Why more wineries aren’t failing
I’ve often wondered why there haven’t been more winery failures or sales in California over the past three years, given the length and severity of the Great Recession. Sure, we’ve seen some, but nowhere near the quantity one might have thought.
It’s been my supposition either than (a) the pressure’s building and we’ll see a steadily increasing number of bankruptcies or forced sales in 2012, providing the recession continues, or even deepens, as now seems likely; or (b) that many winery owners, who are personally wealthy, simply have the means to hang on, until and if things turn around.
The problem with (b), I’ve realized, is that it’s not true. Some winery owners are indeed wealthy and can hunker down, perhaps for an indefinite period of time. But many aren’t. They lead pleasant lifestyles, and aren’t exactly poor, but most of their profits are plowed right back into the family business. So that leaves (a) as the likely scenario.
However, I had a conversation yesterday with someone well known in the wine industry as a veteran leader–someone who understands everything there is to know about leading a medium-sized family winery and navigating the tricky shoals of financial rapids. I asked him why we’re not seeing more changing of hands of winery ownership, and here’s what he replied, pretty much verbatim:
There’s actually a lot less wineries for sale than people might think, and the sellers are doing pretty good.
[Me] How could that be?
There’s a lot of liquidity in the market chasing not many deals.
The banks and wineries are working through a difficult economy and they’re much wsier than in the past: You don’t have banks foreclosing on wineries. You don’t see a lot of wineries in the press financially strained, even though they may be. The banks and wineries are managing this crisis better than in the past. I think the banks learned their lesson from the housing crisis. The’re wiser this time not to put everyone into foreclosure and run everything down.
The way I’m interpreting this is, there may well be a lot of winery owners who are “underwater,” not in the real estate sense but in the sense that they owe a tremendous amount of money to their lending institutions–money they don’t have, and don’t foresee having anytime soon. This historically leads to the classic foreclosure scenario Hollywood loves to portray–recall Jimmy Stewart’s character, George Bailey, fighting to persuade the Board of Directors of the Bailey Building and Loan Association to keep home loans flowing to the working poor, in It’s a Wonderful Life.
We hear a lot these days about banks not lending because they’re afraid of the security of their loans in this devastated economy. We do hear about foreclosures on homes. But maybe it’s true that, in wine country, the banks are much more hesitant to crack down on wineries. Most financial arrangements in wine country are made with local banks, and often there is a personal relationship between the winery family and the lending officials at the banks, the way there isn’t between an ordinary mortgage holder and, say, Bank of America.
Of course, that doesn’t mean the banks aren’t nervous. As financial institutions, they need their loans repaid. But they’re forced into the uncomfortable position of being between the Devil and the deep blue sea: if they crack down on late payments, thus forcing the family winery out of business, they lose, because they’ll probably never get repaid; the winery will be forced to sell at a loss, or only a fraction of what the business would be worth in a sound economy.
Better, from the bank’s point of view, to let things drift, come to some kind of private arrangement with the family, and keep their fingers crossed that 2012 will bring about an improvement in the economic climate.
Let’s all hope for that.