So your thinking about getting into the wine business!
Quote: “Who never drinks wine is a lamb, who drinks properly, is a lion, who drinks too much is a pig.” – from an inscription on an ancient Roman winery ruins discovered in southern Italy.
I started my career in the travel business at Trans World Airlines selling incentive programs and corporate meetings. Along the way, I ventured into TWA’s leisure/tour business, leading me to my first trip to Wine Country. I came to Wine Country in 1969 to set up a TWA tour program. I was instantly enamored with the sights, sounds and culture of California’s Wine Country. I just dreamed someday I would own a winery.
Winery ownership will probably never happen for me, but part of the fun is talking about the dream. Well, the other day I was having a casual discussion amongst friends concerning what was involved in getting into the winery business. That led to an introduction to Mr. Jack Ryno, owner of Winery Transitions in Sonoma County. Jack makes a living consulting with people who want to get into the winemaking business and helping winery owners improve their businesses. His expertise runs the gamut: land acquisition, winemaking, marketing, sales, and buying an established winery versus building. I met with Jack Ryno because once and for all I wanted a reality check about what it is like for “Joe New Guy” to come face-to-face with today’s issues of starting a winery.
Jack and his wife Lynne live in Sonoma County where Jack was raised. Lynne is the Bottling Manager for a large Sonoma County winery and her 2 children work in the wine industry; one owns a vineyard management company in Napa and the other, a winery packaging service company.
“I started as a restaurant sommelier and after graduating from the University of Washington with a B.S. in Microbiology, I completed graduate courses in winemaking at Fresno State University. Later I earned an MBA from Sonoma State University but the real learning started when I began working in the winery and vineyards,” said Jack. “Early on as a winemaker for example, I learned there are a couple of wrong ways to make wine but no one right way. During my thirty years in the wine industry I have led winemaking, vineyard, operations, marketing, and sales teams,” said Jack. “A lack of understanding in any one area can lead to ruin”.
“Whether it is selling wine or tee shirts, ultimately it come down to developing a business model that allows the owner to produce and market a wine that people will buy at a profit,” said Jack. I tell investors that based on their business model, there are five potential outcomes: they can lose a lot of money, lose a little money, break even, make a little money, or make a lot of money. I try to focus on, and steer, my clients toward the arenas that make money.
It is critical to have a model that is suited for today’s marketplace. I start with the end in mind and work backwards. The last thing I would recommend to a winery investor is buy a piece of land, develop a vineyard, build a winery, and make the wine. I’ve seen too many people start that way only to be into the project five or six years, having spent millions of dollars and without any revenue to show for it. I recommend starting by asking where and how they intend to sell their wine.
SP-So, how do we sell the wine we produce?
JR-This is, perhaps, the most important decision a winery owner has to make. Do you have contacts in wine distribution? If you have no contacts, or salespeople with these contacts, you’re in for the biggest challenge of your career. Here’s the issue: distributors want big producers who have great marketing (and budgets) behind their brand. If you are a small producer – less than 250,000 cases annually – you’ll be fighting for distributor “share of mind”. At this level you’ve got to be realistic in how you can compete with the likes of Kendall-Jackson, Beringer or Mondavi let alone the liquor giant brands like Absolut, Jose Cuervo or Jack Daniels.
For small or new wineries, I recommend they build their business based on a model to sell directly to the consumer through their tasting room, wine clubs, email and telemarketing. The name of this game is niche marketing, and the most critical success factor is the location of the tasting room. Location is king.
SP-OK, assume we have a meeting and I want you to tell me what I should be looking at to determine my sanity in wanting to get into the wine business.
JR-First off, you need to tell me your motivation in building a winery. Is it as a business, , do you want to build a winery and eventually sell, or is it a life style decision? Let’s assume you are talking about building a winery with enough land to plant some grapevines.
SP-How much land do you think we need?
JR-Now wait a minute. How much capital do you have, because you will probably need about $16 million to acquire the land in Sonoma, build your tasting room with a modest winery, develop a few acres of vineyard, and enough cash to build inventory and provide the working capital required to get through the start-up years.
There are lots of choices to make. For example, you can maximize your vineyards if you decide to utilize barrel caves and hire a contractor like Don Magorian to help. The long-term costs associated with caves are lower than above ground buildings, but they are slightly more expensive to build.
Locating the right site for the winery is where I’d start. You need a tasting room location with highway frontage on a major wine route. In Napa or Sonoma and there are only 4 stretches of highway that can generate the 70,000 visitors you need each year.
SP-But I’m a little nervous. Don’t we need to have wine to sell?
JR-Yes, of course. But there are a few things to consider first. Many people are surprised by the winery permitting process. The Federal government will investigate your personal history and source of funds, the state will do the same and confirm any other business dealings making sure there are no “tied house” relationships for example. Tired house relates to ownership or control of wine wholesalers, retailers or restaurants – none of which are permitted. Local laws vary tremendously. For example, new wineries in Napa can only open their tasting rooms “by appointment”. You can’t be open to the public and taste you wine with anyone who happens to drive by.
I’d never recommend waiting until my vineyards were producing and my winery was built to start making wine. There are many companies that now specialize in providing custom winemaking services.
I recommend starting with one of these under an Alternating Proprietorship permit. That’s where you are legally a winery within a winery.
If you aren’t a winemaker you will need to hire a winemaker or a consulting winemaker. Some of the more famous consulting winemakers will command $200,000 plus a year to get started. Someone fresh out of school may cost a third of that and an experienced winemaker may be somewhere in between.
Last. Making wine takes time. Let’s say you want to make a Cabernet Sauvignon beginning with the 2011 harvest. Crush the grapes, ferment the juice, barrel age the wine, then blend and bottle it. After six months bottle-age, it will be early 2014 before the wine is ready to sell.
SP-Time is money also, right? How long will this take?
JR-Starting with bare land, it will take two or three months to get a business plan and model together –longer if you are a true winery neophyte. Let’s say you have a piece of property, you’ll need to go to the County with a complete set of plans to obtain a use permit. Allow 6 to 18 months for that approval assuming there is no opposition to the project by neighbors.
Once approved, you can start building and planting. Assume another nine to fifteen months before construction is complete and you’re ready to open to the public. You could easily be two or three years out. That’s one of the reasons I like to start the wine production with a custom service provider while construction is underway. In this way your first wines are ready to sell the day you open your doors.
SP-How long before we start being cash flow positive?
JR-I think I can show you an honest plan, selling direct to the consumer, with an average retail price of $30 where you are cash flow positive and making money in 4 years. By year six or seven, profitability and cash flows can become quite attractive. This, of course assumes the winery is developed on the property I have in mind (which has an approved use permit), a solid business plan, leadership and a great team of vineyard managers, winemakers, marketing and tasting room sales staff.
The Good side of the wine business is that it can be fun for the right personality type. It really boils down what is the perspective owner’s motivation in wanting to be in the wine business. While I like to focus on profitability, believe it or not, not everyone has the motivation to make money.
The Bad is that it is labor, time and capital intensive. With 11 acres of vines, a good location for tasting room traffic, excellent staff, good equipment and around $16 million you could have a profitable winery in 5 years. The real trick is to provide a unique product, differentiate yourself from your competition, and have a great marketing plan.
If a person was willing to own a winery outside of Napa or Sonoma you could buy an existing winery needing some work but with a great location and market potential, for $10 million – maybe less. Right now, there are some really attractive deals if you’re looking to buy a winery.
Now for the Ugly. There are risks. Jack believes wine consumption will continue to grow in the US; but there is no guarantee. Consumer interests change as do capital markets and governmental regulations (local, state and federal). Lastly, never underestimate Mother Nature.
“I believe in the wine industry” says Jack. “Like any business, a winery’s success is predicated on producing a great product at an affordable price (value proposition) and being supported by good marketing. There are risks, but a smart business plan will help mitigate those risks. That’s what I do”.
Mr. Ryno shared a lot of information with Symtrek Partners over time and his historic perspective and insight into a complex industry was and continues to be fascinating.