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
• 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.
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
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.
The state of the Property insurance market for wineries is experiencing some severe difficulties and there is no relief in sight for the foreseeable future. We are experiencing what the insurance industry calls a Hard Insurance Market. It is hard to get to coverage and hard to tolerate the coverage reductions, lack of available insurance limits and increased prices.
“For the larger wineries, it is extremely difficult to purchase enough limits of insurance to adequately cover all of the exposures to loss of buildings, machinery and equipment, inventory and business income in the event of a loss.”
How did we get here and why is this happening? It started in California with the 2017 fires followed by the 2018 floods and then the 2019 fires. Insurers took substantial fire losses in 2017, an extremely large flood loss in Northern California and bourbon plant fire in Kentucky in 2018 followed by large fire losses in 2019. These compounded losses caused several insurers to withdraw their interest in the wine industry altogether while others have dramatically reduced the coverage offerings available while substantially increasing rates / prices.
A winery was previously able to be able to purchase an extremely broad Property coverage through what is called a Stock Throughput policy which was offered by Lloyd’s of London syndicates. This form has been dramatically modified to reduce the insurance coverage offered. A Lloyd’s syndicate is still looking to offer Property insurance, however primarily to the largest of the large wineries. There have recently been new insurer entrants into the marketplace, while their true interest in offering terms is yet to be fully determined.
For the larger wineries, it is extremely difficult to purchase enough limits of insurance to adequately cover all of the exposures to loss of buildings, machinery and equipment, inventory and business income in the event of a loss. Previous to 2018-2019, limits of liability of 100’s of millions of dollars were readily available. Today, it is a laborious process to layer enough limits in order to build an adequate insurance program to cover the full exposure to loss or damage. Oftentimes loss limits or stop loss limits of insurance protection are purchased to cover the largest foreseeable loss at a single location. Increased property deductibles are also being required in order to obtain coverage. However, the fires have shown us that there is no easy way to determine what could possibly be lost, damaged or destroyed so insuring to 100% replacement value is a good practice to employ. Building replacement costs have gone up dramatically and a true assessment of the true current replacement cost is essential.
What can you do? Work with your finance team, CPA, banker and insurance broker to determine accurate values to substantiate the limits of liability you are desiring to purchase. Know the true replacement value of your buildings, machinery and equipment. Insurers are oftentimes asking for limits equal to 100% of replacement cost, in lieu of previously allowed lower limits of insurance. Have a firm understanding of your stock valuation for inventory in all phases of production, from fruit just picked to and through the entire process of bottling and warehousing finished inventory. In advance of approaching the insurance marketplace, have all of your information professionally and concisely documented.
There is currently no relief in sight for property insurance in the wine industry. What used to be a relatively easy process for an insurance brokerage to approach the insurer marketplace now is a process that requires oftentimes several months. By working 120 or more days in advance of a property insurance renewal, unexpected requests by the insurers and delays in getting physical inspections and additional details of insured locations may be avoided. It is important to work with a team of individuals and firms that understand the wine industry and have strong relationships within the insurer marketplace. Patience and frequent communication are key to a successful property insurance placement.
What inext? If your current insurance brokerage is currently working with wineries, you may be in good shape as they should be familiar with the scenarios above. If they do not, ask your other professional relationships such as CPA or banker who they would recommend that work in the wine space. Reach out to your friends and colleagues at other wineries your size and ask how their renewal process is going/went and who they are using. Local “business journal” type of publications have lists of property and casualty insurance brokers in the wine space. Protea Financial team also have insurance brokerage relationships they will introduce you to or contact Chet Laws of InterWest Insurance at firstname.lastname@example.org / 707-657-4505.
It’s been a tough summer. First, the COVID pandemic slowed down commerce, and most recently the massive wildfires are burning throughout Northern California. This year’s fires came earlier than they historically have and this early arrival means grape harvesting is caught in the crossfire.
Many winery owners are rightfully nervous about what the future holds and are thinking about what they can do to protect their business. Fortunately, the government has stepped in to help businesses impacted by the wildfires and there are numerous action steps you can take today to help prepare you and your business for future natural disasters.
Extended Tax Deadlines
The IRS recently granted some relief to taxpayers impacted by the California wildfires. It extended the filing deadline for all tax returns and payments that were due starting on August 14 through December 15. The new deadline for these returns and payments is December 15. The California Franchise Tax Board followed suit and issued a similar extension.
So, C-corporations that timely filed for an extension to file their annual tax return would have had to file by October 15. The new deadline is now December 15.
Likewise, S-corps, partnerships, and sole proprietors would have had to file by September 15 but now have until December 15 to do so.
Any estimated income tax payments that would have been due on September 15 are now bumped back until December 15.
Those 3rd quarter payroll tax returns and any payment that would have been due on October 31 are now due by December 15.
If your county has been declared a federal disaster area by FEMA, you will receive this automatic extension. This new extended deadline is automatically applied by the IRS and there is no need to file any paperwork. As of September 2020, FEMA has declared the following counties federal disaster areas: Sonoma, Napa, Lake, Yolo, Butte, Solano, San Mateo, Santa Cruz, and Monterey.
All penalties and interest will be waived so long as you file all your returns and pay all your tax by December 15.
Disasters and Insurance
Most wineries have multiple layers of insurance protection. Property, business interruption, and viticulture policies just to name a few.
Now might be that time you need to make use of your insurance. If you’ve suffered damage from the wildfires, contact your insurance agent right away. Many property insurance policies cover natural disasters like wildfires. And some policies will cover a portion of lost revenue and increased expenses due to business interruptions.
Reviewing your insurance needs should be a regular occurrence. And if you haven’t had that conversation with your agent in a while, now is a good time. Talk through all your business needs to craft the coverage that’s right for your winery.
It’s never a fun topic to discuss but disaster preparation and plans should be an important part of your winery’s business strategy. With a proper plan and early preparation, you can lessen the chance of being negatively impacted by a natural disaster.
Regular Maintenance Is a Must
Winery owners should make sure their property is in the best possible shape to withstand any natural disaster. Repairs and maintenance should be made regularly, including clearing fallen debris and removing dead or dying landscaping.
Create a Continuity Plan
Have a plan in place to communicate with winery staff in the event of an emergency. Create a contact list with all employee’s names and phone numbers and establish procedures about how communication will happen in the event of a disaster. Don’t forget to consider how you’ll communicate with customers and suppliers.
Have a point person at your winery who is responsible for monitoring natural disasters. This person should have clear authority to make decisions about the safety of your crop, inventory, and staff.
Ensure your plan includes how you’ll protect your equipment, buildings, and inventory.
Protect Your Electronic Data
With so much of your business data stored electronically, be sure that it’s backed up regularly. The backup should happen off-site so that in the event your computers and servers are damaged, you’ll still have access to all your records.
If you’ve been hesitant to use the cloud to store your data, consider making the switch. Most cloud storage providers make multiple backups each day and access is easy from anywhere you have an internet connection. Cloud storage could help your employees to continue working even if your winery has been evacuated or damaged from a natural disaster.
Document, Document, Document.
Keep thorough and complete records of all your business assets and keeping pictures of all your assets will help if you have to make a claim to your insurance carrier.
You’ll want to document:
- The type of asset, including model number and serial number, if applicable
- The year it was placed in service
- The price you paid for it
- Any customizations made to the asset
A good place to start would be using a fixed asset schedule or report. If you don’t keep this schedule, your tax accountant should have a copy.
Keep in mind all your assets might not be on the fixed asset schedule. Inexpensive equipment like computers or office furniture may not be on the fixed asset schedule, but you’ll want to keep track of those, too.
Managing and Protecting Inventory Before a Disaster
Inventory is one of the largest assets a winery owns. With a robust inventory management system, you’ll know exactly what you have, and protecting your inventory from a natural disaster should be included in your contingency plan.
Your wine racks should be sturdy enough to withstand the shaking of an earthquake or strong winds from storms and your wine inventory should be well organized and labeled correctly.
Keeping your inventory system up to date and organized will be helpful in the event you need to file an insurance claim.
Your inventory management system should know the exact dollar value of all your inventory at any given moment. And if you hold a large amount of inventory, ensure your insurance policy covers all of it. A report with your costs and quantities can be created quickly.
If your business has been affected by the wildfires in California or you could use a helping hand with your business strategy or accounting, get in touch with Protea now. Our professionals are experts at bookkeeping for wineries and work tirelessly to ensure your financial goals are met. Learn how outsourced accounting and bookkeeping can save your winery time and money.
The primary goal of many wineries is to develop, cultivate and produce products that promote repeat business and retain customers. Wineries exist to satisfy customers’ needs through products or services and it’s important for a winery to retain these customers. Since we operate in a competitive business environment, it is important to identify how we can increase customer retention levels.
Let us first define customer retention:
Customer retention is a combination of intentional repurchase behaviour and psychological attachment of a customer to a particular product or service (Al-Hawari 2005:231; Peelen 2005:239; Godson 2009:72; Cant & van Heerden 2010:444). McManus and Guilding (2008:779) also define customer retention as an attitude where a customer’s attachment to a product, service, brand or company is developed. According to Zhang, Dixit and Friedmann (2010:128), customer retention is the likelihood of a customer choosing a particular brand with reference to his/her past purchases.
Why is customer retention important?
Retaining existing customers is cheaper than acquiring new customers.
By retaining customers it allows a winery to generate more profits with each additional year of the customer-relationship. Research has shown that 12 – 15% of customers are loyal to a single retailer, but these customers represent 55 – 70% of total sales, and the only way to increase customer retention is to increase customer satisfaction. Satisfied customers have the tendency to return to the same store and they end up buying the same product.
What happens when customers are dissatisfied? The negative aspect of customer dissatisfaction is that customers lower their expectations when buying from the same winery or stop buying from the winery completely. Conversely, customers that are satisfied have the tendency to return and possibly refer new customers to your winery. As a result, the winery increases its customer retention and lowers customer acquisition costs, which in turn increases the profit of the business. One of the focal points of a winery should be on customer satisfaction as it can possibly yield greater profitability than customer acquisition strategies.
The question then remains, how to satisfy customers and develop a winning customer retention strategy?
Provide quality products
Quality is more than just producing a quality product. The quality of a product should be customer-driven. What is the customer looking for exactly and how do they define quality? It all comes down to how the customer experiences the product. It is important to note that the higher the quality of the product, the more likely a customer will be satisfied. Quality is also not something that you can improve overnight. Take for example the comparison of wine produced in the early 19th century to today’s wine. The use of modern-day technology, a variety of cultivars, viticulture, and overall winemaking experience allows us to produce outstanding quality wine. It takes time to design and build a quality product from the ground up.
Customer service is intricately associated with good quality products. It is important to respond timely to the disgruntled customer and resolve their issue promptly. Customer service is one variable that you can easily control and oversee. Implement standardized service response systems that can deal with inquiries and complaints promptly. These response systems and remedial actions are vital to realize increased levels of customer satisfaction. Your ultimate goal should be to decrease your customer service queries, this in turn evidences that you are producing a quality product. An investment in quality and perfecting your product will reduce your need to deal with customer complaints.
Training and preparation are key
“He who fails to plan is planning to fail!” – Sir Winston Churchill.
It is important to train employees and convey to them that customers are the ultimate judge of quality. Provide employees with a detailed guideline and proper training on how to deal with disgruntled customers. This is especially important as these employees will be representing the brand and they have a big influence on how a customer can perceive the brand. It is important to listen to what the customer is complaining about and utilize this information constructively to improve the overall quality of your product.
Build a relationship of trust with the customer
When a customer trusts the product, the quality, and the brand, they tend to share their experience with family and friends. A case study by Nielsen found that 92 percent of people trust recommendations from friends and family above all other forms of advertising when making a purchase decision. Therefore, nothing comes close to the influence of word of mouth, and satisfied customers share their positive experience with more than five to ten people. Customers need to be able to trust what they buy. By building trust you are providing your customers with something of value which leads to a positive trend towards brand awareness. The winery sales team needs to be thinking about how to deepen the relationship with their customers, especially when they are not in buying mode.
Use automation to your advantage
There is no doubt that technology is there to help us. Try to make use of automated marketing software to engage, re-engage, and keep your customers up to date on what’s happening with your winery and products. Specifically, success stories at wineries have been reported using Customer Relationships Management (CRM) software such as Salesforce, Hubspot, Commerce7, WineDirect, and eCellar. All these CRM systems complement a full marketing methodology for wineries. Make sure to use standardized email newsletters, event notifications, gated content, promotional emails, abandoned shopping cart reminders, and survey emails. Marketing automation will keep you one step ahead of your competitors by communicating more effectively and efficiently with your customers.
Use social media to your advantage
Social media can power your brand forward but can also be detrimental to your brand. Use social media to research your target audience, analyze your competitors, create engaging content, generate website traffic and grow your audience. Make use of customer reviews online and utilize this space to promptly deal with issues customers may have. By promoting brand awareness online, you create credibility and build trust with customers based on your online activity.
By implementing the above strategies, a winery can increase customer satisfaction, leading to an increase in customer retention. In today’s fast paced competitive market, the wine industry needs to focus their efforts on retaining customers and realise the importance thereof.
Al-Hawari, M. 2005. The effect of automated service quality on bank financial performance and the mediating role of customer retention. Journal of Financial Services Marketing, 10(3):228-243.
Cant, M. & van Heerden, C. 2010. Marketing management. Cape Town: Juta.
Godson, M. 2009. Relationship marketing. New York: Oxford.
Magatef, S. & Tomalieh, E. 2015. The Impact of Customer Loyalty Programs on Customer Retention. International Journal of Business and Social Science, 8(1):81.
McManus, L. & Guilding, C. 2008. Exploring the potential of customer accounting: A synthesis of the accounting and marketing literatures. Journal of Marketing Management, 24(7/8):771-795.
Peelen, E. 2005. Customer relationship management. Essex: Pearson.
Zhang, J.Q., Dixit, A. & Friedmann, R. 2010. Customer loyalty and lifetime value: An empirical investigation of consumer packaged goods. Journal of Marketing Theory & Practice, 18(2):127-139.
Accounting and bookkeeping are the heartbeat of the business side of your winery. Unfortunately, these critical functions are too often overlooked by busy owners. While it’s tempting to take shortcuts, or simply rush through the tasks, that can lead to inaccurate financial statements. That’s why Protea Financial offers outsourced accounting services.
While it’s certainly understandable – you have your plate full with so many other business tasks – errors in your accounting and bookkeeping can derail your business. And often without warning.
In 2019, it was reported that 82% of small businesses fail due to cash flow problems. And this infographic from SmallBizTrends shows that 30% of all small businesses are continually losing money due to poor financial management.
With business growth, wine sales and general management stealing your focus, you may consider outsourcing your accounting to ensure financial accuracy and promptness. Outsourcing your winery accounting can help reduce your workloads and divert some, or all of your financial tasks to qualified, highly-skilled accountants. The results will be evident. Once you have outsourced your winery’s financial tasks to an experienced accountant, you can rest assured that your business accounts are in safe hands.
Don’t believe us? Consider this: A survey in 2018 showed that over 80% of businesses outsourcing their accounting function would recommend their accountant to other businesses. If you’re not yet convinced, we’re going to tell you about all the benefits of outsourced accounting.
What Can an Outsourcing My Accounting Department Do for My Business?
Outsourced accounting can take some elements or even the entire function of accounting outside of your business. This will make room for other tasks – especially those that are particularly time-consuming. Whatever your current accounting situation, outsourced accounting can offer you a far more comprehensive solution. Here are 4 of our favorite benefits of outsourced accounting.
1. Accounting Firms Are Made For This
Wine accounting is a complex and challenging task. Not only does outsourcing your accounting take the work off your shoulders, but it places it in the competent hands of highly trained and experienced accounting staff. That’s right, with many accounting firms, you’re no longer relying on one person to manage your books, often you’re getting a whole team.
2. You Can Cut Your Overhead
When you outsource accounting, you will only pay for the work done. In the USA, worker illness and injury cost businesses a total of $225.8 Billion. You need not be one of them. By outsourcing your winery accounting needs, you skip the hassle of payroll taxes, sick leave and vacation time. Therefore, significantly improving your winery’s profit margin. You also eliminate the risk of suddenly losing staff – an issue that most businesses face when someone goes into long term sick leave or quits without notice, leaving you and your books high and dry.
3. Trained Accountants Are Meticulous and Logical
There’s nothing quite so analytical and precise as the mind of an experienced accountant. By nature, accountants are highly logical and willing to deep dive into the details in order to produce the best outcome. Often, accountants utilize highly complex software in order to manage your accounts and to produce the most accurate results possible. One of the many benefits of outsourced accounting is of course, the accountants themselves.
4. You’ll Save Money
While paying someone to do a task you managed yourself might not seem like it would save you money, it definitely will in the long run. You are now free to take care of your business in other more effective ways, or to hone your focus into one element of finance such as bookkeeping and redirect the rest. So the fee your business pays to an outsourced accountancy firm will pale in comparison to the profits from a more active business. In fact, around 30% of businesses outsourcing their accounting functions have been able to increase profit with the guidance of their new accountant.
How Protea Financial Will Bring You All the Benefits of Outsourcing Your Accounting or Bookkeeping
To remain successful, wineries need business leaders to run fast while remaining agile, as well as access to accurate financial data. The opportunity cost of not having superlative accounting is potentially enormous. Protea is here to empower you to cultivate business growth, while your outsourced accounting team manages your financial back office.
Our clients enjoy the benefit of having a team structured around your business needs. The strategic benefits of outsourcing accounting start with the savings. It’s the stack of talent that works with you around the clock to maintain the integrity of your company finances. No matter what happens, your Protea team will have your back and strive to make your job easier.
Begin your journey with Protea by requesting an evaluation today. Our goal is to design a winery financial strategy that allows you the freedom to scale at the pace you desire.
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.