DtC Is Lifeblood of Wineries, Banker Says

Industry executive warns that wineries would close without direct-to-consumer sales; meanwhile, Napa residents question new projects

by Paul Franson
Results of the Silicon Valley Bank Wine Conditions Survey.
Napa Valley, Calif.—Most Napa wineries will not survive without an increasing emphasis on direct-to-consumer sales, according to Rob McMillan, executive vice president and founder of Silicon Valley Bank’s wine division.

He spoke Thursday during a community meeting the Napa Valley Vintners organized to foster communication between area residents and members of the wine industry. McMillan offered a preview of information he will present to Napa County Commissioners looking at changes in regulations in a few weeks. His findings were based on a survey of 60 Napa Valley clients and prospects, primarily family-owned, medium-size and small wineries, as part of the bank's larger annual Wine Conditions Survey. According to statistics kept by Wines Vines Analytics, Napa County is home to 1,042 wineries.

Attendees were likely surprised to learn how the business model of Napa Valley wineries has changed over the years. Noting that 95% of Napa Valley wineries are family owned, and 78% make less than 10,000 cases per year, McMillan made a strong case that direct sales are vital to most of these wineries.

Importance of direct sales
“Wholesalers don’t want small wineries. Distribution isn’t available for most wineries, so they have had to elect more direct-to-consumer options,” he said. “Forty-five percent of a typical Napa Valley winery’s sales are direct,” primarily through the wine club and tasting room.

McMillan found that almost 80% of Napa Valley wineries had tasting rooms, a percentage lower than other prominent premium wine regions such as Sonoma, Oregon and Washington.

He added that wineries had good access to distribution until the early 2000s, when a spike in the number of wineries distributors to reconsider how many brands they could support. Since then, they've consolidated, seeking out large wine producers that can match the needs of their nationwide retail partners.

"That's made the wineries with less than 10,000 cases production left out in the cold, forcing them into selling direct to consumer," McMillan said. "While gross margins are higher for that approach, there are significantly higher costs to support selling by the bottle direct versus by the palate to wholesalers."

He also noted that the pretax profit was 12.5% and gross margin 65% in 2008 before the recession.

Also, in Napa County, 65% of wineries are open by appointment only—those founded after 1990 by law, but others by choice. This is far higher than the second-highest region for appointment-only tastings: Sonoma at 15%.

McMillan concluded his remarks with a warning: “Most Napa wineries will not survive without an increasing emphasis on direct-to-consumer sales.”

Community perspective
Residents of the Napa Valley called for wine industry restrictions Thursday, when three controversial wine projects generated significant discussion during a community meeting held by the Napa Valley Vintners.

The three projects are:
• The Woolls Ranch winery proposed in an isolated rural area on Mount Veeder
• The Yountville Hills winery located where the divided highway ends upvalley
• Craig and Kathryn Hall’s plans to develop 365 acres of vineyards on 2,300 wild acres on Walt Ranch between Atlas Peak Road and Monticello Road in the undeveloped southeastern part of the county.

All of the projects appear to meet current laws, but they still need approval. In the case of Walt Ranch, the county planning director has taken the unprecedented step of calling for a public hearing. Normally the planning department makes its decision based on written comments, though the planning commission and board of supervisors can overrule those recommendations.

Though each project has attracted specific concerns, the underlying question behind them all is: How much is too much? Should tourist-attracting businesses and other development continue, or should new limits be added to what Linda Reiff, president of the Napa Valley Vintners (NVV), notes are already the toughest restrictions on how to run a wine business in the world?

The Vintners themselves have called for greater enforcement of existing laws—in a recent audit, eight of 20 wineries audited by the county were exceeding event, traffic, production or other entitlements—and many wonder why you can build a winery on a 10-acre parcel without a demonstrated source of grapes from Napa County, much less the site, or even water.

Those issues and more are sure to find wide discussion in the near future in Napa, though some worry that changes could open the door to the foundation of the laws that have kept Napa Valley mostly undeveloped, “an Eden for grapes” according to the Napa Valley Vintners, and equally a paradise for its residents and visitors.

Posted on 10.27.2014 - 17:09:06 PST
Seems like another locical option would be to have more small niche distrbutors. Consolidation of distributors has not been Napa's friend or the micro brewery or small batch spirits. Seems like an opportunity to me??