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Planning for Price Changes

Planning for Price Changes


It is common for small wineries to avoid raising their prices for an extended period of time. This is due to a variety of factors, including a lack of accounting input regarding price-volume trade-offs and management’s desire to preserve customer interest. Alternately, a winery may opt to make price changes based on a gut feeling. Neither of these strategies will help you maximize your profit margins and grow your business.

The Financial Impact of Price Changes


Perhaps the winery simply neglected to make price changes. That is still a decision that will impact the winery but produces exclusively negative results. When wineries choose to delay price changes, the cost of production steadily eats away at profit margins. This reduction in profit margins may go partly unnoticed or unattributed and encourage wineries to make ineffective price changes. Wineries should adjust their prices with relative frequency to match the rise of inventory costings and the value of labor. Planning for price changes is a key step for proprietors to undertake.

However, important decisions regarding price adjustments do not need to be made by a single person or section of the winery – rather, it should be a deliberate choice based on data from multiple individuals or teams. By facilitating a conversation between sales, winemaking, and accounting, a winery can make informed decisions.


Establishing a Team of Expert Staff


Each section of the winery provides valuable information. Effective accountants will be tasked with determining the true profit margins for each wine. While it may seem simpler to apply a blanket price increase, this ignores individual inventory costings. A generalized decision can negatively impact your price-volume trade-offs and result in lost profit. It’s invaluable for wineries to track data on individual SKUs throughout the year.

Each wine will have a set of associated costs: fruit costs, barrel costs, winemaking costs, and packaging costs. By keeping track of these SKU-specific profit margins, it will be easier to adjust the price for individual products.

The sales team can compile market data to estimate the price elasticity of demand. This can help guide the price change by demonstrating how much a 2-5% increase will impact the volume of sales. This insight on price-volume trade-offs is an invaluable factor for providing an estimate for a price increase range and its effect on the business’s profitability. This market data is also crucial for pricing individual wines to maximize profit. Your most valuable wine can generate a higher ratio of profit when marketed and priced appropriately.


How to Determine the Right Price Change for Your Winery


It is important for wineries to avoid making gut-feeling decisions. At best, these choices will be ineffective – at worst, they will negatively impact your profit margins and customer trust. Wineries should rely on a dedicated team to keep an eye on trends, track inventory costings, and reevaluate costs versus prices.

For the most part, wineries should plan to increase prices for their products. Production costs and the value of labor is steadily rising, and that cost should be reflected in the price to maintain a 45% or better gross profit margin. There are rare cases where a winery will elect to decrease price and increase the volume of a particular wine to reap more profit over time.

However, due to the extensive timeline needed for winemaking, it is difficult to increase product circulation quickly enough to improve profit margins. Wineries may choose to invest in additional labor and inventory to bottle more wine. Yet months will pass before a winery can sell their product to consumers. This lag between investment in the product and reaping profits (and the associated time value of money) can compound the difficulties and further reduce the return on capital caused by low profit margins.


Another possibility exists for wineries to improve their profit margins by decreasing the price of their wines. However, this is a rare situation. This is most common in wineries that already have high-profit margins, and even then, it is rare. As with all pricing decisions, choose to approach price decreases with carefully collected analytical data.

Instead, wineries will almost always increase the price (instead of the volume) to reflect the value of the product. It is likely that a winery may delay price increases due to fear of customer reaction. This is one reason why it is necessary to rely on data from the sales team. By allowing sales to collect and report data regarding market elasticity, management can make guided price adjustments and have a realistic estimation of the impact on consumers.


Employing Phase Planning


If a winery has delayed increasing prices for an extended period of time, it may be necessary to institute phase planning. Planning phases of price increases can preserve the overall price elasticity in your market, therefore encouraging consumer retention. Choosing to increase prices gradually will also allow for the sales and marketing team to evaluate the effect of each phase. This data can be used to adjust future phases as a winery restores its profit margins.

Price changes can and should be communicated to customers. This is especially true for phased planning, as the buyer will see multiple raises in price. The communication can be effectively handled by management and sales. Providing a brief snapshot of the accounting data is usually deemed unnecessary. Instead, communicate with consumers in generalities while maintaining transparency. By setting expectations, customers will be more receptive to price increases. Effective marketing has the potential to reduce price elasticity.

Though it is possible to manage larger price increases or phrased price changes, it is ideal to make more frequent changes. Reviewing costing and pricing quarterly encourages wineries to track and record data throughout the year. Insightful inventory costing is often left until the end of the year. However, this decision can harm wineries. Accountants may neglect collecting important information under the pressure of a deadline. This can easily impact a winery, as it loses the potential to prioritize marketing its most valuable wines.


Price Changes Keep Your Winery Thriving


In order to maintain profit margins and preserve positive consumer opinion, plan for price changes. Even if you do not increase your prices quarterly, it’s crucial to collect and analyze pricing and costing data on an ongoing basis. If you haven’t done so already, construct a dedicated team to address pricing. Opening this line of communication and trusting in the expertise of sales, winemaking, and accounting is the key to maintain and improving gross profits.

American Viticultural Area Valuations Offer Potential Tax Savings for Wineries

American Viticultural Area Valuations Offer Potential Tax Savings for Wineries

Producers and consumers place great value on where their wine grapes are grown. The famous wine-grape producing areas—such as Napa Valley, California, and Walla Walla, Washington— have come to be publicly associated with quality.

However, many wineries are surprised to learn this perceived quality can be quantified and used to offset tax liabilities in the years following a vineyard purchase. The more prestigious the land area, the greater the potential savings.

This complex process includes an American Viticultural Area (AVA) valuation, and the potential tax savings can be significant. Here’s what wineries and vineyard owners need to know about the process to potentially benefit from the savings opportunity.

What’s an AVA Valuation?

An AVA is a geographic area where wine grapes are produced, as defined by the Alcohol and Tobacco Tax and Trade Bureau (TTB). As of June 3, 2020, there are 248 established AVAs in the United States, with 139 in California.

An AVA may have an intangible value associated with the quality of the grapes produced within it. Unlike land, producers may be able to amortize the value of this asset for tax purposes, but doing so requires a valuation to determine the intangible value of the AVA.

Intangible Value

Simply put, the intangible value of a production area results from the perceived value of the wine and wine grapes produced there. This value comes from a number of factors, such as established root stock, weather, soil quality, and consumer preference.

Wineries are only allowed to claim their wine was produced in an AVA if the following conditions are met:

  • 85% of the grapes used to produce it were grown there
  • The wine is registered with the TTB

Grape Pricing Comparison

Prices paid for grapes from different regions can vary dramatically. The graphs below illustrate 2019 bulk grape pricing in California, as reported by the US Department of Agriculture (USDA) for different crush districts.

Grape Pricing Comparison

For example, in the Cabernet Sauvignon grape pricing chart, we can see that in district four—which is Napa County—the median price of Cabernet Sauvignon grapes was approximately $9,000 per ton.

This can be compared to the median of district 10—which includes the Sierra Nevada Foothills counties such as El Dorado and Amador—where the median price for Cabernet grapes was $1,625 per ton.

Potential Tax Benefit

When a buyer purchases a vineyard, the AVA intangible creates a potential tax savings by amortizing the AVA value in the 15 years after the purchase occurs.

If an AVA intangible isn’t measured at the time of a purchase, an AVA valuation can still be performed and the amortization expenses can be retroactively applied to recognized deductions not taken in prior years.

Amortization

Amortization is the gradual recognition in income of a capital expense over a specific period of time. It’s typically associated with intangible assets—like trademarks—or, in this case, AVAs.

Essentially, it expenses the intangible value of the AVA associated with the land. This option allows vineyard owners to put some of the money they’ve spent to acquire land in a highly desirable AVA back into their businesses.

AVA Valuation Methods

If you purchase a vineyard, you can’t depreciate or amortize the value of the land used to grow the grapes. There’s a distinct separation between the AVA value and the value of the land.

Quantifying the AVA value happens through a complex process known as an AVA valuation. The resulting amount is what vineyards are able to claim for amortization.

There are a few different methods used to determine the potential AVA value.

With and Without

This method involves looking at two scenarios in which vineyards producing the same grapes of similar quality are compared. One vineyard is within a particular AVA, and one isn’t.

By comparing different prices of the grapes produced in each area and the subsequent effect on projected cash flows from the vineyards, the AVA’s intangible value can be calculated.

Relief from Royalty

Estimating a hypothetical avoided royalty or licensing fee is a common way to value tradenames. Distinguishing that a wine is made with grapes from a specific AVA is much the same as marketing that wine with a specific trademark.

While we know AVA designations can’t be licensed, wine brands, as well as brands for other similar products, can be. Comparing the licensing and royalty fees that might be paid by wineries wishing to use different brand names on their packaging offers many insights into the potential value an AVA designation could offer.

Generally, the more profit a winery can produce by licensing a brand, the higher the value of the associated intangible asset.

Vineyard Land Sales

Also known as the market approach, comparing the sale records of different vineyards offers an indirect way to quantify the effects of an AVA designation on land value.

While the price of vineyards can be impacted by many factors, these designations can have a significant impact on comparative vineyard value. The goal is to separate the cost of the land from the value provided by the AVA designation.

Getting Started

With owners making claims about AVA value due to the potentially significant tax savings, the IRS and states are increasing scrutiny on these claims. The larger the claim, the more likely an examination could occur.

Making a well-supported claim should be the ultimate goal. Utilizing multiple valuation methods, providing the appropriate documentation, and working with an advisor with deep industry expertise can help the process move smoothly.

Next Steps

For more information about AVA valuations and how they could help your winery save money, contact an accounting or consulting professional.

Donovan Trone has worked in finance and research since 2009, performing valuations services for operating companies, partnerships, and limited liability corporations for mergers and acquisitions and financial reporting. He can be reached at (408) 558-4320 or donovan.trone@mossadams.com.

Alex Luke has worked in data processing and analysis since 2013. He has extensive experience in data solutions, marketing and business, and valuations analysis. He can be reached at (425) 961-7029 or alex.luke@mossadams.com.

Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory services offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.

Accountant vs Bookkeeper

Accountant vs Bookkeeper

As wineries search for growth in today’s digital world, the accountant vs bookkeeper debate has become all the more relevant. Innovation, technology, and eCommerce have made traditional marketing strategies for wineries nearly obsolete. 

As RaboBank recently highlighted, only those wineries who respond to market changes with the needed urgency will thrive, and wine businesses that have leveraged the power of eCommerce have already seen massive returns. In this effort, the need for winery accounting and bookkeeping management has also risen.

Accountant vs Bookkeeper: Who Does What?

Before we get into which professional is right for your winery, it’s important to highlight the differences between them; each specializes in different responsibilities between financial and operational management within your winery business. 

An accountant is responsible for recording and presenting the financial well-being of a business. The most pertinent profiles for Ecommerce wineries are management accountants and tax accountants. 

Management accountants take charge of representing the financial performance of your digital business through drafting budgets, reconciling balance sheets, and analyzing financial reports stored on your eCommerce platform, among other actions. 

On the other hand, a tax accountant does tax reporting management. That includes calculating your business taxes and offering counsel on your business strategy to minimize tax audits and lessen the possibilities of tax law breaches. 

Unlike accountants, a bookkeeper records any and every financial transaction that your winery does. They are important team members, as they are responsible for identifying, recording, and labeling the purpose of every financial transaction in your winery.

Is an Accountant or a Bookkeeper Right for my Winery? 

The Ecommerce winery business model calls for both management and tax accountants. Management accountants are important as they provide you with the financial insight you need to gauge the effectiveness of your business strategy and make better financial decisions. While some winery executives feel that they can handle finances on their own, doing so will take them away from other important areas of business development, like sales and digital marketing.

Similarly, tax accountants are all the more important now than ever as winery businesses now need to enter into unchartered waters of eCommerce. Onboarding an accounting professional who has the right legal and tax knowledge in the digital field will steer you away from possible tax infringement. 

Bookkeepers take care of major responsibilities. However, practice shows that they are often too bogged down by data entry tasks that they don’t have the time to deal with possible financial issues, or provide actionable analysis and insight into the business’s key performance indicators (KPIs). While accountants can absorb the role of a bookkeeper, they tend to be overqualified and too expensive for the role. Furthermore, hiring all three professionals individually is too costly for most wineries, and the winery owner or executive is still responsible for making sure all three individuals work together seamlessly.

Luckily, the solution to this financial dilemma can be solved by getting in touch with Protea Financial.

Protea Financial: Ultimate Winery Accounting & Bookkeeping Services

Protea Financial is an accounting and bookkeeping firm that designs and implements customized accounting solutions for businesses. We are not a tax preparer, but we support businesses of all sizes in managing their finances so that they can focus on other facets of their business development. 

Our services include tax schedules, managing financial accounts, preparing accounting documentation, and bookkeeping

For wineries, we have an all-inclusive service that covers responsibilities needed for tax and financial management and bookkeeping, and our services are significantly less expensive than if a winery were to individually hire each professional. 

By housing all professionals under one team, we deliver the same services at a rate that’s below the average marketing-price while maintaining premium quality and accuracy. Furthermore, the winery’s leadership does not need to spend time training, overseeing, and making sure unrelated financial professionals are working together productively. 

Our team, led by Zane Stevens, consists of almost 25 accountants that, together, bring decades worth of accounting and financial managerial experience to our projects. We are poised to assist you in driving your winery business to success.

Get in touch with us to set up a consultation for your winery accounting and bookkeeping needs. We will conduct a thorough evaluation of your winery financial life-cycle to develop and propose a strategy that will lead you to financial freedom. 

Set up your evaluation today.

Harnessing Data for Tasting Rooms

Harnessing Data for Tasting Rooms

The value of that customer relationship is typically 5-6 times what they spend during their tasting room visit, and it takes some effort to ascertain this value, but this is critical to understanding how much can a winery spends to attract more customers.

Direct-to-consumer sales continually grow in importance for small wineries in the face of distributor consolidation. Wineries now have a greater range of options for eCommerce and POS systems, but few wineries effectively harness all the data they have to grow sales. A good financial team can help capture, organize, and analyze this information to support management and sales to increase revenue.

This data collection and analysis should start even before a guest arrives. Hotels use pace reports to judge how well they are progressing toward their occupancy goals, and tasting rooms should use them, as well. Your tasting room seats are like hotel rooms or seats in a restaurant – if you don’t sell them, you will never have a chance to sell that same seat again. Of course, if you don’t sell a bottle of wine today, you will still have a chance to sell it tomorrow, but you will have missed the opportunity to use that perishable seat to develop another customer relationship.

The value of that customer relationship is typically 5-6 times what they spend during their tasting room visit, and it takes some effort to ascertain this value, but this is critical to understanding how much can a winery spends to attract more customers. If you know the typical customer arriving at your winery is going to spend $3,000 and generate $2,000 in marginal profit over the next three years, you can justify a fairly healthy marketing budget to find more customers.

This process does require a few steps to develop actionable information. The winery needs to track customers over time in order to determine the customer’s lifetime spend. Fortunately, most CRM software will provide sufficient historical transaction data that your accounting team can download the transaction history, clean up the data to provide a year-by-year summary of each customer’s purchases. From this, you can determine a customer’s spend over a certain period. Then, combining this purchase history along with good costing information on the wines the customer has purchased (see previous post on costings), and a good understanding of the operating costs (credit card processing fees, shipping costs not borne by the customer, commissions paid to sales staff, etc.) allows the winery to determine the marginal profit from a customer. That provides guidance on how much a winery can spend to acquire more customers. If the cost of acquiring a customer is less than the customer’s lifetime marginal profit for the winery, the winery will see a steady growth in DTC sales and profitability.

Once the customers are on-site, it is time for the hospitality staff to shine, but the financial team should be helping the hospitality staff refine their efforts by looking at conversion rates, data capture, and order sizes on a routine basis. An aggressive marketing effort to attract more customers isn’t effective if it increases visits, but the staff isn’t capturing visitor data (so you can sell them more wine in the future) and converting them into customers. Given the difference in value between a visitor and a customer, the financial team should be able to help management develop an incentive plan that will reward staff and help the business turn more visitors into customers. In some cases, we have seen simple sales incentives more than double a tasting room’s performance.

Maximizing Profit Through Wine Pricing

Maximizing Profit Through Wine Pricing

Most small wineries fail to properly maximize profit when setting prices.

In fact, most wineries evaluate and change their wine pricing too infrequently – a decision to not change wine prices is still a price-setting decision by default.

A good wine pricing exercise needs to be a three-way conversation with sales, winemaking, and accounting.  More importantly, the discussion needs to go beyond just a gut feeling about the market. Most wineries have data to guide the discussion, but it requires some effort to identify and analyze the necessary information, as it is rarely in plain sight.

The sales team can provide a sense of the market’s likely response, but the results from the winery’s most recent price change are likely to be more instructive.  If your accounting team can estimate the price elasticity of demand (basically, a measure of how sensitive the volume of sales is to a price change) for the wines, management can then have a better guide to evaluating the price-volume trade-offs. (Yes, there are some step functions in the demand curves, but management should use data, not gut, to evaluate the actual magnitude of these wine pricing changes.)

Equipped with this price elasticity estimate and the current cost of production, the accounting team can then estimate the total gross profit at each combination of price and volume.  We have seen so many wineries that haven’t changed wine prices in years, but costs have steadily crept up, eroding their margins.  In this scenario, especially when gross profit margins slip below 35%, it is actually much easier to raise total gross profit with a price increase (rather than trying to increase volume).  Furthermore, given the length of wine’s product cycle, the return on capital for growing through volume is often lower than the return on growing through price (but this is a topic for another day).

Conversely, some wineries with very high gross profit margins may be able to increase total profitability through a decrease in wine pricing, but this is actually a rarer situation, so a winery should be very careful and examine the data thoroughly before dropping prices.

Another reason for making small, thoughtful changes to wine prices more frequently, is to develop a deeper data set from which to develop insight to drive a more strategic and profitable pricing strategy.