Challenges Faced by Wineries
Similar to any other small enterprise, small wineries have cash problems. There may not be enough cash available to hire necessary staff, invest in expansion, develop marketing programs and/or hire management help.
While a business may overcome bad times over the years, it must never run out of cash. There is no surviving this.
This lack of cash is ordinarily caused by:
- Low profitability. The costs are higher than forecasted, and/or the sales are lower than expected. This is discussed below.
- Inadequate financing structure e.g. using short term loans for fixed assets.
The low profitability in turn is frequently caused by
- Poor return on investment (ROI). As a result there is not enough money to finance operations, marketing and business development.
- Performing below industry benchmarks.
- A high cost structure. It is unable to generate a sufficient gross margin to obtain the cash necessary to further invest in the business.
- Lack of competitive advantage. As a result it competes on price instead of differentiation. Its offerings may have a cost disadvantage by comparison to other regions and countries.
- Competitive weaknesses in expertise and/or leadership.
- Selecting an unpopular product (e.g. the wrong type of wine.)
- Weakness in marketing. The business suffers from low sales because it lacks visibility. Perhaps it is not attracting enough business.
These general causes of low profitability section may be grouped under specific weaknesses:
Since we are dealing with poor cash positions and low profitability, it is essential that we first address f the issues of costs, cost control and stopping the hemorrhaging of cash. To achieve this, an environment that will deliver the following is required:
- A well thought out forecast and sensitivity analysis
- A solid break even analysis
- A reliable method to monitor the actual performance against the forecast.
- A financial system that delivers:
- A periodic income statement
- A working capital analysis
- A breakdown of costs as a percentage of revenues for major categories
- A thorough cost accounting measure per segment sold e.g. type of wine, as
well as per bottle sold
- A constant monitoring of the cash flow
- Without a thorough monitoring of costs and revenues, the business will continue to bleed.
Operational problems often have the following sources:
- Inefficient processes that require too much time and cost too much to run
- Use of outdated technology
- Poorly trained staff
- Some operational problems may be a reflection of the culture and leadership prevailing
in the winery
Before even starting a business, the founders must understand why the business will be successful. Common strategic weaknesses are:
- A weak business model. The model does a poor job of creating value and capturing value for itself.
- The business plan does not provide a road map to reaching the mission and vision of the business.
- Challenges in wholesale distribution. One commonality among small wineries is the challenge to succeed in wholesale distribution. Since the winery will receive just fifty per cent of the final bottle price for wine sold through wholesale distribution, most small wineries rely heavily on sales through the tasting room, where the winery receives 100 percent of the final bottle price. This dictates a strategy built around attracting tourists and visitors.
A successful marketing plan makes effective use of the 4P’s and the 4E’s (see below). It requires segmentation, definition of the target market, and the creation of a brand.
The 4P’s define the business’s marketing strategy.
- Place of delivery of the product
The 4E’s provide the experience for the customer, and deliver:
Segmentation implies that the business has a well defined target market for which it is the best choice available. It does not sell to the whole world.
Branding: Sometimes the value of the brand is not enhanced. The management of every
winery should be able to answer the following questions:
- What makes your wine different?
- Why should customers buy your wine?
A business has many moving parts as shown above. While most entrepreneurs bring a passion and technical expertise to their operation, they frequently need help in financial, strategic and marketing areas. A poor financial plan may devastate the business.