Owning a Virginia winery

By Posted on Jul 31 2012 | By

 A fulfilled vision for some but money & hard work are the reality 

The scene is repeated throughout the Old Dominion: undulating rows of verdant vines surrounding a tasting room where convivial conversation and tinkling wine glasses unfold before a backdrop of blue skies and mountain views.

But is the scene a mirage? What’s the reality behind calling yourself a winery proprietor?

With well over two hundred wineries gracing the rural landscape of Virginia, the dream has come true for a growing number of entrepreneurs seeking an income producing bucolic lifestyle. But be certain you aren’t wearing a pair of rose-colored wine goggles before taking the plunge. Measure twice cut once.

“Most people have no idea how complicated starting a winery can be,” says Dr. Bruce Zoecklein, Head, Enology-Grape Chemistry Group at Virginia Tech. “Before I agree to meet with a potential owner, I require them to complete a business plan.”

Zoecklein has written a comprehensive document, Winery Planning and Design, that guides a person through preparing such a plan. The CD formatted publication is available through the industry trade journal Practical Winery and Vineyard. 

Preparing a business plan is de rigueur for any commercial undertaking but is particularly important when venturing into the wine business. Most people contemplating the trade have little or no agricultural experience and making wine is grounded in farming.

Today in the Old Dominion, the supply of grapes is tight and growing more so each year. The blossoming number of wineries is outstripping planted acreage. A successful venture demands a consistent supply of fruit and owning both the tasting room and vineyard is key to a sustainable business.

The numbers
So what is the financial investment required to greet guests in a tasting room and pour them a glass of wine? For a winery to be profitable, production should ultimately be around 5,000 cases annually—60,000 bottles—or higher.  Producing wine below these levels often does not cover costs.

The investment will vary, but assuming that a quality—not high end—facility is built and outfitted with commensurate equipment, here are some cost estimates:

*Purchasing land suitable for grape farming can run from $10,000 to $15,000 an acre, well above the price of average farmland. High quality vineyard land is not found in abundance; some experts estimate less than ten percent of the state’s rural land is suitable for growing delicate wine grapes. In addition to agricultural considerations, land that possesses scenic views is important in attracting paying guests. Overall, to provide for expansion, purchasing a twenty-five acre site is a sound decision. Cost: up to $375,000.

*Planting a ten-acre vineyard with six varietals and installing trellising, well, irrigation system and purchasing a tractor and sprayer. Cost: $275,000.

*Building a 6,000 square foot winery with crush pad, cellar, tasting room, point-of-sale software and computers, crusher-destemmer, press, pumps, hoses, stainless steel tanks, oak barrels, forklift, lab equipment, office furniture, wine glasses and various additional supplies. Cost: $900,000.

*A newly planted vineyard does not produce sufficient fruit to make wine for three to five years. In the interim, the winery will need to invest in grapes, bulk wine and bottling operations to build its inventory annually until wine can be made from the owner’s vineyard. If an owner wants to maintain an inventory of 5,000 cases of finished wine and an equal amount of bulk wine, prices can leap dramatically until the vineyard is supplying the needed fruit. Cost $75,000 to $500,000.

*After the initial investment on infrastructure and wine, an operating fund of $100,000 should be available to sustain operations through the first five years. Typically, small to medium size wineries can take up to seven years or more to show a profit.

Tallying up the capital required for the basic operations comes to around $2 million. True enough, a much smaller winery will cost significantly less but also likely run in the red for an extended period of time. Building sales quickly to 5,000 cases annually is the shortest path to profitably.

Chris Pearmund

“Yes, for a bit less than $2 million a winery can open its doors. But, truthfully, I would encourage a serious entrant to marshal its resources and commit to a $3 to 5 million investment to do it right. Virginia needs larger producers to advance the state’s reputation and produce a rapid return on their investment,” says Chris Pearmund, owner of Pearmund Cellars.

Route to success
So how can a newly smitten winery owner lower the cost of his personal investment? Sweat equity and investors. Performing more of the work, hiring fewer employees and attracting capital from friends and business associates are proven ways to control expenses.

Unless an owner acts as both vineyard manager and winemaker, it can add an additional $100,000 or more annually to operating expenses to hire talented wine professionals. One viable approach for smaller operations is to perform these functions in-house but have a consultant guide them through critical production stages.

Outside money can also ease the burden of using personal funds, the challenge of qualifying for bank financing or having to pay top dollar for needed services. “When I seek out investors, I am looking for both money and talent. I try to attract an array of people with cash and business skills, says Pearmund.

“I want professionals in law, accounting, marketing, heating & air conditioning, food services, and landscaping to name a few. While these individuals are not going to work for free, they can provide guidance and a quick response to critical business questions. And when they do offer their services it’s at a good price,” he explains.

In Virginia wine, the 80/20 business rule generally applies as it does elsewhere; eighty percent of the business is generated by twenty percent of the accounts. While never an exact division, the rule holds true in most industries. Last year,Virginia’s 203 wineries produced 462,000 cases of wine, an increase of 11% over the previous year.

But just a half a dozen wineries produced over 200,000 of those cases; add in twenty or so second-tier wineries and the figure jumps to around 300,000 cases. That leaves around 175 wineries generating just 160,000 cases annually, or around 1,000 cases per winery, well below the profit generating level.

How do they survive? An owner performing much of the daily labor themselves is the key to viability. “Passion drives the success of smaller wineries,” say Zoecklein. “If a vineyard needs spraying at 3 in the morning, a committed owner will do it.”

And selling the finished wine can be even more demanding. The success of Old Dominion wine is closely linked to agritourism. There are very few wineries that can make money dealing with wholesalers.

Wine must be sold in the tasting room at retail prices to succeed. That requires spending hours at the tasting bar on weekends and holidays with wine lovers that are often escaping the rigors of stressful jobs and long commutes. Making their relaxation time a pleasant experience can be demanding on owners.

Pearmund says, “If a customer visits ten or twenty wineries over the course of several months and chooses not to return to your winery, ask why? If you can’t answer the question, do not expect to meet success.”

John Delmare

“A majority of wineries in the state are not operating as businesses per se,” says John Delmare, owner of Rappahannock Cellars. “And that’s not necessarily a bad thing. These are people who are enjoying a rural lifestyle, often with the help of their adult children and may be opened only three days a week. It’s a business model that succeeds through their labor and zeal.”

“But to create a business focused on the bottom line the work is significant. In the early years of building my winery, I worked eighty hours a week, seven days a week.”

Pearmund echoes his sentiments saying, “The work is endless, from securing ABC permits, label approvals, producing promotional materials, managing employee hiring and payroll, overseeing fruit purchase contracts, hosting wine dinners and much more.”

Zoceklin underscores the importance of enthusiasm in the business given its demands. “When an individual prepares an elaborate business plan and runs it by his accountant the reaction is often, ‘Wow, maybe you should just invest in condos in Vail.’ But that misses the point. If running a winery makes their heart sing, it’s not just a business decision. Some of the greatest satisfaction can come from building an enterprise from scratch and leaving it to their children as a legacy,” he states.

A somewhat controversial approach to building revenue involves hosting entertainment-style functions to build quick, steady revenue. Bachelorette parties, weddings, fundraisers and other large group events are a relatively easy sell given the bucolic setting of many wineries. Newer businesses can generate critical cash flow to help service debt by marketing such entertainment functions.

But balancing business needs with the concerns of local residents and county governments is important. Noise and heavy traffic on rural roads can raise the ire of nearby citizens and create a host of problems for an offending winery. As a whole, the industry is sensitive to such criticism and strives to act responsibly. But the issue further crystallizes the demands placed on many struggling young enterprises trying to succeed.

So what if an owner ultimately decides his decision to enter the industry is more work and less rewarding than envisioned? Does he simply sell and move on? “Selling a winery today and recovering your costs is problematic,” says Delmare. “There is not a vibrant market out there for even a profitable business. On the other hand, if owners can slowly build the business, their expenses will decline and sales increase. Most can survive and become prosperous. Patience is key.”

Today,Virginia is the fifth largest wine producing state in the Nation. Winery owners across the state can take pride and satisfaction in what is unfolding here and the role they are playing in achieving national recognition.

But as author David Bly ably wrote, “Striving for success without hard work is like trying to harvest where you haven’t planted.”

Published in the Summer 2012 edition of the Piedmont Business Journal.


Categories : WINE ARTICLES