A 10,000-case winery may provide the best rate of return and the shortest payback period, according to an analysis by two Washington State agricultural economists.
Trent Ball, chair of the Vineyard and Winery Technology Program at Yakima Valley Community College, and Ray Folwell, partner in Agri-Business Consultants and former Washington State University ag economics professor, looked at start-up costs associated with wineries producing from 2,000 to 20,000 cases of premium table wines, defined as $7 or more per 750 ml bottle, a year. Using an economic-engineering approach, they estimated startup investment, operating costs and financial returns.
Premium wines represent 38 percent of all wine sold in the United States, but 67 percent of the total revenues, Ball said at the Washington Association of Wine Grape Growers annual meeting in February in Kennewick. Premium wines, especially those in the $10 to $20 price range, are the fastest-growing segment in terms of sales, and the most profitable, he said, and that bodes well for Washington State’s market position.
"There is no standard winery," Ball said. A number of variables could alter the figures for an individual winery, including juice yields, quality of wine, temperatures during fermentation and length of the process, length of the aging process, use of oak cooperage, labor and capital intensity, bottling dates, marketing methods, and access to grapes.
Ball and Folwell looked at wineries producing 75 percent red wines and 25 percent whites, with a retail price of $15 per bottle or $10 wholesale. They also assumed that the percentage of sales through the tasting room would change based on winery size, from 75 percent for the 2,000-case winery to only 35 percent for the 20,000-case winery.
They estimated costs of cellar equipment, fermentation and storage needs, and equipment for receiving fruit and for handling materials, as well as cooperage and tasting room requirements. Equipment cost estimates ranged from more than $790,000 for a 2,000-case winery to nearly $3.4 million for a 20,000-case winery, Ball said. Equipment costs for a 10,000-case winery were estimated at slightly more than $1.9 million.
Ball and Folwell also looked at financing, for both real estate and equipment, for the various sized wineries. Real estate loans (principal and interest) ranged from $375,600 for a 2,000-case winery to nearly $1.6 million for a 20,000-case winery, assuming 75 percent is borrowed capital. A 10,000-case winery real estate loan was estimated at $922,500.
Equipment loans ranged from $246,400 for a 2,000-case winery to nearly $1.1 million for a 20,000-case winery, assuming 85 percent borrowed capital. A 10,000-case winery equipment loan was estimated at $576,000.
Economies of size
There can be certain economies of size, Ball said. For example, the net present value of a 2,000-case winery was calculated at a negative $120,109, while a 20,000-case winery’s net present value was calculated at $426,569. Internal rate of return ranged from 6.2 percent for a 2,000-case winery to 14.4 percent for a 20,000-case winery. For a 2,000-case facility, the equity payback period was 6.2 years, and debt recovery was 6.6 years. For a 20,000-case winery, the equity payback period was 3.6 years, while debt recovery was 4.6 years.
Ball said, according to their assumptions and calculations, a 10,000-case winery had the best financial performance. The internal rate of return was 18.9 percent, and the equity payback period was 3.2 years, while the debt recovery period was 4.4 years.
Some winery owners may consider paying less for grapes to influence returns, Ball said. But, according to his analysis, the sales price point of wine produced has a greater effect on the bottom line than grape input price. "Therefore it is more beneficial to pay for the best quality fruit and adjust your bottle price," Ball said.
Ball said an on-line winery cost-of-production calculator is being developed to allow investment costs and operating costs to be compared for various sized wineries with various product mixes. Numbers can be changed to see the impact on a winery’s bottom line, he said. The calculator is expected to be launched in December 2008 or January 2009.
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