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MONEY IN THE BC WINERY INDUSTRY
Vancouver International Wine Festival
2015 Annual Wine Law Seminar
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Vancouver, BC
February 23, 2015
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David Enns, Tony Holler, Al Hudec
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David Enns – Laughing Stock Vineyards
David and his wife Cynthia are former
investment advisors who founded Laughing
Stock Vineyards in 2003, when they purchased a
house with 5 acres of land on the Naramata
Bench. Their winery, which achieved
profitability in 4 years, started with 500 cases
($35/bottle) from one acre of grapes and has
now capped production at 7000 cases (6
different wines with 2 Bordeaux blends) with
annual revenues of over $2 million.
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Tony Holler – Poplar Grove Winery
Tony, the son of a Summerland apple
grower, was a highly respected
emergency room doctor and
biotechnology entrepreneur (ID
Biomedical). In 2007 he acquired a
majority interest in Popular Grove.
Tony and his wife Barb brought with
them 110 acres of prime vineyard sites
located throughout the Southern
Okanagan Valley. !
Tony operates a showpiece winery and
tasting room on Munson Mountain
with Popular Grove, (luxury bordeux
type brands) and Monster Vineyard
(affordable day to day wines). He is
targeting 25,000 cases to build a
sustainable family business.
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Al Hudec – Farris LLP
Al speaks and writes frequently on legal
issues relating to the wine industry. Al
provides legal representation to some of
the Okanagan’s largest and most
successful wineries, and to a number of
very successful boutique wineries in the
Valley.
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He has recent experience in the purchase
and sale of wineries and the structuring
of both domestic and international
distribution arrangements. He is familiar
with the intricacies of the regulation of
the wine industry in British Columbia,
including the array of regulatory changes
that are currently being implemented.
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Al has a home in Oliver and divides his
time between Vancouver and the
Okanagan Valley. 4
Legal Categories
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Land-based wineries – 243 licenses
• Minimum production capacity of 4500 litres
• 100% B.C. Grapes
• 2 acres on site
• 25% owned or leased
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Commercial wineries – 3 largest players (11 licensees in total)
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Virtual wineries – 17 non-licensed but manufacturing under another winery’s license
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Income Statement for BC Winery (2011)
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Revenue
100%
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Less COGS
44%
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= Gross margin
55.8%
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Less indirect expenses
54.1%
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=Net profit before tax
2.6%
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Source: Industry Canada: Wineries: Financial Performance Data for 143 small and medium sized wineries ($30,000-$5 million sales)
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See also: Northern Grapes Project Towards Startup Winery Profitability: When do I start Making Money?
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Profitability for Typical Okanagan
Winery
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Using Revenue Canada data from 143 small and medium size wineries (sales of $30,000 to $5 million),
Industry Canada reports that:
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60 % are profitable
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40% loss money
Profitability varies by size
Size/Quartile
Revenue
Net Profit
Bottom quartile
Under $105,000
-51%
Lower middle quartile
$105,000-$237,000
-3.4%
Upper middle quartile
$237,000-$620,000
-17.9%
Top quartile
Over $620,000
10.7%
Deloittes New Zealand Benchmarking Study (2013) supports this conclusion:
• Smaller wineries (under $1.5 million in sales) have losses of 4.4 % of revenue
• Midsize between $1.5-$5 million break even (0.5%)
• Larger wineries (>$5 million in sales) make money – 9.8% to 16%
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Financial Performance Data
Source: Industry Canada: Financial Performance Data
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Economies of Scale
(Average total costs)
Cases
2000
5000
10,000
15,000
20,000
ATC/Case
$154
$137
$126
$126
$124
ATC/Bottle
$12.87
$11.44
$10.54
$10.53
$10.41
Look for industry consolidation, reality in larger competitors with increased scale and resources; impact on margins and customer retention for the small Family businesses.
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Source: Small Winery Investment and Operating Costs, Extension Bulletin Washington Extension Study
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Pricing Points
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Premium/Ultra-premium – highest price and highest profitability
● To be a meaningful consumer you need to be in the top quartile of income earners (boomers)
● Rob McMillan of SVB is predicting a breakout year with 14-18% revenues growth
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Popularly priced brands
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Value price brands
● Dominated by bulk wine import (Cellared in Canada)
● OR uncontracted grapes
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Market Segments
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Source: Lee Cartier (Oregon School of Business) - The British Columbia Wine Industry: Can it
Compete with the Big Guys ? American Association of Wine Economists
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Demographics & Pricing Points
Source: Silicon Valley Bank 2014 Wine Conditions Survey
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Sales Channels
• Direct sales
● Tasting room
● Wine club
● Internet
● Secondary tasting rooms
● Farmers’ markets
● Interprovincial sales
• Hospitality industry
• Retailers
LDB
● LRS
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● Independent Wine Stores
● VQA stores
• Grocery stores – What is the opportunity?
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Channel Volumes for VQA Wine
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Retail Channel
Stats from BCWI
2011
% Total Sales
2014
% Total Sales
Winery Direct
LRS
VQA
Independent Wine - Agency
23.9%
16.7%
8.7%
3.8%
28.2%
18.49%
7.7%
3.7%
Government Liquor stores
25.3%
22.3%
Source: BC Wine Institute
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Sales Channel Net Pricing
Retail Licensee Type
Winery Direct
Bars/Hotels/Restaurants
Independent Wine Stores
Licensee Retail Stores
VQA Stores
Government Liquor Stores
Wholesale Discount
0%
0%
15%
16%
30% (consignment program)
30% (taking into account VQA Rebates)
*Until April 1, 2015 when the Province’s new wholesale pricing model will be implemented
Source: BC Wine Institute
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Making a Big Red
- BC Boutique Winery • RETAIL PRICE
• !PROFIT $35.71
$11.96
•! If selling through mainly ‘direct’ channels
•! !GST/PST – 12%
$4.29
•! Selling Costs
$5.43
• Indirect Costs $6.17
• Direct Costs
$10.44
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Making a White
- BC Boutique Winery • RETAIL PRICE • !PROFIT $19.64
$1.36
Only if selling in mainly ‘direct’ channels
GST/PST – 12%
$2.36
Selling Costs
$3.93
• Indirect Costs $6.79
• Direct Costs
$6.62
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Cost of Sales (Direct Expenses)
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Grapes
• 67 % of vineyard acreage owned/leased by wineries (average 28 acres)
• 33% owned by independent growers (average 6 acres)
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Labour – temporary immigrant work program
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Barrels
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Bottles, closures, capsule, labels, boxes
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Inventory in process, current inventory
Source: BC Grape
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Potential BC Wine Production
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As Okanagan land supply reaches its limits, look to the industry to revise the quality of wine and to develop a true
wine and food culture in B.C.
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Land Prices/Grape Prices
Source: The Wine Industry Symposium Group
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Operating Expenses (Indirect Expenses)
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Sales and distribution costs
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Amortization and depreciation of fixed assets + tangible equipment
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Interest expense
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Insurance
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Property tax
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Volatility of Gross Margin + Pre-Tax Profit
Source: State of the Wine Industry 2015: Financial Performance: 2015 looks like a breakout year
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Risk Factors
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Agricultural risks
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Long manufacturing cycle
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Industry consolidation (resulting in larger competitors within increased scale and
resources – impact on margins and customer retention)
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Changing consumer preferences
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Regulatory changes
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Trade challenge by California or European producers
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Exit Alternatives
A successful exit is the single largest contributor to return on investment
1.
Strategic buyer – portfolio building, geographic expansion, leverage existing
infrastructure
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Financial buyer – DCF + terminal value - winery value negatively impacted by
relatively low year to year earnings up front, but dominated by amount and timing
of the terminal or exit value
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Romantic buyer – intangible lifestyle benefits
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Exit Valuation
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Values run the gamut from one of a kind to commodity
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Value builds in growth in value of unique vineyards and brands
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A non-descript brand without a compelling story will probably garner no more than
value of the vineyard property + tangible equipment (deferred maintenance and
profitability issues) – landscape littered with meaningless and storyless brands
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Restate financial statements to exclude family expenses; provide transitional support
(consulting role)
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Multiples for a Successful Brand
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Private wine company multiples seem to carry higher valuations than many other private
businesses. The Pepperdine Private Capital Markets Survey of 327 private equity companies
done in late 2011 concluded the following:
Source: SVB Blog
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How to Make Money in the Winery Industry
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Focus on drawing profitable volume through sales channels appropriate for price
point and business model
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Quality constant grape supply
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Carefully manage expenses
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Asset and capital structure appropriate to revenue and case volume
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A Business Plan for the Future
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Vertically integrate – forwards and backwards – own your own vineyard, develop your own
distribution (Is a ‘virtual winery’ a viable way to start?)
Focus marketing on the next generation – Gen X and Millennials – this means social
media marketing
Focus on premium/super-premium wines – rising land and grape prices will force a
migration towards high quality
Focus your business model on price appreciation rather than volume growth –
maintaining super premium quality requires meticulous focus on every detail – mitigates
against growing beyond a small to mid-sized winery
Focus on Varietals best suited to the Valley – will sub-appellations (or bench specific
marketing groups) be a significant factor in the future
Be sure you are well capitalized from the outset - you need to build up front to the size
you intend to grow; you will achieve positive accounting net income before you become
cash flow positive
Focus on a business plan synergistic with the coming to age of the Okanagan Valley –
increasingly it is a major internationally prominent ‘local food and wine’ tourist destination
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COMPARISON OF VARIETAL ACREAGE 2008 vs 2011 vs 2014
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