Sunday, November 22, 2009

So, Who Will Survive?

With over 600 wineries in the state and very limited shelf space, who will survive the cutthroat cost cutting now going on at the retail level? I have already heard rumors of several wineries closing their doors. In fact, in my 25 years as a commercial winery a lot of wineries have come and gone. Remember DeHavilland or Stewart or French Creek Cellars? I heard that even Joan Wolverton of Salishan is calling it quits.

A lot of people entered the winery business via spreadsheet. Yes, you read that correctly. They did not have a passion for winemaking, but saw a way to a quick buck with little investment. Steve Burns, when head of the Washington Wine Commission, said there is no end to the high end market and no price that is too much to charge. (I think he meant if you were located in Walla or Woodunville.) A lot of people bought this. There are now over 100 wineries in Walla a long way from Seattle. I just read that two are opening tasting rooms in Woodunville.

Back to the spreadsheets. Okay in cell A1 I put the price per bottle. In cell B1 I put my case production. In C1 I put in the formula =A1*B1*12. Okay $50 sounds reasonable considering I might have to wholesale some of it, and 1000 cases should fit in my garage. Voila, I can make a cool $600,000 per year. If Parker gives me a 95, I can raise my price to $100 per bottle (Remember, Steve said there was no upper limit to what you could charge) I can make a cool $1.2 million and not even quit my day job.

So, the big meltdown happens. Not even wine shops want your $50 French oaked monster because they already have the shelves filled with unsalable $50 wines. You paid $1200 for those French oak barrels, $3500 a ton for grapes (about $5.00 of juice per bottle) you read about in an article by Paul Gregutt, and you paid $21 a case for those three-pound bottles, and $.60 for each of those two-inch #1 extra-premium corks. I hope you like your wine, because you have a lot of it to drink.

I hope you didn't borrow money to start you garage winery, because that is the next group of wineries going down. Highly leveraged wineries have to add debt service to the above expenses. How about that new $11 million tasting room? How do you get that money back.

Ste Michelle Estates will survive. They make good wine on a scale that gets good deals on all packaging materials. They have a quality image and an established distribution network. But what about those midlevel brands that come and go. You know who I mean, the 300,000 case wineries. Just big enough to not get the small producer tax credit, but not big enough to compete with Ste. Michelle. Good luck.

Let's look at the wineries in the Rattlesnake Hills. Many are estate wineries like Portteus and Bonair. They can grow grapes that are equal to the finest in the state for about $500 per ton (about 67 cents of juice in every bottle). Both Bonair and Portteus sell wines for under $10 in the Seattle market and make money because production costs are kept low. We do not work for the bank.

The Rattlesnake Hills AVA is only two hours and fifteen minutes from Issaquah via freeway. It can take that long to get to Woodunville at certain times. Because the wineries are in a rural setting, people like coming here. They have seen enough strip mall and industrial park wineries. Those wineries around Zillah should have no trouble surviving because most the sales are at retail through the tasting room. We had the best September and October in the history of the winery. As Paul Portteus said, "We have become successful in spite of the Washington Wine Commission."

There is a very famous Red Mountain winery opening a tasting room in Zillah. I wonder why? More to come.

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