What makes a winery bankable?

Adam Beak
Posted by Adam Beak
Agribusiness Banking

As the number of wineries has grown in recent years, it’s become harder than ever to be successful in the business. With many wineries out there already and more getting started all the time, there’s increased competition. Additionally, while U.S. wine consumption is up with more consumers than ever before, this consumer growth is not large enough to offset the increased competition.

Broad view down the rows of a vineyard during sunset.Given this environment, what makes a winery bankable?

In our Premium Wine Group, the most important thing we look for is strong management that understands how to run a business with a lot of unique aspects to it.

The first challenge: Mother Nature

To grow grapes to get the best fruit possible, understanding regional growing conditions and how to tend to them, is critical. With Mother Nature playing a central role, these conditions change every year.

Dealing with heat, frost, drought, and pests — while trying to get the fruit into the proper balance of sugar and tannins — is not easy. Even if you get all of that right, you still need to get the grapes to the winery and treat them appropriately to make a good product.

What’s more, wineries are working with very expensive assets — the vineyards, the soil improvements, and the land itself. There’s a lot of money tied up in the winery, not only in real estate and building assets, but also in production assets that are only used once a year, that can make it a pretty risky bet.

Add in business operations and luck

Wineries also need to understand marketing and packaging to put their product forward in the best light possible to create “pull” in an environment where the distribution system is incredibly constrained. Consolidation has left only a fraction of what used to be more than 10,000 distributors operating in this space. Also, more distributors are working with buyers from big box stores, and those buyers do not select a completely different inventory for each store (the way an independent buyer would). Given these constraints, it can be difficult to compete with 8,000 wineries for a shrinking number of available spots on the shelf.

On top of that, wineries have to manage inventory, understand how to effectively run a business from a financial perspective, and maintain proper cash flow to support their levels of debt or unexpected expenses.

There’s also an element of luck or chance at play with wine brands. A big piece of success is hard work, sweat and knowledge, but it’s also about being in the right place at the right time with the right brand and look for the current environment.

Put the puzzle together

In the wine business, there is a huge swath of mid-tier and smaller-tier vineyards that don’t necessarily have the cash flow to hire experienced professionals at every level of the business: a professional who’s running the vineyard, an experienced business person, a top-notch winemaker, a CFO, a director of sales, a marketing person, etc. These smaller businesses often have people in multiple roles or family members in roles where they lack extensive experience.

This often creates a dynamic where it’s harder to be financially successful and therefore, to qualify for attractive financing terms.

Ultimately, for us it’s about working with wineries whose management understands all the pieces of this puzzle. After that, it’s the standard business management process of proper capitalization, adequate cash flow, and reasonable amounts of collateral to support the business both in terms of production assets and working capital assets.

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