Yakima, Wash. -- One of the key challenges wineries have faced during the recession and retrenchment of the past two years, aside from maintaining financing, is ensuring cash flows. A buck in the hand has been worth two from the bank, thanks to conservative lending practices prompting wineries to lower prices on product and reduce margins in order to bolster balance sheets. Some operations have given up, and more may follow.

The latest financial results from Oregon’s 130,000-case Willamette Valley Vineyards Inc. (WVV) -- one of the few publicly traded wineries -- tell a tale common to many Pacific Northwest vintners. Case revenue increased to $4.6 million in the quarter ended Sept. 30, 2010, up 5.5% over the same quarter a year earlier. Year-to-date revenues rose to $12.25 million, 1.6% over 2009.

But gross profit dropped 7.4% in the quarter, while net income fell 30.9% from $248,021 to $171,345 in the same quarter of 2009. Year-to-date net income stood at $111,288, down 83.3% from $666,961 in the first nine months of 2009.

“The decrease in gross profit is due to higher cost of goods relative to prices received, and is the reason for the decrease in net profit over comparable periods,” explained commentary issued with the financial statements. WVV founder and president Jim Bernau remained chipper in the associated news release, pointing to the higher sales as “signs of life” in the economy.

“Now, we just need to work through some high cost of goods to get back to historical gross margins,” he stated.

It’s a situation that Randy Fenich, managing partner in the Yakima, Wash., office of Moss Adams LLP, said is afflicting many wineries as cautious consumers stick to the bargains chosen during the great retrenchment of the past two years.

“There’s definitely margin compression,” Fenich told Wines & Vines, explaining that WVV’s sales figures may be public, but they aren’t unique. “You’ve got to move the product to keep the cash flow going, and the worst thing you can do is continue to build inventory. And then it all boils down to what’s your break-even point, and what can you afford to sell it at without doing more damage?”

A turn to consumer-direct
The need to push product to market has prompted many wineries throughout the Northwest to focus on direct-to-consumer sales, with the number of tasting rooms in Woodinville and Eastern Washington increasing to make wines available to consumers.

But it takes more than tasting rooms to keep product moving, said Barbara Hetrick, who with partner Tim Sampson launched Yellow Hawk Cellars in Walla Walla, Wash., in 1998, but closed the business earlier this year. “The pie can only be cut so thin,” Sampson told Wines & Vines at the time, noting that Walla Walla has seen explosive growth in its wine industry during the past 12 years, with 117 wineries operating today compared to just 14 when Yellow Hawk started.

While wine tourism and tasting rooms are important -- Yellow Hawk itself will be opening for a month from Nov. 19 through Dec. 18 to sell some remaining stock, including its 2008 CV Sangiovese -- Hetrick said it takes more than local sales to be viable.

“Several new tasting rooms are open, but wine sales are not in Walla Walla,” Hetrick told Wines & Vines this week. “People have to get out of town and look at the West Coast markets, the national markets, the international markets. And that’s what’s so hard when you’re small.”

Business savvy needed
The challenges of moving product may prompt wineries to start asking the more fundamental question of whether what they’re producing should be made in the first place, Fenich said. “You’ve got to be able to move this inventory, and if you don’t think you can, you’ve got to think whether you should be sinking all the money into it in the first place,” he said. “It’s a huge dilemma, and there’s not necessarily one pat answer. But it’s a situation where anything and everything needs to be looked at in a different light.”

While rumblings of closures abound -- the most visible example being Diageo PLC’s closing of its Canoe Ridge Sagelands tasting rooms in June, Fenich expects further “transitions” to occur in the weeks and months ahead.

Wineries that opt to soldier on will have a chance to upgrade their business savvy and ask practical questions about financial management at the third annual Wine Industry Financial Seminar that Moss Adams and the Washington Wine Industry Foundation are planning for the Three Rivers Convention Center in Pasco on Dec. 1.

Key sessions include “Business Essentials” (which will address costing, pricing and financial forecasting) and “Marketing Essentials,” offering tips on budget branding and the marketing mix that offers the best return on investment. Wineries will also hear a distributor’s perspective on wine retailing in the session, “The Battle for Shelf Space.” Approximately 80 participants attended last year’s seminar, and organizers are planning for upwards of 100 participants this year. Details and registration: washingtonwinefoundation.org.

 

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