business & technology

Benchmarking Winery Financial Performance

Douglas J. Jordan, Dan Aguilar and Armand Gilinsky, Jr.

M O S T BUSI NESSES CA N A SSE SS their financial performance against that of TA B L E 1 Winery Financial Benchmarks, 2007 & 2008
Year/Annual Averages 2007 2008
their peers by examining publicly available balance sheet and income statement
Cases Sold (in 1,000s) <4 4-20 >20 <4 4-20 >20
data. The objective of this article is to provide financial analysis data from 2007 and
No. wineries represented 27 36 27 22 32 26
2008 for family-owned wineries so that practitioners can assess industry perform-
PRODUCTION & SALES
ance benchmarks, compare their businesses’ financial health to those benchmarks,
Average Cases Sold 2,233 9,470 69,438 2,407 8,278 80,419
and for those in transition to new ownership, develop comparables for business val- Average Cases Produced 3,383 12,891 78,367 3000 9,813 88,869
uations. Production to Sales Ratio (x) 1.66 1.35 1.16 1.33 1.15 1.13
Financial performance data are also important because wine is a big business. The Ave. Sales Price per Case $403 $297 $216 $399 $289 $212
wine industry produces almost $59 billion in economic value for California and COGS per Case $150 $119 $86 $128 $114 $85
more than $120 billion in revenue for the U.S. as a whole, according to 2008 statis- Gross Profit per Case $222 $178 $130 $271 $175 $127

tics from the Wine Institute. For the Napa Valley alone, which produces only 4 per- EBITDA ($1,000) $252 $744 $4,145 $302 $620 $3,882
EBITDA, Less Distributions $181 $652 $3,424 $186 $517 $2,971
cent of the wine grown in California, wine sales comprise nearly 40 percent of the
($1,000)
economic impact of California’s wine industry on the U.S. economy—about $41.9 Sr. Debt per Case Sold $416 $354 $164 $436 $328 $210
billion, according to a late-2008 report released by the Napa Valley Vintners Line of Credit Debt/ $256 $119 $64 $296 $140 $69
Association. With that much money at stake, it is surprising that there have been Cases Sold (x)

relatively few studies about financial benchmarks in the wine industry.1 A major PROFITABILITY

reason for the lack of financial data is that all but a few wineries are family owned, Gross Profit Margin 61.0% 56.2% 55.6% 60.7% 58.4% 53.5%
Sales, Marketing, 16.3% 17.9% 19.3% 19.0% 21.1% 22.3%
and performance data are proprietary.
Promo Ratio
In collaboration with the Wine Division at Silicon Valley Bank (SVB), we ana- Net Margin before 9.1% 10.5% 15.5% 8.1% 10.3% 9.5%
lyzed 2007 and 2008 financial statement data based on SVB’s proprietary peer group Owners Comp.

metrics for some 90 wineries in California, Oregon and Washington. This article Net Margin 6.9% 7.5% 14.8% 6.6% 8.6% 8.9%
Return on Equity (ROE) 12.1% 2.8% 13.4% 6.4% 21.0% 9.5%
presents previously unavailable financial results for these wineries to establish
Adjusted ROE 8.3% 13.0% 18.8% 9.4% 16.0% 10.4%
benchmarks of winery financial performance.
Return on Assets (ROA) 3.7% 7.4% 8.8% 9.6% 8.7% 5.5%

ACTIVITY

Data, Sample and Segmentation Accounts Receivable Days

(365)
49 48 44 41 45 38

Over roughly the past decade, SVB, located in Santa Rosa and St. Helena, California, Inventory Days 1,183 876 739 1,512 968 889
has collected financial statement data (under strict confidentiality agreements) LEVERAGE
from current and prospective client wineries located in Northern California, Tangible Net Worth $592 $2,542 $13,903 $492 $2,052 $16,350
California’s Central Coast, Oregon and Washington. SVB has used the data to create ($1,000)

what it calls “proprietary peer group metrics.” SVB provided raw peer group data Total Liabilities to TNW 1.73 1.72 1.53 1.11 1.89 1.40
Senior Liabilities / TNW + 1.56 1.06 1.20 0.96 1.58 1.03
for analysis after company names were scrubbed from the data, and data were aggre-
Sub Debt
gated to further preserve each individual client’s anonymity. These peer group met- Debt Service Coverage (x) 5.2 5.8 7.5 4.4 4.4 6.4
rics permit analysis and comparisons of financial statements to assess financial
LIQUIDITY
strengths and weaknesses. Current Ratio (x) 3.1 2.5 3.0 3.2 1.7 2.6
Data consisted of year-end income statements, balance sheets and selected finan- Quick Ratio (x) 0.32 0.56 0.47 0.33 0.28 0.29
cial ratios for 2007 and 2008. The 2007 data included income statements, balance
sheets and ratio analyses taken from a sample of 90 wineries; the 2008 data included
similar financial information from a sample of 80 wineries. The reduction in the dance with industry practice) into three different ranges of cases sold—“very small”
number of wineries from year-to-year is due to incomplete data for some wineries. (under 4,000 cases), “small” (between 4,000 and 20,000 cases) and “medium”
The number of cases sold (in industry-standard, 9-liter case equivalents) was (greater than 20,000 cases)—ensuring that there were sufficient wineries in each
used to segment the wineries in the sample as the size of wineries in the data set range to mask the identity of any single winery. In order to provide the most useful
varied dramatically. That is, the smallest wineries sold fewer than 300 cases of wine and accurate aggregate financial data, outliers and wineries with incomplete data
in a year while the largest wineries sold approximately 300,000 cases annually. This were scrubbed from the data set, resulting in financial ratios that were more accu-
is such a wide range that average financial statement data for the entire data set were rate and therefore more useful to practitioners. (See the sidebar for definitions of
not meaningful. Data from wineries were therefore segmented (roughly in accor- ratios calculated for the analysis.)

60 Wine Business Monthly


Douglas J. Jordan is an associate professor of Business at Sonoma State University in
Rohnert Park, California. He earned his Ph.D. in Business Administration from the Univer-
sity of Texas at Arlington in 2001. Contact: douglas.jordan@sonoma.edu.
Dan Aguilar is a Senior Relationship Manager in the Wine Division of Silicon Valley Bank
in Santa Rosa, California. He earned his MBA from the Haas School of Business at the
University of California, Berkeley. Contact: daguilar@svb.com.
Editor’ Note: There are only two known previous studies of financial ratios in the wine in-
dustry. The first was conducted in 2001 by researchers Rocci and Stefani, which provided fi-
nancial data from 27 wineries and agricultural firms in Tuscany, Italy. The second is the very
comprehensive 2009 Wine Industry Financial Benchmarking Report by Moss Adams and
Demeter Group. The financial ratios portion of the 2009 Report focuses on year-over-year
changes in winery profitability from 2007 to 2008 and is available upon request from Jeff
Gutsch at Moss Adams.

Armand Gilinsky, Jr. is professor of Business at Sonoma State University, where he has
taught Strategy and Entrepreneurship since 1998. In recent years, he has served as di-
rector of SSU’s Entrepreneurship Center, Wine Business Program and Small Business In- Highlights
stitute. Contact: armand.gilinsky@sonoma.edu.
• Average sales price per case, cost of goods sold per case and gross profit per case
all vary inversely with winery size. For example, the average sales price per case
decreases from about $400 per case for very small wineries to about $200 per
case for medium wineries. These results can be attributed to: 1) larger wineries’
Results product mixes being weighted toward lower-priced wines, and 2) smaller
wineries often have a higher percentage of volume sold in direct-to-consumer
The aggregated financial ratio analysis results for 2007 and 2008 are shown in TA B L E 1 . and (in California) direct wholesale channels rather than through distributors at
When looking at the results in T A B L E 1 , it is important to remember that the num- FOB pricing.
bers shown are the average for each variable over the number of wineries in the
• Very small wineries carry a significantly larger amount of debt compared to the
group. The data is not representative of any single winery in the category, and usual number of cases they sell. In both 2007 and 2008, very small wineries carried
relationships between variables do not necessarily hold because of the use of aver- over $400 in debt per case sold. This is most likely a reflection of the relatively
ages. For example, gross profit per case is normally equal to the difference between young age of the companies. These wineries have not had time to generate and
the average sales price per case and the cost of goods sold per case. The data in TA B L E 1 retain profits and therefore are more heavily leveraged relative to established
wineries.
do not adhere to this relationship because all of the variables involved are averages
over multiple wineries. Several important observations emerge from the data in • Gross profit margin is higher for very small wineries than it is for medium
TA B L E 1 .
wineries. Very small wineries have a gross profit margin of roughly 60 percent
while the gross profit margin for medium wineries is about 55 percent. As dis-
cussed in the first bullet point, the higher gross profit margin at very small
wineries is likely to be due to channel and product mix.
• Net margin tends to increase with winery size. For example, the average net
margin for very small wineries is roughly 7 percent while the average net margin
Definitions of Financial Ratios for medium wineries varied from 14.8 percent in 2007 to 8.9 percent in 2008.
Line Item Definition This reflects the economies of scale enjoyed by larger wineries.
Accounts receivable, days (Accounts receivable/net cased goods sales) x 365 • The asset-intensive nature of the wine business is borne out by the data. Return
Adjusted ROE (Net income + owners compensation) / on assets is relatively low and varies, from approximately 4 percent to 10 percent
(shareholder equity + sub debt – net intangible
over the data set.
assets – A/R and N/R shareholders)
Average sales price per case Cased goods revenue net of discounts / total cases sold • Wineries spend 16 to 22 percent of gross revenue on sales, marketing and
Net cased goods revenue Revenue generated from the sale of cased goods promotions.
COGS Cost of goods sold related to cased goods
COGS per case Cost of goods sold / total cases sold
Conventional ROE Net income / shareholders equity Year-over-year comparison
Current ratio Current assets / current liabilities The national economy was strong in 2007; however, the recession that began in
Debt service coverage (EBITDA – tax expense – distributions) / December 2007 greatly impacted the wine industry in 2008. Therefore, the data set
(total interest expense + CMLTD and leases)
allows for comparison of winery financial data for a good economic year with data
EBITDA Earnings before net interest expense,
tax expense, depreciation and amortization for a weak economic year. Several interesting year-over-year observations emerge
EBITDA less distributions EBITDA minus distributions from the data in T A B L E 1 .
Gross profit margin Gross profit / net cased goods revenues
• The average sales price per case is slightly lower in 2008 than in 2007 in all three
Gross profit per case Gross profit / total cases sold
categories of wineries. On average, wineries slightly lowered their prices (and/or
Inventory, days (Inventory/COGS) x 365 increased discounting, which amounts to the same thing) in response to the
Net margin Net income/net cased goods revenue weak economy. Contributing to the lower average sales price per case is the
Net margin before owners compensation (Net income + owners compensation) / net cased goods widely-reported shift in sales mix toward lower-priced wines due to the con-
Production to sales ratio Cases produced / cases sold sumer trading down as the economy faltered.
Quick ratio Cash and accounts receivable/current liabilities
• The cost of goods sold per case also decreased year-over-year in all three cate-
Return on assets (ROA) Net income / total assets
gories of wineries. Very small wineries experienced the largest reductions (a 14.6
Sales, Marketing, Promo ratio (Selling expense + discounts and allowances) /
percent decrease) on average. Since cutting COGS will not usually be reflected in
gross cased goods revenue
income statements for several fiscal periods due to the long inventory cycles in
Senior liabilities / TNW+ sub debt (Total liabilities – sub debt) / (TNW + sub debt)
the wine industry, and since it is unlikely winery managers anticipated the eco-
Sr. debt per case sold (Line of credit + CMLTD + Senior LTD+ capital leases) /
nomic crisis (and then took early pre-emptive action), the explanation for the
total cases sold
lower cost of goods sold data likely lies in the well documented shift in sales mix
Tangible net worth (TNW) Shareholder equity – net intangible assets –
accounts receivable and notes receivable shareholders
toward lower-priced (and cheaper to produce) wines.
Total liabilities to TNW Total liabilities / tangible net worth
Benchmarking Winery Financial Performance continued on page 67.

October 2010 61
Benchmarking Winery Financial Performance
continued from page 61.
• The sales, marketing and promotion ratios are higher in 2008 than in 2007 in
each winery category. Wineries responded to the weak economy by spending
more money on advertising and promotion. Winery programming and business-
related travel are also included in this ratio. A portion of the year-over-year
increase can be attributed to increases in these costs during the difficult eco-
nomic environment of 2008.
• Inventory days are higher for all categories of wineries in 2008 than in 2007. As
sales slowed in 2008, wineries were forced to carry inventory longer than they did
when the economy was strong. The most severe increase is in the very small
winery category. This makes sense given that very small wineries have large
imbalances of 9-liter case-equivalents crushed versus cases sold in 2007 as
measured by a production-to-sales ratio of 1.66. Smaller, growing wineries tend
to grow production at a rapid pace as they drive to a target, optimal or sustain-
able volume. This rapid growth tends to result in more severe inventory imbal-
ances during down economies.
• Very small and medium-sized wineries experienced increasing debt levels year-
over-year as measured by senior debt per case sold. This indicates a greater
reliance on debt financing in these two categories of wineries as the economy
deteriorated. It is not clear why the same pattern does not hold for the small
wineries in our sample.
Conclusion
In some ways, the data in T A B L E 1 is not surprising. The results confirm the intuitive
notion that small (often boutique) wineries produce smaller amounts of wine that
sell at higher prices while large wineries’ product mixes tend to be weighted toward
lower-priced wine that is often sold through channels, yielding less margin per case.
Similarly, small wineries are expected to have higher costs and higher gross profits
than larger wineries, and the data reflect that. Higher prices and higher gross profits
at small wineries should lead to higher gross profits and gross profit margins for
small wineries compared to large wineries, and again, that expectation is reflected in
the data. The results of the year-over-year comparison of winery financial perform-
ance in a strong economy (2007) with a weak economy (2008) are also not sur-
prising. T A B L E 1 shows that, as expected in a weakening economy, wineries
responded by lowering prices (discounting) and increasing advertising and promo-
tion. Intuitively, the impact of changing product mix and the phenomenon of con-
sumers trading down seems to be reflected in the data, though inconclusively, given
the nature of the data.
However, the primary value of this article does not lie in the fact that the results
shown in T A B L E 1 confirm conventional wisdom about the wine industry. The con-
tribution of this article is to share winery financial ratios that are typically not avail-
able to the general public. We believe this makes the results in T A B L E 1 of interest to
various parties, internal and external to the wine industry. WBM
October 2010 67