Economics and Marketing Wines From Small Wineries. By William Gorman, NMSU

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1 Economics and Marketing Wines From Small Wineries By William Gorman, NMSU

2 The number of wineries nationwide has Quadrupled in the past ten years to about 10,000 in 2010 Only 2 percent of these wineries produce more than 100,000 cases per year (considered a medium size winery) More than half produce less than 2,000 cases per year Three firms control 50% of all wine sales these firms own collectively more than 1,000 wineries. Wine Market is Highly Concentrated

3 New wineries have no name recognition and no established customer base Wholesale wine distributors focus on selling wine from the large national companies. New small wineries can t easily compete in sales to restaurants and retail stores. Not sufficient year around volume, not profitable The only markets where new wineries can have a competitive advantage is in their tasting rooms and wine festivals where the national companies are not invited Problems--New Wineries Entering the Market?

4 University of Missouri Study Only 2 % entered the wine business expecting to make a profit 30% entered because of their love of wine 22% wanted to improve their quality of life 10% wanted to be in agriculture 10% because of a sense of community Motives for Entering the Wine Business

5 If your goal is primarily a hobby winery, stay small 500 cases to 750 cases annually, possibly only a tasting room If your goal is to build a profitable wine business start small and grow your market before making major investments in winery equipment.10 year plan Outsource the wine making or a few years Focus on being a marketing company Make sure you have the technical skills before making and selling your own wine Things to Consider while Sipping your Wine

6 The lower the price of a product the greater the quantity demanded by consumers If you increase the price less will be demanded This is true for most products but not necessarily true for all products in all situations Wine can be one of those products in certain circumstances Economic Concept: Law of Supply and Demand

7 You are selling oaked Cabernet Sauvignon at $14 per bottle and are selling 5 cases per week You re-label the wine to Proprietor's Reserve and price it at $18 per bottle and sales stay at 5 cases per week or possible increase How might this happen? People associate price with quality Difficult to determine quality each consumer is different You have sufficient higher income customers Proper pricing strategy is important In general have to stay in line with the competition Consider This Situation

8 The number of potential consumers in your market Income of consumers Taste and preferences of consumers Price and availability of substitute products, wine from other wineries in the area and prices in retail stores Factors Influencing Demand of Branded Products

9 There are many ways to segment your potential wine customers in your market Income Age Situation (holiday seasons, weddings) Hobbies, ie dog lovers, wine and cheese parties Ethnicity Tourists verses locals You need to consider these factors in determine which wines to sell, advertising, promotion and in pricing Segmentation of Markets

10 Can the winery name affect sales? What factors should be considered in choosing a name? Regional Affiliation Unique favorable characteristics.santa Fe vs. Deming Referencing the industry winery or vineyard Easy to remember & pronounce Association with wine names in famous regions Impact of Winery Name

11 The location will impact the number of customers as well as the demographics of the customers Which is preferable? Street with a high volume of traffic or a low volume? Higher income location or lower income location? Close to an Interstate? Close to a major tourist attraction? Close to many potential consumers? Adjacent to a vineyard? Rural Setting Impact of Winery Location

12 Your label is one of your primary sales tool Labels brand and describe your wines A variety of labels can be useful Can have more than one brand Varietal Name identify the grape/type of the wine Different demographics particular labels appeal to different segments Labels for tourists green chile Impact of Labels

13 Impact of labels: Example Millennial Generation

14 Labeling Cater to the restaurants by providing wines labeled exclusively for restaurant sales Green stickers Special Reserve

15 Packaging

16 Tasting room (can be more than one) should be attractive Festivals Participate in the 5 or 6 major state festivals Have your own festivals Wine clubs and Internet sales Direct to retail stores and restaurants Sales to wholesale distributors Winery owned restaurants with a tasting room Adjacent event center Market Outlets

17 Boutique Winery sales by type of outlet NM 2007 Festivals 14% Wine Clubs/Internet 9% Retail Stores 9% Restaurants 4% Tasting Rooms 64%

18 Cost to produce a bottle of wine assume $7.00 Price sold directly to a retailer $10.00 ($3.00 margin) Retail shelf price $13 to $14.00 Restaurant menu price $20 to $35 per bottle Suggested price in winery tasting room..$13 to 14 per bottle competitive with retail store prices Structure of Wine Pricing Sales Directly to Retailers

19 Cost to produce a bottle of wine assume $7.00 Price to a wholesaler.$7.25 Price wholesalers sells to restaurants and retail stores..$11.00 Price on the retail shelf $13.50 to $15.00 See why small wineries don t generally sell much wine thought wholesalers even when they agree to handle their wine? Structure of selling Through a Wholesaler

20 Pricing Strategy Called Contribution to Profit and Overhead Method

21 Accurate direct production cost Variable expenses expenses that change with the quantity sold Difference is funds available to cover fixed expenses is the funds to pay overhead expenses and profit referred to as Contribution Subtract overhead expenses and what s left is profit Information Needed

22 1. You need to have a reasonably accurate estimate of your direct production costs and variable expenses to have accurate profit contribution estimates. 2. The cost items that go into the production cost include: 1). Cost of growing or buying grapes, 2). All costs associated with getting the wine in the bottle, and 3). Deprecation expenses on selected winery equipment including oak barrels used for some of the wines. 3. The variable expenses will depend on the type of outlet you are selling into. The example is for Tasting room sales the expenses being tasting room labor, state and federal wine taxes, advertising, promotion expenses, loss of wine from pouring samples, utilities, supplies, and special entertainment. 4. Overhead expenses usually include depreciation and maintenance of the buildings, payments to management, insurance, interest, accounting, and repairs. 5. The contribution to profit and overhead method will not provide an exact procedure for maximizing profit but can give insight on possible combinations of prices and resulting quantities sold that will result in potentially increasing profits. It will also prevent you from selling below variable costs unless you choose a wine as a loss leader which may not work for a tasting room sales like it does for a grocery store. Pricing Strategy For Achieving Profits