You’ve heard it since you were 12 years old, but experienced business owners know it’s true—size really does matter. The problem is, no one ever said what size.

Wineries have always struggled with growing pains. Whether it’s fermenters or degrees Brix, common wisdom says bigger is better. (See a related story about fermentation vessel size in Inquiring Winemaker, page 62.) Still, the majority of wine companies remain small and are operated by owners who do it all, from winemaking to marketing to accounting. Those who shoot for broader targets often discover that the line to success isn’t always straight up.

“I made the fatal mistake and grew based on demand,” said Michael Haddox, who recently sold his Michael Florentino Cellars label, just months after selling the Winemaker’s Loft in Prosser, Wash. The Loft was Haddox’s incubator-style venture, housing tasting rooms for seven small labels that shared use of the facility’s equipment and barrel storage. Haddox produced about 4,000 cases per year of the Winemaker’s Loft house label, as well as 1,000 cases of his premium MFC wines. When his business partners in the Loft filed for bankruptcy, Haddox was forced to sell. And despite his wine’s popularity, MFC went next, he said, because “I didn’t have the capital to bridge the gap.”

Haddox could be the poster child for vintners who have discovered how hazardous growth can be. Advisers with their fingers in the wine business all repeat the same chorus when asked to list factors that must be in place before a winery increases production. Those who expand without a rock-solid business plan probably are doomed to fail; demand for the product and customers to buy it are essential, but those things pale in comparison to the need for capital.

Funding your growth
Money can be hard to find in the current economy. Mark Freund, Pacific Northwest market manager for Silicon Valley Bank, said the recession has knocked the legs off the market for premium-priced wines selling for $20 or more, and he doesn’t see it returning any time soon. As a lender, he looks for “efficient frontiers”—small, integrated business models focusing on hand-crafted wines with a sense of place, on one end, or high-volume producers with national distribution and market clout on the other. Wineries producing between 10,000 and 100,000 cases might find themselves squeezed out of the credit market, he said.

Even those who find credit won’t get all they need from a lender. Large streams of debt often aren’t available. Baker Boyer Bank manages a portfolio of wine investments in the Walla Walla Valley, dating to the Washington wine industry’s infancy. The bank looks closely at a winery’s inventory and marketing before loaning money, said Russ Colombo, business banking manager. But often, cash follows cash. “Each situation is different, but we usually look for an outside income or other assets” before approving a loan, he said. “For every dollar we put in, you have to put in a dollar.”

One of Baker Boyer’s clients is Dusted Valley Vintners, owned by brothers-in-law Corey Braunel and Chad Johnson. They opened their winery in 2003, bottling 750 cases with plans to expand by some 1,000 cases each year. Initially, Braunel and Johnson financed Dusted Valley out of their own pockets (both worked in other professional jobs at the time). But after three years successfully marketing Dusted Valley, they took a leap and launched Boomtown, a value label priced less than $15 per bottle.

“We were able to leverage our premium brand to start our entry level product,” Braunel explained. Their initial loan financed production of 5,000 cases, and less than two years later, Braunel said, they were looking for additional financing to sustain their growth. Their expansion has been very carefully planned. Today they produce 4,000 cases of Dusted Valley, while at the same time bottling 12,000 cases of Boomtown—a 25/75 split in production, even though each label accounts for about half of their company’s profits.

“It’s not a linear progression by any means, and it’s certainly not a logarithmic progression,” Braunel said. “It’s been very slow and gradual. Basically, our profit (from Boomtown) has been funding a lot of our growth. It’s a curve that’s flattening out, in terms of our need for debt.”

A five-year road map plotting grape sources, winemaking, distribution and marketing is a valuable tool, but even the best plans can be punctured by uncontrollable events like the recession.

Jeff Sully has touched almost every corner of the wine industry, including stints as winemaker at large facilities in both California and New York, chief financial officer of a California producer, and accountant and adviser to wineries along the West Coast. Today, in addition to heading the Walla Walla, Wash., office of accounting firm Dillwood, Burkel & Sully, he owns 428 Winery, a small producer of Merlot and Sauvignon Blanc in the Walla Walla Valley.

During the course of his career, he’s seen some wineries follow solid growth curves, while others find the slope slightly more slippery. One client, for example, doubled its output in one year, then saw demand evaporate with the recession. “It had a significant effect on the financial mechanisms of their company,” he said. “It’s more than a hiccup—it’s a loud belch. All of a sudden they have a very large inventory, and they’re not sure what they’re going to do with it. If they had maintained a more steady growth rate, they’d be a lot healthier today.”

Take advantage of bumps in the road
Bumps in the economy don’t always derail growth, sometimes, they compel it. Jeff Gordon has been producing wine from his vineyard along the Snake River northeast of Pasco, Wash., for more than 20 years. Gordon Brothers Cellars today produces 25,000 cases per year, but in the early 1990s it bottled just around 3,000 cases. Gordon and his brother Bill, who was his partner at the time, decided to expand after Boeing laid off some 30,000 employees in the Seattle area, Gordon Brothers’ primary market.

“We had all our eggs in one basket,” Gordon recalled, “so we decided to increase production so we could expand to more markets” around the country. In 19 95, the brothers put together a five-year business plan to double their production from 5,000 cases per year to 10,000.

Gordon said they hit every target in the plan with uncanny precision, but it wasn’t easy. “For every bottle we sold, we were making two bottles.”  And while they were successful, he looks on that early expansion now with a little more wisdom.

“The most important thing is to develop a reputation before you increase production. That was one of the mistakes we made, we didn’t really develop the brand. We pushed the envelope too far. We should have let demand drive production, rather than push so hard. We were always pushing, always pushing to get things sold.”

Jumping a level or two in size means a jump in your level of risk. As Sully pointed out, the cost to grow is a step function: A single initial investment (in equipment or staff, for example) can sustain a growth curve for a period of time before more cash—for more equipment and staff—is needed. While each step increases a winery’s exposure, it also increases its production and potential sales. Sometimes, as in the case of Dusted Valley, expansion means added security.

Knowing your market is key
But growth for the sake of growth is usually a recipe for disaster. “One of the easiest things to do and one of the biggest mistakes you can make in the wine business is just to see how much wine you can make,” said Ed King of King Estate in Oregon. He entered the business in 1991 with around 20,000 cases and plans to distribute his wines across the nation. Today, with 10 times more production, King is easily one of the largest West Coast wineries outside of California. Nothing is more important to sustaining a growth plan, he said, than knowing your markets.

“You can’t make huge amounts of wine without a brand plan or a good multi-year concept of how you’re going to take that wine to market. Ultimately, everything you do should be designed around making the customer happy,” he said. “I don’t think the customers love you more because you’re small. I don’t think they hate you because you’re big. Maybe some do, but ultimately they want a very good product at a very good price.”

One major development in recent years is the consolidation and narrowing of distributors, King said. That creates new management challenges for wineries. As more distributors look for tighter focus, even firing labels they’ve worked with for years, wineries must be prepared to invest time and money in managing those relationships, according to Cary Dasté, a Seattle wine marketing agent. “The distributor is your customer,” he said. “It requires lots of follow-up. You might even have to hire someone to manage it.”

So, is bigger really better? Sometimes. “Wineries grow because the demand is there and they want to make more money,” Haddox pointed out. “And as you grow, you can spread out your cost and expenses, which leads to better profits.”

The bottom line in any business is profits. At the end of the day, according to Gordon, that can be a very good reason to stay small. “You have to be very cautious about increasing your supply. If you go from 1,000 to 2,000 cases, all of a sudden you need to be a marketer, not a winemaker.” Today, at 25,000 cases, he said, “I’m probably making a little more money” than at 10,000 cases, “but I’m working a lot harder. I don’t spend a lot of time at the vineyard. I don’t spend a lot of time at the winery. I spend a lot of time selling wine.”

Anne Sampson is based in Richland, Wash., where she writes about wine and agriculture for publications including Northwest Palate, Good Fruit Grower, Wine Press Northwest and Washington CEO. Contact her through edit@winesan dvines.com.