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Seven Key Actions to Ride Out the Economy

March 2009
 
by Hank Salvo
 
 
All the economic forecasts I read for a global turnaround vary from eight months to 18 months or more. The wine industry is showing that it is not immune to the impacts of this recession. While we all tend to get wrapped up in the operations of our businesses, now more than ever it is important to step back and take key actions to grow cash. Understanding how to protect and enhance your cash position will give you the flexibility to ride out this downturn. On the brighter side, when the turnaround comes, you'll be in a better position to take advantage of the rebound. Here are a few of my thoughts on this:

How to grow cash and equity

Run a new profit scenario that forecasts volume down from last year. You can decide the decrease, but I recommend down 30%-50%. If this sounds doomsday-ish, that's my intent. Scenario planning will give you an idea of just how bad the bad news could really be.

It also will start you thinking of what overhead you will need to cut, and how aggressive you will have to be in a dire situation. Make a list of all possibilities. If you or your people tend to be conservative in your budgeting, rebudget more realistically and be prepared to monitor performance more closely. Nothing should be sacred, but I would also suggest that you communicate clearly with your employees, so there are no surprises.

Rationalize your brand portfolio and tighten your brand message. Stick to your brand strengths, and don't produce periphery varietals that increase inventory and eat cash. Calculate your rate of return by varietal--this approach can help you understand which wines make you money and which don't. More now than ever before, your distributors and brokers are looking for a streamlined portfolio that is easier for them to explain and sell in the marketplace. Both you and your vendors will benefit.

Once you've run a bearish forecast scenario, do a realistic cash flow forecast. Understand the timing of your receivables and payables, and assume you will not be paid as quickly as in a normal environment. Take into account the timing of your big-ticket items--barrels, bottles and grower payments--but don't forget the other stuff, like supplies. Maybe it's time to use tap water in the tasting room instead of bottled water--it all adds up. This forecast will help you analyze when potential cash flow issues will surface, what you can do about them, and, importantly, how they will affect your bank borrowings and covenants.

Suspend all capital spending that is not an emergency issue or essential to brand quality. Be honest with yourself. Ask the question, "Do I really need it?" Try to use up all materials you can before buying more.

Is there anything you can sell to raise cash? Knowing it will be difficult to sell excess assets in this environment, consider bulk wine. Despite the fact that this year's harvest will not be sold for a year or longer, a more realistic forecast may allow you to rationalize your volume and give you the flexibility to move the wine now and generate some cash. You may end up a bit short of volume in the future, if the turnaround is faster than predicted, but there are many luxury brands out there that believe a little scarcity of product is a good thing.

Pay close attention to your most profitable channel. For many, this is the direct-to-consumer business (DTC). The margins are better, and you can afford to be more aggressive in this area to entice sales. Also, DTC is a great place to move those periphery varietals at a higher margin to a clientele that appreciates your winemaking growth.
Finding ways to keep your customers loyal will pay off now and when the economy improves.

Seek unbiased and informed outside perspective before making any major change in your business strategy. It is easy to have a knee-jerk reaction during times of high emotion and uncertainty. Recovery from poorly made decisions is extremely difficult and costly. Your CPAs and banks can be good sources of information and advice. In addition, this is where my colleagues at Scion Advisors really can be useful. It may be as simple as a quick phone call to one of us.

Remember: It's not what you make, it's what you keep. More than ever you need to figure out how to be relevant from a cash standpoint.

Hank Salvo is a partner at Scion Advisors, having served on its board since 2005, consulting with family wine businesses on issues such as strategic planning, succession planning and governance. He was named chairman of the Patz & Hall Winery Board in 2005, has been a board member for the California College of the Arts since 1992 and a trustee for the Educational Foundation of California State University East Bay since 1993. Reach him at (925) 915-1289. To comment on this Viewpoint, e-mail edit@winesandvines.com.
 
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