-growers note that, even if a winery produces less than 5,000 gallons of wine per year (eg. 1,000 cases), current Napa County regulations require expenditure that is no different from those of much larger wineries. Under these circumstances, the smaller wineries are preferentially disadvantaged.
This seems to be a general problem, and may indeed be increasing.
We can see this by looking at the annual Wine Industry Benchmarking and Insights survey in New Zealand, produced by Deloitte organisation, in conjunction with the ANZ Bank and the New Zealand Winegrowers association. I used this information in my previous post, which you can check for more explanation.
Each year since 2006, a survey questionnaire has been sent to all members of New Zealand Winegrowers, asking about details of their previous year’s financial statement. Each report compiles the response data on financial aspects like supply and demand, revenue streams, profitability, equity, and return on assets, as well as other important things like key markets and customer connections.
The reports also subdivide the wineries into four size tiers, based on total annual revenue in $NZ: $0-$1.5 m, $1.5-$5 m, $5-$10 m, $10-$20 m, and $20 m+. [Note: $US 1 ≈ $NZ 1.5]; and aggregate data are presented for each of these tiers.
With the apparent exception of the current report, one section of each report concerns Issues and Challenges. Each year, up to 11 issues were ranked by the participants in order of their perceived importance. These issues will seem all too familiar to any winery:
- Grape supply (too little) or affordability of land
- Grape supply (too much)
- Labour supply / cost
- Terms of trade (cash cycle)
- Sales margin pressure
- Access and/or cost of capital, including interest rates
- Government and other compliance costs
- Company tax rates
- Distribution, including marketing product overseas
- Exchange rates
- Succession
Some of these issues were ranked as very important by all winery sizes, for example Sales margin pressure, and Distribution. However, others differed somewhat, notably Government and other compliance costs. Above is a graph of the average ranked results from the 2017 survey (click to enlarge). Note that for the smallest-size tier of wineries, the top three issues were roughly equal in importance. Also, note that for the wineries in second-smallest tier chose only the same top two issues, and differed notably on the other issues,
Since our interest in this post is on the costs of government regulatory compliance, it is interesting to note the change through time in the ranking by the smallest wineries of the issue Government and other compliance costs. The next graph illustrates this, where rank 1 = most important issue. The importance of government compliance has thus regularly increased in relative importance recently, so that it is now in the top 3.
The Benchmarking reports offer no insight into the exact cause of this rise in importance for the smallest wineries, especially given that the rankings for the second-smallest tier remained between between 6–10 over the same time period. Indeed, the reports focus very much on issues related to wine exports, which is not unexpected given the New Zealand wine industry’s dependence on foreign income (the domestic market is small relative to production).
However, the reports do note that generally there is no “one size fits all” approach for wineries. Sadly, this fact is rarely acknowledged by government regulations.
Such regulations can include, but are not restricted to, aspects of vine growth (including biodiversity management, and sustainable agriculture), winemaking (including food safety, and renewable energy usage), human management (including on-site facilities for customers), and business standards (including local and export marketing). For their members, New Zealand Winegrowers has a document recommending Sustainable Winegrowing New Zealand: Standards, which lists acceptable practices that meet government regulations in each of these areas. No mention is made of the financial cost of implementing any of these practices.
Almost all regulations are perceived by the public to be created to control the big players. When in reality the big players love them. (See PG&E Comcast. AT&T). These regulations make it harder for smaller competitors to stay in the game ( see the story of Sonic an internet provider that had to start providing phone service to or go out of business) and it makes the price of admission for startups too expensive for most. It also, as you point out makes the smaller winery struggle to compete as these layers of compliance add one more cost to an already low margin business. Let us make a point here that costs for a winery go down as it gets bigger due to economies of scale so these compliance layers are easily absorbed into the costing for bigger wineries but can severely hurt the small winery.
ReplyDeleteI have often wondered why the states don't get together and make a simple one form works for all tax and compliance form. They would actually get states more money because the smaller wineries that fly under the radar, would be happy to pay taxes and be compliant if it were reasonable and simple. It's not like each state has different reasons for wanting it. They all want the taxes and to know what is being sold in their state. They do it with non-Alcohol products Amazon sells including tobacco. One tax. Why is Alcohol so special? Thank the repeal of prohibition for giving the states the ability to discriminate against small production wineries. They are influenced and encouraged to make it complicated by state lobbyists with lots of money. Because there is exclusion in these additional rules that allow the distributor and big brands to control the market, making it harder for the small winery to follow the rules and compete. It’s time to federalize this and eliminated the states illegal discriminatory practices on small wineries.