The Sorry State of the Wine Business

October 2011
by Jeffrey Miller
In his Editor’s Letter “U.S. Economy vs. Wine Economy,” (Wines & Vines, September 2011), Jim Gordon conveyed some of the upbeat news for the U.S. wine business. While it’s true that things are better than they were, it doesn’t mean things are good. That applies with special force to small businesses in general and small wineries in particular. The recession created a perfect storm for the small winery, one that can’t help but change the landscape of the wine business. In fact, it already has.

The small winery depends in large measure on the small distributor, but this business has been totally whacked by the recession. Probably the biggest problem has been the difficulty in obtaining credit, since banks have really tightened their lending requirements. Big distributors (the ones that distribute Gallo and Kendall-Jackson) still can get credit, but even they have seen their borrowing capacity reduced. For a small distributor, the credit crunch has been ruinous. This directly translates into distributors reducing their inventories, since they have lost the ability to finance wine purchases to the extent they did before disaster struck. Of course, carrying less inventory means less product to sell, and therefore less profits, which makes them even less of good credit risk. It’s something of vicious cycle.

In large measure (at least from my winery’s point of view) the small distributor has resorted to other means of financing (i.e., not paying their bills on time). If something stays in inventory beyond the date payment is due for the goods, then payment is simply not forthcoming. Even worse is that we’re seeing new orders coming from distributors when payments for the old orders are long overdue. I assume that the distributor has gotten paid, since he probably wouldn’t be reordering from us to supply deadbeat retailers. So I have to think the distributor is just not generating enough margin to pay ongoing expenses, and we get the short end of the stick.

The really unpleasant part is having to fight with the distributors who, in a very real sense, are our lifeline. This definitely isn’t how I thought I’d be spending my time when I started a winery, but it’s where I find myself. So here I am, my own personal collection agency.

Carried to an extreme, the small distributor simply can’t compete anymore and goes out of business. Carried to less of an extreme, the small distributor muddles on, smaller than before since it can’t afford to carry the same volume with less resources. The net result is that smaller wineries have even less of a market for their products.

I know our situation isn’t unique to us. Our winery, like many small wineries, uses a custom crush facility shared with other boutique wineries. I haven’t been keeping close track of things, but I think I can say that bottlings at the facility have been off at least half, and probably considerably more, from last year (and it’s not like last year was anything to write home about). I taste most of the wines these other small wineries make, and they are of consistently high quality (so that can’t be the problem). Why the sharp drop off? In part, there is simply less money available to pay for production costs.

That leads to reluctance to produce more wine when it can’t be sold for a reasonable profit (or any profit at all). After all, if you’re not making any money, what’s the point? And, I think there is some level of exhaustion in trying to deal with an unforgiving marketplace. I love making wine, but selling it is an entirely different matter.

We also sell grapes, and the story is pretty much the same: Sell grapes, harvest grapes, deliver grapes, don’t get paid for grapes. We just received our final payment for last year’s harvest, probably because the winery figured we wouldn’t sell them any grapes this year until last year’s grapes were paid for (and they figured right).

To the extent that a small winery can still succeed, it may need to sell at least a substantial portion of its wine direct to the consumer, bypassing the distribution route to at least some extent. I personally would rather focus on making good wine and let a distributor focus on the sales and marketing. But limiting ourselves to selling through distribution may be a luxury we can no longer afford. We are considering opening a tasting room, where we aren’t at the whim and caprice of a distributor. Though with all the compliance, zoning, etc., that’s a story best left for another day.

At any rate, no matter how you look at it, the small winery faces a challenging future.

Jeffrey Miller is an owner and manager of 12,000-case Artisan Family of Wines, which produces Seven Artisans, Sly Dog Cellars and Red Côte wines from its vineyards in Suisun Valley, Calif. The winery specializes in Petite Sirah, Montepulciano and Meritage.

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