Posted on February 17, 2012 by Bill Skrapits
In Part 1 of Three Ways to Produce Positive ROI in Half the Time or Less, we discussed the traditional method for building a winery and vineyard from scratch and reviewed cash flow from year 1 through year 10. We saw that, if starting from scratch and planting a vineyard, making wine from your own grapes and setting up a tasting room, the winery will not reach a positive cash flow for nearly 10 years. This route is hard, physically, mentally and financially. By the time you’re actually making some money, your idyllic dream of owning a winery has been trampled by brutal reality.
If you break it down, building a winery the traditional way is actually three separate businesses: growing grapes, making wine and retailing. With the traditional model, you are investing in all three and the overall time for making a return is 10+ years, when if you just choose one, you could gain a return much sooner.
Today, let’s look at what you could do if you just grew grapes. You can look back at Part 1 of this series and compare what’s happening in the same years in the traditional way.
Year 1:
Buy your land*, vines, tractor, trellis, irrigation, fertilizers, etc and plant your vineyard. A good rule of thumb for vineyard establishment is a cost of $10,000 – $15,000 per acre, not including the cost of the land. For our discussion, let’s say a 25 acre vineyard and a loan of $300,000.
Year 2-3:
Vineyard is growing. It costs about $3,000 per acre each year to maintain and grow the non-producing vines. Maintenance at $3,000/acre for two years = $150,000. Now you have invested about $450,000.
Year 4:
You have a crop at ⅓ of it’s full production, which you sell at $1,000/ton. You have 30 tons (slightly better than 1 ton/acre). Your gross income is $30,000. Now that you are producing grapes, maintenance increases to $4,000 per acre ($100,000 total). You also invest another $50,000 in fixed assets (bird netting, picking bins, etc.). Gross income of $30,000 less $150,000 equals a investment of $120,000 for the fourth year and a total of $570,000.
Year 5:
Now you are producing ⅔ of your vineyard’s capacity and you make $60k. No extra investment in equipment this year and maintenance costs decrease a bit to $3500/acre, so your investment this year is $27,500. That’s $597,500 total investment.
Year 6:
You are in full production at $100,000/year. Less $3,500/acre maintenance ($87,500) for a return of $12,500. If you are working the vineyard, your salary is from the labor portion of maintenance costs.
This gives an ROI of 2.1%. Not great, but you could possibly increase revenue and volume of crop due to experience and proven quality. If your per ton price goes up to $1,250 while maintaining the crop level, the ROI jumps to 6.28%.
A winery can be approached similarly. A 10,000 case winery (which is pushing small winery equipment to the limit – larger volume wineries need much higher cost capital equipment to handle the volume) can produce an ROI of 7-8% once sales match production (i.e. 10,000 cases per year for both). By purchasing grapes from established vineyards, a winery can skip the investment in assets and time necessary to establish a producing vineyard and begin making wine in year 1 instead of year 4 as we discussed in the first section.
Note: One of the mistakes many growers make is that they are working with too few acres. Fixed overhead costs will be too great to break even if you only have a few acres. You need to have enough acreage producing enough grapes to outweigh the fixed costs to produce a positive ROI. For most, 25 to 35 acres is the minimum necessary to be profitable growing grapes only. Doing this type of strategic planning will make a huge difference in your business.
*If you are a farmer who already has land, tractor, equipment and crews, and all you need are vines and trellis, then that will cut costs and investments significantly, producing a positive ROI sooner.
In the next section we’ll look at a strategy for a winery to have cash flow in the first year of operation, and accelerate ROI significantly.
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About Bill Skrapits
Bill’s roots in wine go back to his grandparents who had a vineyard and made wine in Hungary. Living in Germany, France and Spain, Bill began his love affair with wine and came to know it as a part of life. Wine was not saved for special occasions, but was something that you shared with friends and family amidst love and laughter. He began making his own wine 20 years ago and since 2002, he’s marketed and lobbied for the growing Texas wine industry; publishing numerous articles and winning international awards for his wine. He’s worked with many Texas wineries at every stage of production and studied under several respected wine masters and leaders in the industry. He started Premier Wine Blends in 2009 as a way to share his passion for wine with other winemakers and be the “go to” resource for the growing needs of vineyards and small wineries, from premium bulk wine, grape sourcing and consulting.
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