Managing Winemaking Costs in the Face of Inflation
April 4, 2023 | 5 min read
With rising inflation and operating costs, winery owners are looking for ways to manage the bottom line without raising prices.
Written by Jeanette Tan | Photo by Pexels
With rising inflation and operating costs, winery owners are looking for ways to manage the bottom line without raising prices.
Let’s focus on the rising winemaking costs; I am not suggesting that winemakers allow the bean-counters to make winemaking decisions. However, I am suggesting that winemakers need to be aware of the financial impact of various decisions that they make in the cellar. For example, I told two different winemakers that their yields decreased significantly compared to the previous year. One winemaker said “hmm, I might have concentrated the wine a bit too much.” The following year, both changed something on the crush pad so that the yield was higher. The wine? Just as delicious.
In our wine costing process, we identify four main components of the cost of bulk wine: grapes, winemaking overhead, barrels, and crush costs. Each is important in its own right but affect your bottom line differently. This is why every winery has a different cost structure. When I review the winemaking costs at the end of the year, I only look at the year-over-year variances, because so called “industry benchmarks” are not meaningful, even if they existed.
Winemakers tend to focus on grape pricing alone, doing the math on the back of an envelope: “One ton will get me the industry standard 65 cases, so $2,000 per ton will come to $13 per gallon.” The missing component of this calculation is their actual yield. The yield is a function of both, the growing conditions each year and the winemaking decisions. (Anyone remember how juicy the 2016 grapes were?) Of course, the actual yield is further complicated by the blends and toppings. Sadly, you cannot simply count the juice after the press run, because different varietals will throw off a different amount of lees.
Winemakers tend to focus on grape pricing alone …
To understand your yield, take a look back a few vintages and calculate the number of tons you purchased with the final number of gallons that you bottled. This is your ACTUAL yield. Each varietal will differ. If you do any blending or if you do not self-top, this will be a difficult number to calculate without good cellar software. Remember that racking losses will reduce the yield, but topping losses (when that wine is used to top other wines) do not change the yield.
The next component to focus on is the overhead cost. Just a refresher: the overhead cost pool includes all the payroll and employee benefits, rent, utilities, winery supplies, and wine equipment depreciation. (This is the rule for True Cost, not Tax Cost, that distinction is a different discussion.) The total cost pool tends to be very consistent from year to year. What has been fluctuating dramatically the past five years in Napa/Sonoma is the total gallons produced every year. The overhead cost component is calculated by dividing the cost pool by the total cellar gallons. (Total cellar gallons is the combined total of the number of gallons on hand each month for a year.) The more wine you manage each year, the lower your overhead cost per gallon.
This is where I hope winemakers will take a closer look. The 2022 harvest was one of the smallest in recent years, not counting the fire/smoke years. Word from various vineyard managers is that the 2023 harvest is likely to be small despite this year’s rain. This means that the total cellar gallons will be down in 2023 and again in 2024. Even if your total overhead cost is the same as last year, the cellar overhead component of your wine will increase.
One way to correct this is to increase the number of gallons that move through the cellar. Perhaps bring on some crush clients, or make a wine that can be targeted for a private label program. Don’t be afraid to take a closer look at the productivity of your cellar crew. Ask yourself, are those cellar employees needed on a full-time basis? Did you increase the team when the cellar was really full, and are now having productivity issues?
Do you want to be in business 10 years from now when your wine has reached its best?
These are hard choices, but nobody said that running a business was easy. Somehow, folks in the wine industry think that their “hand crafted, pursuit of excellence” mission means that they should never make winemaking decisions for financial reasons. If you want to be in the business ten years from now, when your wine is reaching its best, often these decisions are necessary.
At QB Winery Solutions we help you with the business knowledge you need to overcome the financial complexities of running a winery. Check out our Costing in 6 Minute course (its free), or our flagship Costing Book Checklist Course.
