The Economics Surrounding Premium Wine Production by Trent Ball 1 and Ray Folwell 2 1 Vineyard and Winery Technology Program, Chair, Yakima Valley Community College, and Partner, 2 Agri-Business Consultants LLC.
Wine Sales in the U.S.- 1996 to 2006 in millions of gallons Year Table Wine Dessert Wine Sparkling Wine Total Wine Total Value (billion) 2006 624 57 35 716 $27.8 2005 608 51 32 692 $25.8 2004 589 45 31 665 $24.0 2003 570 40 29 639 $22.3 2002 552 37 28 617 $21.8 2001 512 34 27 574 $20.3 2000 507 33 28 568 $19.2 1999 475 31 37 543 $18.1 1998 466 31 29 526 $17.0 1997 461 29 29 519 $16.1
Wine Sales Volume and Revenue Relationships Premium table wines priced at $7 or more per 750 ml account for: 38% volume of wine sold 67% of total revenues Fastest growing market segment in sales Most profitable
Economics of Small Washington Wineries 2,000 to 20,000 cases of premium wines Economic-engineering approach Estimate the initial investment, operating costs, and financial returns
No Standard Winery Juice yield Quality of wine Temperatures and length of time of the fermentation process Length of aging process Use of oak cooperage Labor and capital intensity Bottling dates Marketing methods Access to grapes Etc.
Information Generated in the Analysis Identify the personnel and capital assets required to construct & operate 5 wineries of various sizes between 2K and 20K annual case production Calculate the total dollar investment required to construct each winery Estimate annual operating costs for each winery Calculate annual cash flow for each winery Calculate net present value (NPV), internal rate of return (IRR), equity payback, and debt recovery for each size winery
Wine Produced and Percent of Total Output by Winery Size (%) Winery Size (Cases) 2,000 5,000 10,000 15,000 20,000 Variety ---------------Red---------------- Cabernet Sauvignon 35 35 30 30 30 Merlot 30 30 25 25 25 Syrah 10 10 20 20 20 Total Red 75 75 75 75 75 Variety ---------------White--------------- Chardonnay 25 25 15 15 15 Riesling -- -- 10 10 10 Total White 25 25 25 25 25
Capital Assets- 10,000 Case Winery Example Units Prices Ship/ Install Total Receiving Equipment Picking Bin Hopper Stemmer/Crusher Membrane Press Must Pump Must Lines Pomace & Stem Conveyor 65 $300.00 $15 $20,475 1 $13,750.00 $688 $14,438 1 $7,995.00 $400 $8,395 1 $32,000.00 $1,600 $33,600 1 $10,000.00 $500 $10,500 125 $4.00 $1 $625 1 $18,000.00 $900 $18,900 Total $106,932
10,000 Case Winery Units Prices Ship/ Install Total Cellar Equipment Tank Mixer Transfer Pump Transfer Hose Barrel Washer Plate & Frame Filter Air Compressor Pressure Washer Laboratory Equipment Misc. Supplies 1 $850 $43 $893 1 $4,995 $250 $5,245 300 $2 $1 $900 1 $1,000 $50 $1,050 1 $4,500 $300 $4,800 1 $269 $269 1 $500 $500 misc $2,000 $2,000 $1,412 $1,412 Total $17,068
10,000 Case Winery Units Prices Ship/ Install Total Materials Handling Pallet Jack Hand Cart Fork Lift Rotator Implement Pickup 1 $240 $240 1 $20 $20 1 $22,500 $22,500 1 $4,200 $4,200 1 $22,560 $22,560 Total $49,520 Refrigeration System 1 $80,677 $80,677 Total $80,677
10,000 Case Winery Units Prices Ship/ Install Total Fermentation/Storage Fermentation Tanks Storage Tanks Fermentation Bins Tank Stands Tank Washer 3 $10,880 $544 $34,272 4 $9,920 $496 $41,664 2 $2,880 $144 $6,048 2 $3,776 $189 $7,930 1 $1,280 $64 $1,344 10 $1,495 $75 $15,698 12 $145 $7 $1,827 1 $4,500 $225 $4,725 Total $113,507
10,000 Case Winery Units Prices Ship/ Install Total Cooperage Barrels Racks Silicone Bungs Fermentation Bungs 400 $560 $20 $232,000 400 $60 $3 $25,200 400 $3 $1,200 400 $3 $1,300 Total $259,700 Tasting Room Refrigerator Wine Cooler Commercial Dishwasher Stemware 1 $349 $349 1 $199 $199 1 $2,659 $133 $2,792 168 $4 $672 Total $4,012
Total Investment for 10,000 Case Winery Units Prices Ship/ Install Total Plant and Office Computers Office Furnishings Land Building 4 $469 $1,876 $11,970 $29,925 3 $11,000 $33,000 7,500 $160 $1,197,000 Total $1,273,771 Total Investment $1,907,645
Total Investment Costs by Equipment Category and Winery Size ($) Winery Size (Cases) Cost Category 2,000 5,000 10,000 15,000 20,000 Rec. Equip $58,024 $91,320 $106,932 $122,025 $136,900 Cellar Equip $16,623 $16,828 $17,068 $23,613 $24,118 Mat. Handling $49,520 $49,520 $49,520 $49,520 $49,800 Ref. System $28,919 $47,978 $80,677 $112,100 $160,248 Ferm & Storage $62,079 $101,765 $113,507 $143,936 $288,805 Cooperage $51,944 $129,800 $259,700 $389,400 $519,200 Tasting Room $5,084 $6,302 $6,470 $6,566 $6,662 Plant & Office $518,496 $684,151 $1,273,771 $1,780,798 $2,194,232 Total Inv. $790,688 $1,127,664 $1,907,645 $2,627,958 $3,379,965
Total Investment and Per Unit Costs by Winery Size ($) Winery Size (Cases) Cost Category 2,000 5,000 10,000 15,000 20,000 Per Unit $/Case $395.34 $225.53 $190.76 $175.20 $169.00 $/Gallon $166.11 $94.76 $80.15 $73.61 $71.01 $/750 ml $32.95 $18.79 $15.90 $14.60 $14.08
Assumptions Made in Calculating Cash Flows Project planning horizon is 10 years All five wineries are regular corporations subject to regulations outlined in 05 IRS publication 542 Tasting room sales accounted for a % of premium cases sold Winery Size (Cases) 2,000 5,000 10,000 15,000 20,000 Tasting Room 75% 65% 55% 45% 35% Wholesale 25% 35% 45% 55% 65%
Assumptions Made in Calculating Cash Flows A 2% inflation rate was used Any and all additional injection of capital beyond initial outlays at time 0 are 100% equity financed In the first year, Riesling was sold, in second year Merlot and Chardonnay, and in the third year all varieties were sold Wine pricing $15/bottle or $180/case retail $10/bottle or $120/case wholesale
Loan Amount (Principal and Interest) by Loan Type and Winery Size ($) Winery Real Estate Loan Equipment Loan 2,000 Case $375,600.00 $246,404.88 5,000 Case $495,300.00 $397,174.05 10,000 Case $922,500.00 $575,998.30 15,000 Case $1,289,850.00 $771,934.50 20,000 Case $1,589,100.00 $1,071,990.06
Net Present Value (NPV), Internal Rate of Return (IRR), Equity Payback Period, and Debt Recovery Period by Winery Size Winery (Cases) NPV ($) IRR Equity Payback (yrs) Debt Recovery (yrs) 2,000 ($120,109.10) 6.19% 6.24 6.61 5,000 $111,239.26 13.89% 3.78 4.77 10,000 $530,385.27 18.90% 3.19 4.37 15,000 $500,611.77 16.12% 3.40 4.48 20,000 $426,569.74 14.41% 3.60 4.63
NPV by Winery Size (cases) for a 20% Product Price Decrease, 20% Grape Input Price Decrease and Increase Scenario 2,000 5,000 10,000 15,000 20,000 Product Price Decrease (20%) ($276,403) $22,779 $337,192 ($33,543) ($421,609) Grape Price Increase (20%) ($141,256) $66,811 $419,474 $327,934 $233,260 Grape Price Decrease (20%) ($97,891) $166,558 $660,179 $712,879 $686,621
Product Versus Grape Price Impact on returns Product price has greater effect than grape input price The bottom line can be dramatically influenced with control of product price
Summary and Conclusions Plant and office followed by cooperage were the largest investment costs Economies of size exist with the wineries The 10,000 case winery had highest IRR and shortest payback periods Cooperage has significant impact on operation costs and quality Product sales price control has more impact on returns than grape input price
Coming, Fall 2008! Winery Cost of Production Calculator Online By case size (500; 1,000; 2,000; 5,000, 10,000) By product mix Initial Investment costs and annual operating costs
Helpful Links Wine and Concord Grape Economic Research http://www.agribusinessmgmt.wsu.edu/agbusresearch/projectslist.htm Washington Annual Grape Report http://www.nass.usda.gov/wa
Thanks for Your Time! Trent Ball Yakima Valley Community College tball@yvcc.edu