If wine businesses are going to survive this period, they need to make some changes
to adapt to the current market.
By Kevin A. Krakora
The wine industry is experiencing a complicated period of decline. Shifting consumer preferences and mounting financial pressures have left many wineries around the world in the lurch. For the wine industry to survive its current turmoil, it must implement savvier financial strategies and prepare to make difficult decisions.
For many wine producers and sellers, the current market has been a big batch of sour grapes. Consumers, especially younger ones, are less and less likely to be reaching for a Riesling this summer. Meanwhile, shifts in climate have made harvests less predictable and more prone to natural disasters. Going into this year’s harvest, wineries are facing both decreasing demand and, potentially, increasing supply.
If wine businesses are going to survive this period, they need to make some changes to adapt to the current market.
Challenges Facing the Wine Industry
The only demographic experiencing sales growth in the wine industry has been the over-60 crowd. Today’s consumers, particularly the younger generation, are more likely to reach for alternatives such as craft beers, hard seltzers, spirits and even non-alcoholic beverages.
As such, many wineries are left grappling with reduced demand and increased competition. Some of these challenges are easier to account for than others. For example, climate-related issues such as high temperatures and extreme, unpredictable weather, including devastating fires, have impacted the quality, quantity and timing of harvests.
Even larger wine companies, such as Vintage Wine Estates (VWE), are feeling the heat. VWE, a public company, aggressively expanded through acquisitions over the past few years. In doing so, it accumulated a substantial amount of debt. As consumer preferences evolved and overall wine sales declined, VWE has found itself in a precarious situation as it struggled to manage its large portfolio of brands and winery assets.
With sales dropping, VWE pivoted from expansion to contraction. The company tried to sell off some of its brands to raise funds and pay down its debt, but those monetization efforts did not generate meaningful results quickly enough to stave off a bankruptcy filing. Now, VWE is undertaking a complete auction of all of its brands and winery assets in order to repay its debts. While there are certainly gold nuggets in the sand, the values of VWE’s assets are certainly not what they were a few years — or even months — ago.
The financial difficulties faced by VWE are not unique. The wine industry is at a crossroads, where understanding and navigating financial complexities and declining revenue is necessary for survival. For wineries, this means reassessing their business models, sales strategies and financial practices to adapt to the new market realities.
Understanding where and how to sell wine will naturally impact profitability and sustainability. Not all sales channels offer the same benefits, and strategic choices in this area can make all the difference.
Wine Clubs: The Gold Standard
Wine clubs are consistently recognized as the most profitable sales channel for wineries. These clubs provide a direct-to-consumer (DTC) pathway, letting wineries maintain higher margins by eliminating intermediaries. Members often commit to regular shipments, ensuring ongoing sales and a stable financial base. The personal connection and exclusive benefits that wine clubs offer also enhance customer satisfaction and retention. Onsite tasting rooms and active social media presences are effective ways of generating and retaining wine club members.
Wholesale: A Balanced Approach
Wholesale channels can offer moderate success for wineries. While not as lucrative or predictable as wine clubs, wholesaling lets wineries reach a broader audience through restaurants and distributors. This channel can be particularly beneficial for mid-sized wineries looking to expand their market presence without dealing with the complexities of large-scale retail. However, the margins are typically lower, and maintaining strong relationships with wholesale partners is essential for success in this channel.
Retail: A Tough Bottle to Uncork
Retail sales, particularly through large-scale retailers, present significant challenges for most wineries. The highly competitive nature of retail requires substantial resources for marketing and distribution, which can erode profit margins. Typically, only the largest labels — those with substantial brand recognition and marketing budgets — will thrive in this space. For smaller wineries, the costs and risks associated with retail often outweigh the benefits, making it a less attractive option.
Wineries should continue to focus on high-margin channels such as wine clubs while strategically managing wholesale partnerships to provide a balanced approach to sales. Unless equipped with the necessary scale and resources, it may be wise to avoid the pitfalls of retail.
By prioritizing sales channels that offer higher margins and stability, wineries can better navigate the financial pressures of today’s market. Focusing on direct-to-consumer models, particularly through wine clubs, represents a sustainable strategy for long-term success.
Examine Pricing Strategies
Despite the importance of price management, many wineries are hesitant to implement necessary price increases, often to their own detriment. For brands with established recognition, in particular, regular price increases are not only feasible but necessary.
A common issue among wineries is their reluctance to raise prices, which (they fear) will alienate customers or cause them to lose market share. However, developing a systematic approach to pricing can help maintain market position and financial health.
One of our clients, for example, had not raised prices in nearly a decade, which meant they’d missed out on years of stronger revenue opportunities. Upon recognizing the need for change, we implemented immediate price increases across its extensive library as well as current vintages. This was followed by a structured program for annual adjustments.
By implementing and communicating this strategy transparently and with rational justification to its wholesale and distributor partners, we mitigated resistance and maintained strong relationships across the supply chain. Regular price adjustments help wineries keep pace with inflation and rising operational costs, ensuring stable revenues over time.
To implement an effective pricing strategy, wineries should conduct regular market analysis, communicate changes clearly to customers and avoid drastic price hikes. Enhancing the perceived value of price increases by offering additional benefits can also help in gaining customer acceptance. By adopting a structured approach to pricing, wineries can navigate financial challenges and build a resilient and more predictable business model.
Enhancing the Onsite Experience
For wineries with available capital, investing in the onsite customer experience can yield significant returns. A high-end, enjoyable onsite experience not only enhances customer satisfaction but also drives increased wine club memberships and overall brand loyalty.
Many wineries neglect the importance of their physical spaces, missing out on opportunities to create memorable experiences for their visitors. Simple improvements to tasting rooms and visitor areas can transform the customer experience. Upgrading facilities, enhancing aesthetics and offering personalized services can make a significant difference.
For example, replacing basic furnishings with more comfortable and stylish options, providing educational tours or hosting exclusive events can elevate the visitor experience. A high-end onsite experience builds a deeper connection between the customer and the brand. When visitors enjoy their time at a winery, they are more likely to remember the experience and share it with others, generating positive word-of-mouth and increasing customer retention.
Financial Management and Forecasting
The wine business is known for its “lumpy” cash flows, with significant expenses leading up to and during the harvest season. Understanding liquidity, debt structures and cash flows is essential for strategic planning and forecasting.
Wine production involves high upfront costs, particularly during the peak harvest period. Expenses such as labor, bottling and storage accumulate, creating substantial financial outlays before the wine is even sold. Additionally, wine sales are concentrated heavily in the fall through spring to avoid the risk of spoilage during summer shipping. This seasonality requires wineries to carefully manage their cash flow to ensure they can cover expenses throughout the year.
Wineries must be adept at forecasting to avoid cash crunches during critical periods. Accurate forecasting involves anticipating sales cycles, managing inventory levels and planning for seasonal fluctuations in demand. Strategic forecasting lets wineries allocate resources efficiently, plan for capital expenditures and maintain financial stability.
Wineries should also regularly review their debt obligations and explore options for refinancing or restructuring to improve financial health. Wineries may be able to unlock significant value through creative management and financing of assets such as wine libraries, brands and real estate. By managing debt proactively, wineries can reduce financial stress and free up capital for investment in growth and innovation.
Looking to the Future
Shifting consumer preferences, climate-related challenges and mounting financial pressures have wineries experiencing notes of distress. However, by implementing strategic adjustments and adopting savvy financial practices, wineries can persevere through these challenges and position themselves for long-term success.
Focusing on high-margin sales channels such as wine clubs, systematically adjusting pricing strategies, enhancing the onsite customer experience and nailing financial management and forecasting are essential steps. These strategies can help overcome current difficulties and build a resilient and adaptable business model for the long term.
As the industry continues to evolve, wine businesses that embrace these changes and make informed, strategic decisions will be better equipped to survive and thrive. By prioritizing customer relationships, maintaining financial agility and continuously adapting to market conditions, the wine industry can turn these sour grapes into a rich, fruitful future.
Kevin A. Krakora
Kevin A. Krakora, CTP, is a managing director at Getzler Henrich, with more than 30 years of experience in corporate turnarounds, strategic consulting and corporate restructurings. He recently served as chief restructuring officer of Spring Mountain Vineyard. Contact him at kkrakora@getzlerhenrich.com or (312) 283-8071.
