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Winery Adaptation

Winery Adaptation

How smaller, independent wineries can sell more wine in a hypercompetitive marketplace

 

State of Industry – Lots of winners but many “silent” losers

 

It’s amazing how the world can change in a year! Even before the COVID-19 pandemic made its global impact, the U.S. Wine Industry was in a tough spot with oversupply, consumer buying-habit changes, three-tier consolidation issues and more.

Today, these challenges have been dramatically magnified. For smaller, independent wineries across the United States, the time has come to take a serious look at adapting to the rapidly evolving trade and consumer trends shaping the industry. Here are just a few of the most important dynamics to consider in order to successfully compete in the wine marketplace in the years to come.

 

New packaging – It’s not just a 750ml game anymore

The wine industry is an agriculture business and one that is historically slow to adapt to change. In the last few years, this business paradigm has rewarded producers who are willing to take the risk of packaging their wines in unconventional ways that go beyond standard 750ml bottles.

 

wine

Many wineries still cling to the belief that quality wines MUST be packaged in 750ml bottles. Some even believe that those bottles should be heavier than standard-weight bottles, in order to convey a high-end image. This thinking does not take into consideration that today’s consumers—across all generations—are more cognizant than ever of the environmental impacts of their everyday purchasing choices. From aluminum cans to 1.5-liter box, here are the top trends in packaging over the last few years: 

Cans, boxes, Tetra cartons, 375ml, 500ml … all should be contemplated depending on a winery’s channel focus. These alternative packages are clearly appealing to due to their convenience, sustainability and “avant garde” positioning.

 

 

wine packaging

Source: Wine Intelligence – Trade interview program 2020

 

Wine Types and Styles – Tastes they are a-changin’

 

Consumer buying habits change over time for all industries—that’s just the way it goes due to generational shifts, technology advancements and innovations. While the Boomer generation (born ‘55-‘65) has driven wine industry growth and premiumization for the last 30 years, the smaller GenX cohort (born ‘65-‘80) has overtaken it to become the key purchaser of premium wines in the U.S. The Millennial generation (born ‘81-‘96) is right behind the Boomers, in the No. 3 spot. These younger generations have different wine preferences than their parents before them.

 

As food styles evolve and consumers embrace healthier eating habits, lighter and fresher wines such as Sauvignon Blanc, rosé and Pinot Noir continue to gain in popularity. This trend shows no sign of abating, which means that the sales dominance of Cabernet Sauvignon and Chardonnay will wane. While this can spell trouble for some wineries, it will provide opportunities for those willing to make the jump.  (To learn more about this trend, see Ray Isle’s article in Food & Wine.) 

market share

But before any winery looks at producing new products, it must first examine its existing portfolio and weed out underperforming SKUs that do not truly contribute to the brand’s success. Slow-moving SKUs weigh on resources and divert attention from products that could become hero wines that drive sales success and profitability

 

 

Three-Tier Channel – Consolidation continues

 

No one could have predicted the catastrophic collapse of the on-premise segment in 2020. For decades, many wineries benefited from a restaurant-focused strategy, but these producers have now been forced to look for alternative sales channels within the three-tier trade.

Retail trade was already controlled predominately by the larger wine companies—those 50-some-odd producers making more than 250,000 cases annually. So, for smaller wine companies looking to make up for lost sales in this channel, it will continue to be extremely difficult to increase sales and distribution, unless they have unique, sought-after or highly rated wines.

The small, independent winery already entrenched in the three-tier marketplace must learn to adapt to selling wine in a whole new manner focused on some of the following principles:

  • Focus on account relationships directly, relying less on distributors to generate business. Simplify wholesale pricing nationally so that resulting trade prices between all states show minimal variations, limit ultra-deep online discounting in states like N.Y., N.J., Calif., and Conn.; and have depletion allowances/price supports that are targeted on volume deals vs. everyday pricing.
  • Look less at a traditional 50-state distribution plan and adopt a strategic, state-by-state strategy in which the winery’s time and money resources are focused more effectively.
  • Focus on distributors that are committed to being transparent, communicate regularly, and are structured to work off depletion and account base goals – not shipments.

The Winning Game – DTC is clearly the haven but increasingly competitive

 

Direct-to-Consumer (DTC) is an obvious focus for most small wineries since it’s more of an open marketplace and a more profitable sales channel. That said, there are many competitive realities in to consider:

  • Hospitality – Wine tourism will return, but competition for the wine tourist dollar will be fiercer than ever as things open back up. To attract and retain a more customers, wineries should continue to invest in tasting room spaces and staff to elevate their experiences.
  • Membership – Because younger generations that have become the wine industry’s dominant buyers don’t necessarily want to have wine shipments show up automatically “X” number of times per year, traditional wine club memberships are declining. When building this important channel, consider fully customizable membership structures, shipping cost supports (including flat fees and/or shipping included) as well as unique added value benefits (not just events)
  • eCommerce – Online wine sales got a big boost due to pandemic restrictions, and wineries will need to invest in this channel to keep the momentum going. eCommerce requires resources in digital marketing (website, email, SEO, social media, etc.). Since most wineries don’t have the resources to hire a full-time employee to manage this area, outsourcing is vital. (Just a few of the companies that specialize in providing ecommerce support are:

Wine Glass Marketing, Ving Direct, and Juice Box Direct.)

 

 

 

Don’t Just Survive, Thrive – The strategically minded winery will prevail

 

The biggest trends in the wine industry today were already wielding their influence well before the pandemic hit, and now the need to develop alternative routes to market is clearer than ever. Wineries must accept the fact that the marketplace has changed, and rapidly adapt to remain relevant to the consumer.

Small, family-owned, independent wineries can not only survive but thrive in today’s hypercompetitive wine industry. However, they will need to develop a sound overall strategy with a realistic operational plan for executing initiatives that fit the winery’s capabilities—financially, operationally and even culturally.

Protea Conversations – Rachel Martin

Protea Conversations – Rachel Martin

Protea Financial was founded in 2014 to provide high quality out-sourced accounting at an affordable price.  Given Protea’s flexible work environment, the Company especially appealed to accountants who wanted to re-enter the work force after taking time off to start a family. This allowed Protea to attract extremely talented individuals who were overlooked.  Over 80% of both Protea’s leadership and accounting teams are women.

We selected the name Protea because is the national flower of South Africa and is a symbol of our connection. The Protea flower has become an ornamental flower because of this striking beauty and is included in arrangements and bouquets as a symbol of courage or daring to be better or a sign of positive transformation.

Protea Conversations focuses on successful woman in business and their achievements.  The hope is that these conversations will create a forum to discuss the experiences, opportunities, and challenges women face, and how we can build a more diverse, inclusive, and successful environment for everyone.

In April 2021 we spend time with Rachel Martin. A unique combination of education and experience brought Rachel Martin to launch Oceano Wines with husband and co-proprietor, Kurt Deutsch in 2016. A Virginia native, Martin was present at the inception of what is now considered one of that state’s premier wine producers, Boxwood Estate Winery, in 2005. As Executive Vice President of Winery Operations, Martin’s job was to oversee all facets of production, sales and marketing of Boxwood’s award-winning whites, rosés and Bordeaux-style red blends.

Appreciating the distinctiveness of Middleburg’s terroir, Rachel spearheaded the move toward securing a coveted American Viticultural Area designation from the Alcohol and Tobacco Tax and Trade Bureau, the federal agency charged with evaluating the merits of all such applications. The petition she authored on behalf of the region was approved in 2012, making Middleburg Virginia the state’s seventh AVA.

Rachel’s forward thinking led directly to Middleburg having its own wine identity separate from the more generic Virginia designation, making her well suited to again start from scratch with Oceano Wines. None other than the esteemed author Jancis Robinson noted Rachel’s marketing savvy in her book “American Wine.”

Rachel is a member of Les Dames d’Escoffier International New York and Washington, D.C chapters and was the first woman to be inducted into the District of Columbia chapter of the International Wine & Food Society. Rachel was a founding board member of the Middleburg Film Festival where she was closely involved with the beverage/culinary. 

How did you get into the wine industry and why did you decide to start Oceano Wines?

My path to the wine industry began in 2002. It was my step-father’s awesome and somewhat crazy idea to plant a world class vineyard and build a state of the art winery in Middleburg, Virginia- Boxwood Estate Winery. My position would be Executive VP in charge of all operations, so in advance I attended the Diploma program at the University of Bordeaux’s School in Enology in Bordeaux, France and studied Enology and Viticulture at Napa Valley College in Napa, California.

In 2016, while still a Boxwood, I visited Spanish Springs Vineyard just east of Pismo Beach on the extreme coast of San Luis Obispo County, California. I was so intensely struck by the vineyard terroir to produce unforgettable Burgundian varieties, I immediately contracted for 6 tons of Chardonnay. We hired industry veteran winemaker Marbue Marke to craft our first vintage in 2016. That was the first step in establishing Oceano Wines with my husband and business partner, Kurt Deutsch. And in 2018 we added Pinot Noir to our offerings. Our wines are made by Marbue in Napa.

 

What has been the biggest challenge you have experienced in reaching your current success (personally and professionally)?

Since I feel like I have had two lives professionally in wine, I can speak to both challenges in each life. At Boxwood Winery, my biggest challenge, personally was working for my step-father. He is very old-school when it comes to business, and it could be soul crushing at times. That said, I am incredibly grateful for the opportunity that he gave to me as Executive VP of his promising winery. That was the start of my life in wine. Professionally, I was challenged at every level. I had been responsible for logistics and creative projects in the past, but nothing of this magnitude. I had to learn all facets of the business by the seat of my pants. The only industry mentor that I had was our viticultural consultant, Lucie Morton. That was amazing, but I was responsible for much more than that. I had to grow in every direction to meet the requirements to run winery operations, sales and marketing. It was a huge job, but very satisfying!

With Oceano Wines, there are not any personal challenges. It is like breathing, because I am literally living my best life. I am at my happiest when I am creating. We are sourcing from an incredible vineyard site, Spanish Springs, which is owned by our family friend Henry Warshaw. I am privileged to work with our winemaker, Marbue Marke. He is highly experienced, down to earth, professional and most importantly, expertly skilled as a winemaker and a viticulturist.

Professionally, since we are sourcing fruit from the extreme coast of San Luis Obispo County, making our wines in Napa as a client and I am based in New York City, we have not yet been able to establish a tasting room. This is the greatest challenge. We are looking into options on the east coast. Hopefully we will find the right opportunity in 2021. Right now, our wines can be purchased from our website and at restaurants and retailers in California, New York, New Jersey, Delaware, Maryland, Virginia, Washington, D.C., North Carolina and Florida.

 

What are your short term goals of your career/business and yourself?

Short term goals for business is getting our tasting room situation figured out and open in 2021. For myself, my goal is to continue my role as a leader and mentor in the alcohol beverage industry, by bring valuable content and support to my member associations: Women of the Vines & Spirits and Les Dames d’Escoffier.

 

What is the best piece of advice you have ever received that has helped you in your success?

Not everyone is going to like you, and that is okay.

 

What is the piece of advice that you wished you had gotten when you were starting out?

Approach people by what you can do for them, not what they can do for you.

 

What advice you give to others to help them be better leaders?

Cultivate and nourish your employees, they are your greatest asset.

 

As a thank you to our interview and Protea’s commitment to more diverse and inclusive leaders, Protea will make a donation to Vital Voices (https://www.vitalvoices.org/). Vital Voices Global Partnership is a global movement that invests in women leaders who are solving the world’s greatest challenges. They are “venture catalysts,” identifying those with a daring vision for change and partnering with them to make that vision a reality. They scale and accelerate impact through long term investments to expand skills, connections, capacity, and visibility. Over the last 22 years, we have built a network of 18,000 change-makers across 182 countries who are collectively daring to reimagine a more equitable world for all.

Protea Conversations: Destiny Burns

Protea Conversations: Destiny Burns

Protea Financial was founded in 2014 to provide high quality out-sourced accounting at an affordable price.  Given Protea’s flexible work environment, the Company especially appealed to accountants who wanted to re-enter the work force after taking time off to start a family. This allowed Protea to attract extremely talented individuals who were overlooked.  Over 80% of both Protea’s leadership and accounting teams are women.

We selected the name Protea because is the national flower of South Africa and is a symbol of our connection. The Protea flower has become an ornamental flower because of this striking beauty and is included in arrangements and bouquets as a symbol of courage or daring to be better or a sign of positive transformation.

Protea Conversations focuses on a successful woman in business and their achievements.  The hope is that these conversations will create a forum to discuss the experiences, opportunities, and challenges women face, and how we can build a more diverse, inclusive, and successful environment for everyone.

Destiny Burns is a native Clevelander (born and raised in Euclid), and she recently moved back home after more than 30 years to be near family and to live my dream of opening an urban winery here in her beloved hometown. Destiny is a retired U.S. Navy officer (served for 20 years on active duty (thank you!), and then spent more than 13 years as a business development executive in the defense industry in the Washington DC area. Destiny is also a former volunteer firefighter/EMT and has a great love and respect for first responders and for all those who serve our country and communities in uniform.

Wine has always been a great passion of hers having lived and traveled all around the world throughout her adult life, studying and enjoying wine and food. Destiny has advanced degrees in Business and professional experience in all aspects of business development, marketing and management, and also pursued formal and informal training and professional development opportunities in the wine industry. All of her experience and education, combined with a passion for wine and for her wonderful hometown, has culminated in her decision to open and run her own winery in the metropolitan Cleveland area and provide the “wine companion” to all the great craft beer and spirits made here! As they say, let’s have fun, celebrate, connect, support charitable causes and drink some great wine together at CLE Urban Winery! 

How did you get into the wine industry and how did you come up with the concept of CLE URBAN WINERY?

I always wanted a food- or wine-related business of my own as a “someday” dream. When I turned 50, newly divorced after a long marriage with an adult child fully launched, I decided to get serious about achieving this dream. I left my high-pressure career in the Washington DC area and returned to my hometown of Cleveland, Ohio to open my own business.

After performing a market analysis, I decided that opening a restaurant was too risky (too much competition), but I discovered that I absolutely loved the craft brewery culture of Cleveland. I decided to build my business based on my love of wine and my hometown, so I created a craft brewery-style urban winery and Tasting Room in a 100 year old former auto repair garage in my suburban Cleveland neighborhood. I call it Good Wine Made Fun that Celebrates Cleveland and Creates Community, and I will celebrate my 5 year anniversary this July!

 

What has been the biggest challenge you have experienced in reaching your current success (personally and professionally)?

I would say the biggest challenge that I have faced as an entrepreneur (aside from COVID-19, which has presented a number of significant challenges for all of us) is really understanding the costs, key performance indicators and other financial measures of my business. The unique business model I created is a bit of a hybrid, and I struggled with generating the financial reporting I needed to truly understand how to profitably manage and grow the business. I finally found my financial bookkeeping partner in Protea Financial – I can’t say enough good things about how they have helped me truly understand the unique financial aspects of my urban winery business model and to effectively manage my books. The resulting financial confidence has been a godsend as I have worked to successfully navigate my business through the COVID-19 crisis.

 

What are your short term goals of your career/business and yourself?

I think I have the same short-term goal as many other small business owners… to survive the pandemic, both personally and professionally. Both aspects are challenging in this stressful and unpredictable environment, and that is doubly so as an entrepreneur. I have had to continually hustle and pivot throughout this crisis – no staying home and making a sourdough starter for me!
The other short term goal that I have been working on in 2021 is to launch the Urban Wine School™ – a comprehensive wine appreciation and education learning community that is affordable, accessible and fun! I plan to bring the first courses online this spring.

 

What is the best piece of advice you have ever received that has helped you in your success?

The best piece of advice I ever received was from a former boss who once told me that “Hope is not a strategy.” The only way you will be successful is through hard work and by developing a strategy and executing a plan to get you where you want to go… just hoping everything will work out is not going to get you very far.

  

What is the piece of advice that you wished you had gotten when you were starting out?

I knew this when I started out as a small business owner, but I didn’t fully understand how important this advice was until I was neck-deep in it… CASH IS KING.

  

What advice you give to others to help them be better leaders?

Don’t be afraid – and the best way to mitigate that fear is through knowledge. Do your homework, leverage resources, work hard and stay focused. Don’t take no for an answer. Set clear expectations and goals, and then hold yourself and your team accountable for achieving them. Surround yourself with great people and do everything you can to make them successful and productive, both personally and professionally – they, in turn, will then take care of you and your customers.

 

As a thank you to our interview and Protea’s commitment to more diverse and inclusive leaders, Protea will make a donation to Vital Voices. Vital Voices Global Partnership is a global movement that invests in women leaders who are solving the world’s greatest challenges. They are “venture catalysts,” identifying those with a daring vision for change and partnering with them to make that vision a reality. They scale and accelerate impact through long term investments to expand skills, connections, capacity, and visibility. Over the last 22 years, we have built a network of 18,000 change-makers across 182 countries who are collectively daring to reimagine a more equitable world for all.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Why You Should Hire a Bookkeeper

Why You Should Hire a Bookkeeper

Running a successful winery requires you to manage numerous departments—production, processing, sales, and administration, to name a few. Often bookkeeping and accounting are some of the first areas neglected when there’s not enough of you to go around.

When you find yourself scrambling at tax time or with a pile of unopened bills, hiring a bookkeeper can help ease your burden. With a professional in charge of your day-to-day finances, you’re free to tend to the areas of your winery that need your expertise.

 

A Bookkeeper Will Allow You to Focus on Your Business

 

Great bookkeeping is the backbone of any successful business. Ensuring your bills and employees are paid on time, your taxes are filed, and your financial statements are current are just some of the things a great bookkeeper does.

While you may think that doing your own bookkeeping saves you money and allows you to better understand your business’s finances, every bit of time you spend crunching numbers is time away from building, managing, or expanding your business.

You didn’t get into the winery business because you enjoy accounting and administrative work. Your time is better spent working on producing wine.

Bringing in a professional to help with your bookkeeping can prevent you from being spread too thin and burnout. Stay focused on what you really love doing and leave it to the financial expert to handle the numbers.

 

A Bookkeeper Will Help You Better Understand Your Business

 

You know a lot about wine grapes, harvesting, and selling wine. Chances are you aren’t a skilled accountant.

You may know how much your grapes cost but do you know you receive a 10% discount if you pay your vendor a few days early? A bookkeeper will help you manage cash flow to ensure your business takes advantage of any money-saving opportunities.

As your winery grows, knowing how much cash you have in the bank isn’t enough. You’ll need to know how much money you have coming in and going out in the future. Keeping track of it in your head can lead to cash flow struggles.

A great bookkeeper will manage your accounts receivable and accounts payable to keep cash moving.

Having a bookkeeper who’s devoted to your winery’s books allows them to be able to spot irregularities early. Maybe a vendor is charging more or you are selling more than in the past, but you aren’t  collecting more sales tax. Addressing any inconsistencies from the start will save money and time in the long run.

An experienced bookkeeper can help streamline procedures too. They can help standardize how documents are retained or create a calendar to manage due dates of bills.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

A Bookkeeper Will Help Keep Your Business Compliant

 

Taxes come in many shapes and sizes. Federal payroll and excise taxes. State payroll and income taxes. Sales taxes and business licensing.

Bookkeepers excel at organizing, recording, and filing. Experienced winery bookkeepers know the ins and outs of the various taxes your winery will need to pay. They will ensure processes are in place so that your taxes are filed and paid on time, preventing you from incurring penalties and reducing your anxiety.

State regulations govern the winery industry. Keeping on top of your winegrower’s license, wholesaler license, and your on or off-premise retail license is another area an experience bookkeeper can assist. They can ensure your licenses are renewed before they expire and can provide any necessary reports. 

If you have loan covenants to maintain or investor reporting to prepare, an experienced bookkeeper can manage this to ensure you don’t miss a deadline.

With a dedicated bookkeeper, year-end tax time can be less stressful. Your bookkeeper has kept your financial house in order throughout the year. This makes it easy to hand over your tax records to your tax professional.

 

A Bookkeeper Can Save Your Business Money

 

In addition to the compliance aspect of tax time, your bookkeeper is probably less expensive than your tax professional. Having a bookkeeper on staff who timely records your transactions decreases the amount of work your accountant has to do to prepare your tax return.

A high-quality, experienced bookkeeper will have a general idea of how much things costs. While they may not know specifics about the winery industry, they will know prices for office supplies, telephone service, and bank fees. This wealth of knowledge will prevent you from paying more than you should.

A bookkeeper will ensure your bills are paid on time so you avoid late payment fees or interest. These unnecessary expenses reduce your profits and may harm your business’s credit score.

Bookkeepers can also monitor your budget. They can provide reports comparing your budget with actual expenditures and will be able to zero in on any differences. With enough experience with your winery, they can also assist in developing future years’ budgets.

Even if you’re just starting on your business journey, hiring a bookkeeper early will prevent the stress and struggle that comes from DIY bookkeeping. And those further along the business path, now’s the time to consider the benefits a bookkeeper can provide.

Whether you’re looking to hire a bookkeeper as an employee or outsource it, having a professional in your corner makes sense. You’ll be able to focus on taking your winery to new heights.   

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Small Producers Tax Credits for Everyone!

Small Producers Tax Credits for Everyone!

‘Small Producers Tax Credits for Everyone!’ (Said in my best globally famous talk show host voice.)

So you’ve heard that the Craft Beverage Modernization Act was made permanent. And you operate a winery or you support operational reporting for a winery.  Now what?

 

Let’s Begin at the Beginning – Tax Class for Still Wine

Before you can figure out how to take a tax credit, you need to check the tax class.  The rates of tax for still wine can be found in 26 U.S. Code SECTION 5041 (c) or by clicking here if you really want to read tax code.  Effective January 1, 2021, still wine that is not more than 16% alcohol by volume (‘ABV’) is taxed at $1.07USD per gallon and still wine between 16% ABV and not more than 21% ABV is taxed at $1.57USD per gallon.  That means that while the tax rate has not changed, the ABV for still wines in a specific tax class did change.

If you produce still wine and you have removed it tax paid from the winery’s bond, the excise taxes owed are based on the rates listed above.  Still wine that is transferred from the winery’s bond to another bond (typically for storage or order fulfillment) and tax paid later is still eligible for the tax credit.  In short, if you pay tax on still wine of your own production you are eligible for the tax credit described below.

 

Side Note – Labelling Rules

TTB labeling rules for listing the ABV on wine labels did not change.  I received questions about this over the past two years and the listing requirements along with permitted tolerances, can be found HERE.

 

Tax Credit?  What Tax Credit?

Effective January 1, 2021, among other changes, the words ‘For Small Domestic Producers’ is removed from that same 26 U.S. Code SECTION 5041(c) mentioned above. This permanently establishes that the following tax credits are available to all wine producers and importers:

  • $1.00USD/gallon on the first 30,000 gallons produced in the United States or imported into the United States in a single calendar year
  • $.90USD/gallon on the next 100,000 gallons
  • $.535USD/gallon on the next 620,000 gallons

Up to 750,000 gallons of wine are eligible for some form of tax credit in a single calendar year.  Note that while the tax class changes only applied to still wine, the tax credits apply to all types of wine.

Excise Tax Class? Check.  Tax Credit? Check.  Where Do I Claim the Credit?

Before you can claim the tax credits listed above, you need to first tell the Tobacco Tax and Trade Bureau (‘TTB’) that you have removed the wine from bond to tax paid status.  If you work on the winemaking side of the business or support winery operations, you’ve probably heard the terms ‘702’ or ‘5120’, depending on your vintage in the industry.  Those terms apply to the TTB Report of Wine Premises Operations, found HERE on the TTB’s website. This report is where a wine producer declares how much wine they have produced, what winemaking activity (including bottling) occurs and, among other things, what wine is removed from bond during a given reporting period.  (Reporting periods vary based on production volume.) Just in case you’ve looked up the form and you’ve never filled one of these out before, there are two rows on the form where you list wine removed tax paid – Section A (Bulk Wines) on row 14 and Section B (Bottled Wines) row eight. Both rows have multiple cell options depending on the tax class and type of wine or hard cider that was removed, but those rows are where you specify what has been removed tax paid. Once wine has been reported as ‘removed taxpaid’, excise tax is owed on that wine.  After the operations report is filed, it is time to file and pay the excise tax for the wine removed from bond along with claiming available tax credits.

The TTB Excise Tax Return or TTB F 5000.24sm, is where you declare the taxes you owe and credits allowed.

 

Updated Forms Available

There are now forms available for winemaking activity prior to January 1, 2018 and activity from January 1, 2018 to present.  You can find the most common TTB forms HERE.

 

A Permanent Tax Credit is Not a Change in Tax Rate

Making these two changes permanent is great news for producers large and small.  What needs to be clear is that these are two different changes – one to the up to 16% ABV tax rate and the other allowing all producers to claim a tax credit that had previously been reserved for small producers.  While the net impact may be a reduction in taxes paid, it is not a reduction in a tax rate across the board.

For anyone who has read the relevant section of the 5,000 plus page document where these changes were made permanent, you will notice something missing from this post.  This post is directed at domestic wine producers and does not explain how it may apply to importers of wine in the United States.

 

Need More Information?

Cronbach Law Group PC is a law firm located in Napa, California.  Our focus is helping our clients understand the complex world of alcoholic beverage regulation –  50 states, 51 sets of rules. Let us be your guide and keep your busines priorities top of mind on along the way.  www.winedeal.law

 

 

 

 

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How to Calculate the Cost of Making Wine

How to Calculate the Cost of Making Wine

To run a profitable winery, it is vital to understand how much profit you are making per bottle of wine sold. You will need to be able to determine and understand what you can sell your wine for and how much that wine costs to produce.

While the market will dictate how much you charge for your wine, you control how much it costs to make it, as long as you understand what is included in the costs and have a mechanism to track it.

An accurate calculation of the costs to make your wine increases the likelihood of operating a profitable winery. Although this sounds like a simple endeavor, there are challenges. From determining which costs to include, to tracking all expenses through the production process, getting to a final dollar value takes time and careful consideration.

The Basic Terminology

Before we can start discussing how to value your winery inventory, let’s define two key accounting terms.

Cost of Goods Produced (COGP) 

Commonly known as wine in process or cost of inventory, all costs involved in the process of making wine are included. This includes things like:

Raw materials
• Services
• Labor
Overhead allocations

Whether direct or indirect, all costs from planting through to bottling the finished wine are included in COGP.

Cost of Goods Sold (COGS)

The COGS is the cost of the wine sold in a specific period. You’ll need to match the cost of the inventory you sold to your revenue. A simple way to put it, for each bottle of wine sold, how much did it cost to make and get it into the hands of the customer.

Now that you understand the two primary accounting terms related to production, we need to dig deeper into the different ways to develop a value for your COGP, starting with the groups of costs involved.

Inventory Costs

Winemaking generally involves three main types of costs.

Direct materials
Direct labor
• Overhead allocations

Direct Materials in Winemaking

Calculating materials cost is reasonably straightforward. It is the cost, including tax and delivery fees, to acquire your materials and get them to your production area. This includes raw materials like grapes and packaging materials like bottles and boxes.

Segregating these costs makes the allocation of overhead (which we’ll discuss a little later) a little easier and more accurate. And it makes sense for blended wines. You’ll be better able to track the component costs.

While you may initially record the cost of grapes separately (if you are farming, this will be more complex than if you are buying grapes), it will be added to the other expenses, such as fermentation and cellar costs, to get to your bulk wine cost.

Direct materials don’t include materials consumed in production. For example, light bulbs or air filters in your production facility are manufacturing overhead.

Labor in Winemaking

Labor required to turn your raw grapes into a finished bottle of wine should be included in inventory costs. You’ll want to include not only salary and wages but also benefits and payroll taxes.

Owner or executive compensation is difficult to classify. While they are involved in the winemaking process, they also work in other areas, like administration and finance. For these individuals, determine how much of their time is involved in the winemaking process and apply the percentage to their total payroll costs. Using reasonable estimates is acceptable.

Overhead in Winemaking

Costs incurred to keep your winery operating but aren’t direct materials or labor are overhead. Overhead costs are usually aggregated into cost pools and allocated based upon the number of bottles produced.

Examples of overhead include property insurance and taxes, building repairs and maintenance, utilities, and administrative staff wages.

With your bulk wine value, adding expenses for your direct labor and overhead gets you to the total cost of the finished, ready-to-sell wine.

After you’ve tabulated the total inventory costs, you’ll need to consider how your wine inventory moves. This cost-flow is your inventory valuation method and impacts your COGS, income taxes, and balance sheet ratios for lending requirements. Choose the other that best suits your production process.

COGP/Inventory Valuation Methods

Specific Identification

This method involves tracking each item from the time of purchase through to when the wine is bottled. Meticulous record-keeping, data collection, and data segregation make specific identification highly accurate.

Starting with the calculation of exact juice or wine yields for each varietal vintage, even getting detailed down to which vineyard or vineyard block, you then track the juice into the individual barrels for each lot, parsing and combining as barrels get blended.

Weighted or Average Cost

When costs are intermingled and difficult to specifically identify, using the average cost method may work best. Using the average or weighted average for consumable supplies like yeast and sulfur or general costs like storage is appropriate.

First-In First-Out (FIFO)

Another valuation method is the FIFO method, which assumes that inventory moves such that the oldest stock (the first in) is the first sold (the first out).

Last-In First-Out (LIFO)

As you might guess, the LIFO method assumes the newest inventory items (the last in) are the first to be sold (the first out). This is unlikely the case in the wine industry since older vintages are typically sold before newer ones.

Specific identification and FIFO are the most commonly used valuation methods for wineries.

Using LIFO for tax purposes requires you to use it for financial reporting purposes. This can be achieved while still using the specific identification or FIFO method by recording a LIFO reserve on your books.

Recent changes in the tax code for expensing of certain winemaking costs make consulting with your CPA very helpful.

Regardless of which inventory valuation method you use, use it consistently. Consistency is required for U.S. GAAP reporting and makes spotting an error easier.

Valuing winery inventory is challenging and unique. It requires specialized knowledge acquired through years of experience. The professionals at Protea have decades of experience helping winery owners with complex accounting and tax issues. Reach out today to see how we can help you.