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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.

  1. Steve, there are a lot of us who know that debt coupled with unbridled growth can be unprofitable and eventually toxic, so we have no loans, bank or otherwise. That, and a healthy personal resolve and work ethic, has allowed us to sustain and survive economic pressures during the past 40 years.

  2. Hello,

    This all makes sense but I would be interested to know (though I am sure that no one will ever admit in public) how many wineries are being bought into by Chinese investors. I know of several wineries who have brought in Chinese inventors in the past couple of years but am sure that there are many, many more. Could the Chinese be saving the Napa Valley?…


  3. George Coope says:

    Steve, you’re right about the banks. My observation is that they have been very flexible with troubled winery clients if they are reasonably well managed and can generate reliable financial reports. Loans have been restructured, credit limits raised and forbearances granted on loan covenants. So widespread BKs have been avoided, but there are a lot of businesses out there with uncomfortably high debt levels as a result.

  4. Robert Morey, I doubt if there’s any way to know this. I’m told that California wine is not, repeat not desirable in China at the higher price points, so there may be relatively little Chinese interest in buying into California wineries.

  5. While I do not personally bank wineries I do know people that do. After reading this it peaked my interest and wandered over to another floor of our office to ask a few questions. The long and short of it is that the practice of lending to wineries and farmer (vineyard owners) has changed a lot over the last 15 years. Even over the last 5 years. Lenders aren’t advancing as aggressiviely against inventory/harvest as they once did.

    My co-workers also mentioned a rise in alternative outlets for grapes and inventory. Operations like Cameron Hughes and WineAccess allow farmers and wineries to liquidate inventory and it’s still usually above the loan made against the grapes/wines.

    Both of these combined seem to be benefiting the industry, though nothing is forever. I learned some interesting stuff (and I found wine buddy here at the office).

  6. uff the fluff says:

    Could it not simply be the case that California wineries have healthy profit margins?

  7. Uff – I suspect your notion has a ring of truth. In 2009, at the height of the economic downturn, I increased the sales of the winery I worked for by 23%. The interesting fact is the wine was all over $100 a bottle. Sure, there are some wineries hurting. I think those that relied heavily on sales through restaurants took the biggest hit. But most wineries have experienced a nice increase in direct-to-consumer sales in the past few years. It may be just like all businesses – those that are well run survive hard times. Those that are mismanaged have a tougher time surviving bumps in the road.

  8. Virtually Nothing says:


    Sometimes you need to take the nose out of the glass and sniff the air in your own backyard. While there may not be a desire for wine at higher price points in China, there may be a desire for a green card/US residence visas at one per $500K loan to/investment in a US business. (Go to shopping centers and look at the increments in “loans available for new businesses” – $500K.) Look up EB-5 Regional Centers, then check with the U.S. Citizenship & Immigration Service to find the one nearest you!

    Now this is a green economy.

  9. Steve,
    I always appreciate your musings so thank you, but as someone who does lend extensively to the industry, I can tell you it’s neither A or B of your scenarios. The situation is as follows:
    1) there never have been many foreclosures in the business so this is nothing new,
    2) banks are operating independently and making their own decisions about how to handle a problem loan (no “lessons learned” from the retail housing collapse),
    3) There are a lot of wineries changing hands relative to the past cycles. There are plenty of buyers for few properties
    4) Bankers are highly competitive when it comes to new business and if anything, have gotten more aggressive with rates, terms and conditions in the past 10 years.
    5) The wine business is profitable again and growing. Only 7% of wineries describe themselves as being significantly weak; consistent with our view of benchmark information we posses.
    6) Inventory is in balance for the first time in quite a while and grape prices are going up. There will be fewer and fewer wine “deals” in the stores in 2012.

    So there is no building bulge of wine properties that will be in foreclosure. The business is way past the bottom of the market, credit is available, profits are improving and there is a large amount of capital looking for a small number of deals (few are Chineese BTW.)

  10. This vintage(2011) is not going to help the situation. Yields are down and the prices have sky rocketed. The consumers are not going to purchase wines that will be inevitably higher, especially in Napa. Consumers buying habits have changed for good and it will be very challenging for wineries to raise prices. In addition to the banks working closer with struggling wineries to protect there assets, there are new wholesale distributors opening everyday that help perpetuate the situation. Inevitable something has to give.

  11. “Robert Morey, I doubt if there’s any way to know this. I’m told that California wine is not, repeat not desirable in China at the higher price points, so there may be relatively little Chinese interest in buying into California wineries.”

    I have seen this attitude in them. They scoff at a price and go elsewhere only to return to accept a price but it’s usually too late because the wine is already gone. These days around my facility they seem to be more agreeable to my asking price. (don’t forget to keep two or three bucks in there to give them their ever expected discount)

    They don’t trust their wineries and we all know why. Albeit the Dynasty facility I visited two years ago was top notch and I was very impressed. Then wine …. was excellent and 100% gets sold every year. What is amazing to me is that the millions of cases going into China just gets sucked up so fast. You go there and it’s not easy to find wine. I like it !!

  12. This is interesting as I wondered the same thing recently. As I look at the local scene here in Ohio, the wineries that are flourishing are family owned, well run, generally have a good cash flow and have had fortunate weather conditions for growing wine grapes lately. Sweet wines are generally popular here and those can be turned quickly. Dry reds cost more with the attendant oak barrels and aging added in, but they also cost more and wineries are getting it.
    The sub-$10 bottle is generally supermarket and Big Box Retailer fodder and there are more imported “cheap” grapes being used to make those by VLW’s (Very Large Wineries). Local wineries don’t generally have that dry red $10 bottle of wine, because it doesn’t make sense with their cost basis. I can understand the mid to high end of the market not being too affected as long as their customers have the money and drive to buy them. And they do.
    My own feeling is that unless an earthquake and wildfire takes out the vineyard and winery, only poor business management or stupidity (Both possible, but perhaps not probable) will put a majoe CA winery under.

  13. I think another answer is that there are astute business men and women more involved in their family wineries than in the past where it’s just been generation after generation of farmer/makers. Two wineries I have worked for (Dry Creek & St. Helena) are owned by people that have extensive experience in big business in general. Both have diversified their businesses in different ways. One diversified by acquiring or creating new wine labels to appeal to a broader customer via price point and varietal. The other has always had a diversified offering beyond wine to include a multitude of other fresh, artisan, organic foods. I have witnessed first hand how these owners have seen things further down the road (by years) than just thinking and hoping about what the next crop brings.

  14. If what Rod Mc says above is true, then profit margins are, in fact, healthy and our appetite to pay escalating wine prices has not reached an uncomfortable point yet…

  15. Thanks, Rob, for the insight! Better to get the scoop direct from a person in the thick of things than idle speculation from the outside…

  16. We’re a 3000 case urban winery that’s 95% self-funded. We sell 80% direct to consumer the remaining 20% direct to local restaurants. We manage our inventory and don’t own vineyards. We’re doing fine.

  17. Great insights. Steve, great thinking and questions.

    Rob McMillan, great answers. T

    his reminds me of one winery owner, who, when I told him that someone’s proposal was going to have him not be profitable should he accept the proposal, told me flat out… “I don’t care if I make a profit with this business, or not.” Clearly, in his world, it would be a tax write off, which would help him in other ways with his other businesses. He could absorb the loss. Big money thinking…

  18. Jo: Big money thinking, indeed. How many of the rest of us could rationalize similarly? I need to make more money than I spend, that’s for sure, even after the self-employed writeoffs I’m allowed by the government. I can’t even imagine someone who invests huge amounts of money in a venture and then doesn’t care if he makes or loses money.

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