Monday, June 15, 2020

How large does a winery have to be, to be consistently profitable?

This question is of great interest at the moment. The Covid-19 pandemic has, to coin a phrase, hammered much of the wine industry. In the USA, for example, there has a been a large spike in wine sales for supermarkets and large online retailers, but this benefits mainly the larger producers, who sell considerable inventory through those channels (especially large-format and bag-in-box brands). Small to mid-size wineries, on the other hand, have less of this form of retail distribution, relying mostly on bottle sales through restaurants and bars, as well as direct-to-customer business through their tasting rooms. With on-trade locations closed for a long period, revenue has been hard to come by (Despite high sales, Covid-19 has taken a toll on California's independent wineries).

So, size matters, in terms of weathering the ups and downs of the retail world. It is not just pandemics that we are talking about here — yearly variation in sales volume is “situation normal” for primary producers. There needs to be some reliable mechanism in place to address the economic hurdles created by this annual variability; and bigger companies find it much easier to jump over the hurdles. But how big is “big enough”, in the case of wineries?

Obviously, I cannot answer that question in any global sense. So, I will restrict myself to one country, as an example. That country will be New Zealand, mainly because some relevant data are available.

The Deloitte organization is a multinational auditing and consulting network, which (among other things) releases a whole range of reports about financial trends, in many places on the globe. One of those reports is based on an annual Wine Industry Benchmarking and Insights survey in New Zealand, produced in conjunction with the ANZ Bank and the New Zealand Winegrowers association.

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. The latest report claims that the current respondents “account for approximately 44% of the New Zealand wine industry by litres of wine produced and 35% by export sales revenue ... [they] either own or lease 39% of the 37,969 producing hectares currently under vine”. This is not a great response rate, but it is better than we might expect.

The 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. Here, I am interested solely in profitability, and its relation to winery size.

Profitability of New Zealand wineries 2006-2018; from Deloitte

The reports 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] Aggregate data are presented for each of these tiers, as shown in the graph above. This illustrates the mean profit before tax as a percentage of total sales, for each size tier (referred to as a turnover band), across all of the published surveys to date.

The basic answer to our question is, thus, that wineries need to be in the top three tiers in order to be consistently profitable, through the years. The lower two size tiers are much more risky, from year to year.

So, lets look at these lower two in more detail. To do this, we should look at the variation in the data among the wineries within each tier. In finance, this is best done by looking at the median value plus the inter-quartile range. [If this is unclear, see the explanation at the bottom of this post.] In the following graphs, each vertical bar represents one year (ie. one survey), with the middle cross-bar representing the median and the upper and lower bars representing the quartiles.

Pre-tax profit for small New Zealand wineries, 2006-2018.

Here is the appropriate graph for the second-smallest winery size. It shows that at least 75% of the wineries made a pre-tax profit in almost every year. On the other hand, 75% of these wineries made less than 20% pre-tax profit on sales. This is not great, but it is probably sustainable, long term.

Sadly, the same cannot be said for the group of smallest wineries, as shown in the next graph. Here, in only some years did at least 75% of the wineries make a pre-tax profit (eg. 2018); and in only 6 / 13 years did at least 50% of them make a profit. Even worse, in some years almost nobody made a profit (eg. 2012); and even when a profit was made (half of the time) at least 75% of these wineries made less than 10% pre-tax profit on sales. The year 2009 was obviously very bad for at least 50% of the wineries (with 25% losing more than 250%).

Pre-tax profit for the smallest New Zealand wineries, 2006-2018.

So, the detailed answer to my question is that a turnover of at least $NZ 5 million seems to be good enough for long-term winery profitability, while those with less than $NZ 1.5 million will have serious trouble balancing the good years with the bad ones. You can translate this into your own favorite currency, for comparison with other countries.

Note that I have discussed only economics here, and not any of the other issues that might be related to winery size, such as regulatory compliance (eg. see the Napa Valley Save the Family Farms).

So, why do small wineries even exist, at all? Bob Campbell has noted (Not for the faint-hearted):
I recall enjoying lunch with two ex-winery owners. One had lost millions of dollars while the other confessed that he had only made a profit in one of the nineteen years he had been in business. Both were astute businessmen who knew all about budgets, cash flow and the importance of staying in the black, but both had been dazzled by their passion for wine.

For the data summaries, 50% of the survey responses are greater than the median, and 50% are less than the median (as represented by the dot in this figure). Furthermore, 50% of the responses are between the upper and lower quartiles (as represented by the grey box).


  1. Here in the States, small and mid-sized wineries have a very difficult time garnering representation by distributors to secure shelf placements in retail stores and wine list placements in restaurants.

    Distributors whose business model is predicated on representing large production wineries to cover their national and multi-state regional "foot print."

    Selective articles from the wine media attesting to the struggles of smaller wineries . . .

    Excerpt from Wine Spectator
    (November 12, 2013):

    "West Coast Wineries Are Up for Sale -- Quietly”

    (A wave of recent deals show investors see opportunities in wine, while owners see an exit strategy.)


    By Tim Fish
    Senior Editor

    “. . . While small wineries can succeed by selling most of their inventory direct to consumers and large producers have muscle with wholesalers, those in the middle -- annual production of 5,000 to 15,000 cases, for example -- can’t get much attention from distributors unless the brand is hot.”

    Excerpt from Wine Industry Advisor
    (March 22, 2017):

    "New Company Breaks Barriers to Distribution for Small Producers"


    By Editor

    "Consolidation continues to make distributors bigger and fewer while the number of producers grow with new small producers enter the market. The vast majority of wineries in the US produce less than 5,000 cases, and theyve been effectively blocked from three-tier distribution because distributor giants wont take them on . . .

    Excerpts from The Gray Report
    (July 31, 2017):

    "Wine trade secrets revealed at OIV Wine Marketing Program"


    "John Collins, CEO of a company called GreatVines that sells alcohol distribution software, started the week off with a slap in the face to all wine companies: 'None of the wine companies are getting any attention (from distributors). Period. Because the spirits companies are that important to the distributors.'

    "Collins compared the profit size of Diageo, a huge spirits company, to Jupiter. Gallo, the largest wine company, is Neptune. And if Gallo doesn't matter to a big distributor like Southern Glazer's, no wine company does.    . . ."

    "The opposite of Constellation was a presentation by Bruno Walker, director of sales and marketing for Chambers and Chambers Wine Merchants, a California distributor with an outstanding fine wine portfolio. 

    "Walker was one of several speakers to caution people that large distributors won't do much to sell wines by small wineries. 

    " 'If your wine is not on some kind of special of the month, it won't sell' at a big distributor, Walker said. 'That sales person is not out making presentations of your wine. Their manager is telling them, you've gotta sell this and you've gotta sell that. That's how their bonuses work. That's how they're hired and fired.'

    "But Walker also chilled expectations for what a distributorship like his can do.

    " 'The reality is, I have 15,000 unread emails,' he said. 'Most people are really, really busy.'

    "He said that when his salesmen present wines to stores or restaurants, they only have about 45 seconds per wine. 'We have to be able to deliver a compelling story, quickly,' he said."

  2. For most East Coast wineries I'd say to be in the 3200 - 6000 case range sold retail. This obviously ties in with conservative building start-up costs and keeping your structure design such that minimal employees are needed. Ergonomically and functionally thought through.
    Fixed costs must remain low.
    Tom Payette
    Winemaking Consultant