I am asked often by many people entering or considering entering the high-end wine business in Napa about their potential prospects. I usually tell them they need to answer the following questions before entering their dream…
In a business with strong (and growing) long-term headwinds, namely the following…
- Gen Z having less disposable income than Boomers and Gen X
- The growing evidence against alcohol from a science standpoint
- Other alcoholic beverages going after elite buyers with luxe branding and high-end products
- Boomers beginning to reduce large-scale purchases as they age
- Climate change effects impacting the entire west coast, where most wine over $20 comes from
- Rising costs of land, labor and winemaking
- Most recently, distribution. leaving this sector to focus on more grocery store brands.
Given all these things happening simultaneously… “Why should serious wine buyers purchase the wines you wish to make and sell?”
Next, given the pool of potential collectors may be slightly contracting, this leads to the second question to be asked and answered… How will your winery take market share from wineries already doing the same thing you are? In other words, why should that buyer leave them, for you?"
When I ask these questions I am usually met with some combination of the following responses…
A. Well, if we make great wine, people will find it.
B. We are really passionate about wine and the land and the process and buyers will notice this.
C. If others can do this and be successful, so can we.
There may have been a golden age where this was actually possible. I think it was the period between 1991-2007. Before the Great Recession and during the peak influence of Parker and Laube. I feel the Great Recession changed this dynamic and the Pandemic magnified the change, further.
Now, more than ever, one needs to have a well-thought out business plan before entering this business. Jack Welch, former General Electric CEO said that a business plan should address the following… “How do we plan to win in this business?” The dream needs to be set aside and the hard reality addressed.
Wine is a for-profit, global business segment that competes against beer and spirits. Investment capital is spent two years before revenues are received (at least for many red wines) and that is right away a risky venture. Any serious investor (one who does not like burning through money) will have to think through likely cash flows, marketing and above all, the competition.
It’s been several years since I double-checked this, but I believe when the 2002 vintage came out, Parker scored 59 Napa Cabs 95-100pts and of those, 6 scored perfectly. Now, whether it is Jeb or Antonio or WS, the number of Cabs from Napa scoring in that range is at least in the 300+ range, yearly. That’s almost as many wineries that existed in Napa when I moved here in 2005.
Now that 95pts+ is the entry level for Cabs hoping to sell at $125+, scores have become close to a commodity. Commodity businesses are poor businesses, especially if the valuation of your quality by others is itself becoming a commodity.
If someone is hiring one of the top named consulting winemakers with a long list of 100pt scores going back a decade on their resume, and you want to hire them and use the same big name vineyards also receiving such scores, how will one differentiate oneself? Who needs the 25th Vineyard Designate “Z” for $395?
Differentiation is the name of the game, moving forward, for high-end wine, in my opinion.
The only way I can see doing this is by one (or more) of the following:
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Estate Fruit and/or Estate Winery-Tasting Room. This is the ultimate edge, as it gives buyers a place to go and an some kind of story to tell. Alas, no one in Napa can boot-strap their way into this anymore and since most wineries are “virtual” or “nano” wineries, this Is an excellent “moat” around the business of those who can afford it.
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Story. If you don’t have #1, you had better have this one. And it can’t be… “Me and the wife made it rich in Business Y and so we bought a place here.” Although there is nothing wrong with that, and it is in fact common, it is also not a reason for someone to purchase your wines. For more than a few clients, it might be a reason not to. Make sure the “story” is on the right topic.
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Price. It is hard to believe when the 2003 Scarecrow came out in 2006 and received a mega-score from Parker, that the retail price was $90. Those days are not coming back and if you look at the most recent Napa-review issue of WS, almost all the top wines were $200-1,250 per bottle. I have believed for some time that the winning acronym in this business is “QPR” (Quality to Price Ratio.) I remember that term being used all the time when I was still a collector in the early 2000s. I do not own a winery or a vineyard and so QPR is practically my religion. Surprisingly, very few projects go this route, and instead take the view “If our wine is as good as Wine X, we should price ours the same.” I find that does not work well because, again, that is not a reason to buy.
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Scarcity. And by this I do not mean “perceived scarcity” but instead mean “absolute scarcity.” Perceived scarcity gets found out, eventually, usually when message boards start talking about how Scarce Wine X that used to have a three year wait now offer their wine to new signups. Or when the offer was for 3 bottles and now is 24. The bubble is popped. True scarcity lasts longer because it is real. Again, for myself, I am the sole acting employee. I make it and sell it, and this weekend am busy creating a spreadsheet with 770 orders to get ready for shipping, which is not in any way romantic, I assure you. I simply can’t make any more wine than I am and that acts as a kind of insulator as well. But people really do like having access to relatively rarer things.
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Packaging. This is now the least important edge. I remember when Buccella first hit the scene with their bottle shapes around 2004. I thought it was the coolest looking wine bottle I’d ever seen and I have little doubt it helped their sales. But now I think in many cases, big wood boxes and ultra-heavy bottles might be a drag on sales and profits. This is in flux and worth considering.
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Key Employee Retention. Oh, this one is huge one and rarely talked about but low-turnover has been an obsession of mine since my college years, studying investing. Great businesses have low turnover of staff, which eventually leads to low turnover of clients. People like to see the same faces over and over again and they become attached to those people, building loyalty.
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Personal Touch. If an “estate” is the ultimate advantage of the larger wineries, this is the ultimate advantage of smaller ones. 95-100pt scores are all over, but it is much more rare to meet the actual owner or winemaker. This is where connections and loyalty are built. It takes years but is worth the investment. Once achieved, it becomes profitable.
For someone who is beginning their adventure into the high-end wine business, some combination of these advantages must come to fruition or they will become a break-even business venture, at best. More likely they will fold, or stay a marginal player in whatever sandbox they are in.
This is about the hardest time to enter this business in my time loving it, which began in 1991. Leaving my career in 2005 and starting my winery in 2010 has worked well but if I were starting it in 2024, it would have been a much harder road. I was lucky to get in during the 7th inning of a great, nine inning ballgame. The game does not end. We always have to keep working at it and not take anything for granted. I wish those luck who wish to get into it and hope these thoughts help a few people think this through as they make their decision.
PS- sorry for any typos, I wrote this all in one-shot off the top of my head.