After Friday's class, I became very curious to understand just how much it costs to start a typical winery. We talked about whether or not Barolo producers should have stuck with the old style of their parents or developed a new style. Although the new style may have been more appealing from a marketing perspective, the drawback was that the new style could easily be replicated.
During this discussion, it struck me that perhaps the cost of even starting a vineyard could provide a defense for producers already in the market against new entrants. Realizing that I had no idea what these costs even looked like, I did some research and found an interesting presentation from Cornell University breaking down the components and costs of starting a 10,000 case premium winery in the Finger Lakes (http://wine.appstate.edu/sites/wine.appstate.edu/files/NC-Timeline%20and%20Strategies%20for%20Investment%20in%20a%20Winerybw.pdf).
The high level summary of the costs is below:
1. $13.5k per acre (ex-land costs) to get vineyard to full production
2. $150k for machinery
3. $1.6 mm to cover negative cash flows for first 5 years
In summary, approximately $2 mm is required just to start the winery (excluding land costs) in this example. Although 10,000 cases is larger than the figures we discussed in class for Barolo wineries versus typical Napa wineries, it still struck me just how expensive it can be to just get off the ground. Given this, potentially the capital investment required could be a potential defense against new entrants. However, this doesn't take into account that most of the wineries we discussed in class probably needed some updates versus. The investments might be substantial, but definitely not as high as this example. Interesting food for thought as we evaluate the profitability and the economics of the wine industry.
This information about the costs of starting a winery is quite interesting and start-up costs would certainly be a barrier to many entrants, but I had a bit of a different take on what we discussed in class on Friday. When Prof. Hannan was discussing the fact that the 'new' style of Barolos are easily replicated my take was that the real problem was not that new entrants were going to replicate the style, but rather that existing wineries either already make wine in the same style or easily could. This issue of having the style be rather undifferentiated leads to a major challenge for Barolos to then market, message and create an identity for themselves in a market where the taste of wine is similar to many other regions. In this context, I think that Barolos lose the power of a category (even if it is a category with narrower appeal) when they are effectively interchangeable with French or Napa wines.
ReplyDeleteThank you for posting this. Really interesting analysis. What this doesn't take into account is how hard it is to actually generate positive cash flow as a winery. Almost every winery I have talked to in Napa that isn't a mass-production type place has said that they breakeven or turn a small profit. The cost of capital is a huge barrier to overcome in this industry. If you have made the $2M initial investment, it is hard to sustain enough positive cash flow to cover your costs.
ReplyDeleteThank you for posting this. Really interesting analysis. What this doesn't take into account is how hard it is to actually generate positive cash flow as a winery. Almost every winery I have talked to in Napa that isn't a mass-production type place has said that they breakeven or turn a small profit. The cost of capital is a huge barrier to overcome in this industry. If you have made the $2M initial investment, it is hard to sustain enough positive cash flow to cover your costs.
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