One Big Happy Family
There's a sense in the wine business that your neighbor is part of your support mechanism. They are not a rival or a competitor. Lots of information and stuff is shared in this wonderful trade. If you need a tractor because yours is mired in a soggy field, no problemo! Need a little welding and custom fabrication on a pump? I'll be right over with a welding rig. Stuck fermentation? I'll send over a portable heating unit.
That kind of sharing happens all the time. But ask for a customer list, or ask "Can you show me a copy of your financial performance so I can compare my winery to yours?" The answer is always just < ..... crickets ..... >. When it comes to that question you'll just get a mixture of liars dice, false bravado, partial truths and ..... well ..... the following video I put together is the best explanation of how that game is played in wine country.......
You can't fool a fool
As industry focused bankers, Silicon Valley Bank gets real financial information so we're a little harder to fool. We use the agglomerated financial statements of clients and prospects to create financial benchmarks for our customers. That's just a gratis part of working with the Bank. I also use the financial information to provide annual forecasts of the business. I have been really good at hitting predictions over the past decade, but this year I feel a little foolish.
Nielsen Scan Data: One Source of Sales Growth Information
In the 2016 SVB State of the Industry Report released in January of this year, we reported the great rotation in premium wine. The Bigs are moving on up. Consumers are permanently vacating lower prices segments in favor of higher quality wine and large wineries are following.
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In the above Nielsen slide for fiscal 2015 you can see how the below $9 segment is failing both in dollars and case volume, and above $9 is showing nice growth. You can also see the above $20 segment showed 10.6% growth in sales dollars and 11.1% growth in case volume. That's close to 14% which was the lower end of my prediction but still not hitting the forecast. So by this measure, I was wrooo. I was wrerrrr. Wait!! Maybe Nielsen is wrong?
While an excellent source of information, Nielsen scan data does have its limitations. It doesn't include restaurant or direct to consumer sales, so with direct sales accelerating in the small family owned wineries, a growing percentage of sales above $20 won't get captured in Nielsen. Maybe that's why Nielsen is lower than my forecast?
SVB has another way of viewing real industry financial performance and that approach provides an accurate view of the small family owned fine wine business because we are using real financials.
How Much Do Wineries Really Make?
SVB is able to present many different views of performance using our own proprietary database of actual winery financial statements. The following chart is one I present each year in the State of the Industry Report and use in many of my speeches.
It's important to understand the data are not weighted by case size. Had we weighted the results by case size, the largest volume producers which grow by about 2% annually would dominate the data making the benchmarks useless for most as comparisons. The "average" winery is quite small by case production measures but higher in sales growth rates compared to the largest wineries.
In the following PGA chart, the red bars represent gross margin (sales minus the cost of sales), and the green line is pretax profit. The blue line is industry sales growth. You can back into total operating expenses if you are interested, by adding pretax profit and gross margin and subtracting the sum from 100%. The scales for each point of information are on the right and left vertical axes.
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The Truth About 2015 Financial Performance
When the statements were all collected and input this year, wineries ended up having a better overall year in 2015 compared to the prior period, showing almost a 10% pretax profit margin on overall sales growth of 8.8%. While it was growth, that fell well short of the 14% - 18% sales growth forecast released in January of 2015. So I was apparently, technically, in a small way, just a little bit wron...werrrrr.
What is also interesting to note is the sales growth from the financials we collect from smaller wineries ended up slightly below the growth noted in Nielsen. That shouldn't be the case intuitively because the smaller wineries should have higher growth rates than most of the wineries Nielsen captures, so what gives?
The reason larger wineries seem to be doing better at the moment is a bit of a mystery to me, but I have a theory. I suspect there are two issues at play: The first is that wineries in distribution - the ones Nielsen is largely capturing, are hitting on all cylinders. Distributors are answering their calls and those wines are selling in the large and growing retail and big box stores to the swelling premium wine consumer. Those large wineries that are moving with a purpose and are taking sales away from smaller wineries because of distributing muscle. The bigs are moving out the smalls from shelves.
The second plausible explanation why sales growth is higher in Nielsen versus SVB's information is the growth rate in direct sales is slowing after ratcheting up for the past decade. A review of the fiscal year end report from Wines & Vines/ShipCompliant show that direct sales in 2015 were up only 8% in 2015 compared to 15% in 2014. Perhaps the anti-tourism/anti-winery movement that is most visible in Napa, Sonoma and Santa Barbara is taking a toll? That could also provide an explanation.
A third candidate could be a generally slowing consumer economy, but that's not an obvious explanation for me at this point given the move to higher premium wine consumption overall, and that those macro factors impact both large and small producers the same.
Forget the Theories - What's Happening
What is apparent to me is the business is rapidly evolving.
- Consistent with what we said in the State of the Industry report in 2016, the days of the small commercial bootstrap startup are largely over. It's a very expensive game even for Private Offices and Hedge Funds.
- Heavy harvests in 2012, '13, and '14 have created a little bloating with fine wine producers. There are good deals for the consumer with a modest amount of looking
- New consumers are moving into the $10-$20 segments and it shows in the Nielsen chart above.
- Boomers are slowing their purchasing of more expensive wine, pressuring down pricing opportunity for fine and luxury wine producers.
- Cabernet is not only king, it's a demigod. Prices for Napa Cab are absurdly high and real estate prices are blowing off the doors in Napa and Sonoma - but trending up everywhere in the premium space.
- Napa producers looking for growth, are moving into pinot noir and looking at new regions.
- Large producers moving into premium production are competing for grapes and dirt, also driving up real estate values and grape prices.
- Oregon, Washington, and the Central Coast are finding new consumer opportunities with more reasonably priced premium production
What Do You Think?
So now you know how much wineries really made in 2015. The growth rate is still positive but not as dynamic as I expected. It seems that the larger wineries might be having a better time of things compared to the smaller ones, but it's a pretty early read for me and I'm still searching for better clarity as we move to analysis for the 2017 State of the Industry Report.
I am big enough to admit that my forecast for sales growth in 2015 was wrong. There. I said it. But now I have to deal with guys like this who want to rub it in.
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