When Quinton Jay earlier this year was named managing director of San Francisco-based Bacchus Capital Management, which provides creative financing and operational consulting to wineries, he brought with him a long history in the wine industry. Jay was founder and managing director of Bacchus Consulting Group, whose major clients included Beringer Blass, Quintessa and Geyser Peak. He also did a stint as general manager of Bonny Doon Vineyard in Santa Cruz, Calif. Most recently, he was vice president and general manager at Artesa Winery in the Carneros region.

Jay began his career in the beverage industry at Coca-Cola, and later worked in the corporate finance and investment banking division at Bank of America. He earned his bachelor's degree in finance at California State University, Long Beach, and his MBA at the Kellogg Graduate School of Management at Northwestern University.

Wines & Vines: What is the most important piece of advice you could give to a winery about surviving and even thriving during a recession?

Quinton Jay: I would advise a winery that the best way to survive and thrive during this recession is to review the winery's business and operating plans. If a winery does not have one, it is never too late to develop one. This review has to look at each piece of the winery business, each department, and how they impact each other: specifically, vineyards (grape purchasing), winery (bulk wine and finished goods inventory) and sales trends (shipments and depletions).

Understanding both your current-harvest vineyard yields and your contracted grape purchase plan is important for two reasons. Grape payments and bulk wine require and use up valuable cash, which might be more scarce if wine sales are not happening. Also, you can adjust your own vineyard yields based on grape needs, or talk with your grapegrowing partners to see if they have another buyer for the grapes you have contracted for.

Bulk wine inventory is a reflection on how well your wine is selling. If you're not selling, you shouldn't be bottling. If sales are slowing and a winery decides to bottle the bulk wine, this could compound a bad situation, and the winery could be selling an out-of-vintage wine in the marketplace. Sometimes your first loss is your best loss, and selling the bulk wine is your first loss. Remember, bottling and bottling supplies (bottles, cork, capsules and labels) will use up valuable cash.

Finally, reviewing sales trends -- both shipments and depletions -- is crucial: If the distributors are not depleting the wines from their inventory, shipments will not continue from the winery. Then wineries must decide if cutting back on grape purchases or selling off the current bulk wine is a decision that needs to be made, based on their cash-flow needs. If the winery has enough working capital, then it might be OK to do both, but if it doesn't have the working capital to fund both, a winery really needs to make the hard decision of one or the other.

By taking an objective look, the winery can identify areas of weakness and strength, pinpoint needs that might otherwise be overlooked, and spot opportunities early. In this process, the winery might uncover the need to search for alternative or flexible financing, which would be important to identify before true working capital needs arise.

Building your direct-to-consumer sales     Quinton Jay is a great proponent of selling directly to consumers--especially for small- to medium-size wineries. There are two main reasons why this approach is important, he says: better margins and "a one-on-one relationship" that helps to build brand loyalty. "Direct-to-consumer gross margins are higher than FOB," he notes. "And the relationship between a winery and the consumer that is developed over time is not only about the sale but also about bringing the consumer in as part of the family/brand. During difficult economic times, consumers gravitate to brands that they know and trust. Consumers trust, buy and recommend 'their' brands, brands to which they are connected." There are several ways to build the direct-to-consumer side of the business, Jay says. "Every direct-to-consumer sales plan should have three main channels: tasting room (if your use permit allows), wine club and e-commerce. The collection of names and e-mail addresses is key to continuing the relationship. If they sign up and you have permission, consumers have opened the door to building a relationship with you." He cautions, however, that wineries shouldn't deluge customers with e-mails or unload problem wines on them. "Think of these customers as your friends and family," he says. "Treat them like VIPs, and you'll reap the benefits during good times and bad." Jay also suggests creating "occasions" to prompt consumers to buy, a technique he says he learned while working at Coca-Cola. Such "occasions" could include "Cabernets for Father's Day," "Pinot Noir for Thanksgiving," or "Sauvignon Blanc Summer." L.D.

W&V: What are the drawbacks to discounting in an effort to move inventory?

Jay: The main drawbacks to discounting are damaging the brand position and image, and establishing a new, lower price-point for the brand. I will not go into the first drawback, as you can read many books and opinions on this topic. However, the second point is a clear and present danger.

Consumers understand that we are experiencing a recession, but if your discount is too drastic, your current consumer base could reset your price and brand at that new, lower price. And when the economy comes back, which it will, your consumers might only remember that your wines used to cost 50% less.

Therefore, the smarter way to discount is to manage or implement strategic discounting with selected partners (each state has its own regulations, so these are generalities). You can work with your distributors on where and how a discount will be applied, implement a by-the-glass program with restaurant partners so that people who might not have tasted your wines can try it by the glass, and not dump your wine in the market.

W&V: How do the economic challenges facing big, medium-size and small wineries differ?

Jay: The differences are really between the big and the medium-to-small wineries. The bigger wineries are really a consumer product wine. With that in mind, they have the financial wherewithal (cash flow and borrowing capacity) to weather this economic storm.

However, medium-to-small wineries are very much affected by cash flow, borrowing limits and the amount they can discount to get their product on the shelf or sell through. These wineries really have to evaluate their position and their long-term goals, and move very strategically. To weather the storm, they may need to evaluate alternative sources of capital and consider partnerships they might not have considered previously.

W&V: What sorts of expenditures can wineries cut or delay during difficult economic times? What sorts of things do wineries sometimes cut that they shouldn't?

Jay: There is not a cookie-cutter approach to cutting expenditures. We have talked about reducing bulk wine and bottled goods inventory. Next, we have to look at reducing other material costs and operating costs. Other material costs include labels, corks, capsules and boxes. Ask your suppliers if there is an equal but less expensive alternative to what they currently sell you.

Another area of possible savings is operating cost, which includes travel, entertaining, point-of-sale printing and other marketing expenses. However, I would like to caution not to do the straight percentage reduction, as you did not build your business budget using a straight percentage, nor should you reduce by the same amount.

The things that most wineries cut are their most important resource: not grapes, not wine, but good people. People are the greatest resource of any company, and the first reaction is to cut people, because they are the easiest targets and have an immediate impact on the bottom line. Now is the time to reward your best employees and let them know that together we will weather the economic storm.

W&V: In the long run, is consolidation in the wine industry a good or bad thing?

Jay: In the long run, it will be good for the wine industry, as the industry will become more significant as a whole, with greater visibility and impact on the country's landscape. However, the level of fragmentation will always be high, since there will always be many small wineries that make up the entire wine industry.

I believe the industry will divide itself between the wines that are consumer product wines and artisanal (wines). Consumer product wines will grow as wines become a bigger part of the American lifestyle as per capita consumption grows. Small wineries will be the artisanal part of the business that connects humans (consumers) to the earth.

We see the importance of this trend -- the organic movement in America -- as people increasingly want to know where their food comes from and more about it. There will always be room for and an opportunity for those with a great product and a commitment to the industry. It will be increasingly competitive as bigger players assert themselves. Wineries and wine businesses will have to be ever more strategic and creative. Branding and distribution will remain the drivers of success. Execution will matter more than ever as competition intensifies.

A resident of the Santa Cruz Mountains, Laurie Daniel has been a journalist for more than 25 years. She has been writing about wine for publications for nearly 15 years and has been a Wines & Vines contributor since 2006. To contact her or comment on this article, e-mail edit@winesandvines.com.