Could a San Joaquin Valley wine grape grower improve his bottom line by making and marketing his own wines directly to consumers on a modest scale to cut out the winery, the distributor, and the retailer?
Maybe so, provided several assumptions are made and conditions met, says Jim Lapsley, associate adjunct professor in the Department of Viticulture and Enology at the University of California, Davis.
Lapsley sketched the possibilities at the recent San Joaquin Valley Grape Symposium at Easton, where he said growers of wine grapes must differentiate themselves to prosper in today's global wine market.
“One potential way to do so is to vertically integrate by producing wine,” he said. “Although more capital intensive and essentially a different business than grape growing, wine production allows a grape grower to enter a different market segment while helping to build appellation awareness among consumers. You need to start small and sell as much as you can direct from the winery.”
The idea might be appealing to some SJV growers since the 2005 California crush price of a ton of Cabernet Sauvignon grown in Napa averaged $3,700, while a ton grown in Fresno averaged $275.
Lapsley, who once operated a small winery and teaches continuing education courses in wine production at UC, Davis, said for the past 25 years wine growers around the world have been producing 15 percent to 25 percent more wine than can be readily consumed.
In the U.S., he added, two-thirds of all wine sold goes for less than $7 a bottle but garners only one-third of the sales dollars. “In contrast, wine retailing for over $14 is only 12 percent of the market by volume but, at 35 percent of revenue, commands more revenue than all wine selling for below $7.”
In the present system, wine grape growers who don't make wine have only wineries as customers for their grapes. The few large wineries that produce the $7 and below wines process the grapes into wines that become commodities with a market chain of distributors and retailers and dilute the differentiation of the product.
On the other hand, more than 2,000 wineries, most quite small, make up the sector for wines priced above $14, said Lapsley.
“Generally these are product-driven, making wine in small volumes, with a specific appellation for the grapes. Producing a hand-crafted product, they sell as much wine as possible to the consumer and rely on word-of-mouth and influential reviews to market their wine.”
While these modest operations have greater costs than high-volume wineries, they command a higher price, and, by selling direct, they claim a higher percentage of the sales price. Joining this segment could offer some relief for growers having sufficient capital, skills, and promotional aptitude.
Aside from buying satisfying flavor, Lapsley said, many consumers of more expensive wines are motivated by intrinsic, value-added qualities, such as getting acquainted with the producer and sampling and consuming a “local” product not available with broadly distributed wines.
In describing a fictitious winery to capture the value-added component, Lapsley offered the scenario of a 40-acre, family operation planted to Cabernet Sauvignon and Syrah, with the owner deciding to make 2,500 cases from each variety and market most of the wine in the local region.
The vineyards have been farmed for yields of 10 tons per acre, but to gain grape intensity, the owner decides to dedicate 14 acres to more expensive practices, holding yields at six tons per acre at a cost of $3,600 per acre.
Assuming 60 cases of finished wine per ton, the fruit production cost is $600 per ton or $10 per case.
Continuing the assumptions, Lapsley said an existing 40-foot by 100-foot Quonset hut becomes the winery. The grower spends about $300,000 on used equipment and an additional $100,000 on insulation, refrigeration and permits. That capital investment of $400,000 is depreciated straight-line over 20 years and divided by the 5,000-case production for a capital equipment cost of $4 per case.
The hypothetical list of per-case costs also include labor (mostly by family members) and energy at $6, oak chips and used barrels at $4, packaging with non-cork closures at $8, and a mobile bottling line at $3, for a total cost per case of $35.
From its 5,000-case output, the winery sells 2,000 cases direct to the consumer through the tasting room, which is open five days a week and promoted with monthly events to draw in clientele.
One family member becomes the major outside sales person, calling on better non-chain restaurants and liquor stores within a 50-mile radius to move another 2,000 cases. The remaining 1,000 cases are sold to a distributor in Massachusetts, where relatives are involved in a retail liquor store.
For the operation's gross revenue, Lapsley figures 2,000 cases sold direct at $130 per case (10 percent discount) for $260,000, 2,000 cases sold to retailers at $95 per case (33 percent discount) for $190,000, and 1,000 cases sold to the Massachusetts distributor at $70 per case (50 percent discount) for $70,000, totaling $520,000.
Subtracting the cost of goods ($35 per case times 5,000 cases) of $175,000, Lapsley reaches a gross profit of $345,000. “This is gross profit,” he reminded, “and the tasting room, salaries, promotion, and other costs have to come out of it. Essentially, you are starting a very capital-intensive business, and you have to consider whether you have the personality to succeed in a new business like this.”
Networking with other small wineries, he said, could further improve the grower's returns if he found other small operators interested in buying his grapes. Consumer attention for several successful small wineries could promote their reputation and the locality's appellation.
Another speaker at the symposium, Becky Westerdahl, Extension nematologist at UC, Davis, said nematode management in vineyards varies according to the pest species, grape variety, soil texture, irrigation, and climate.
That is why growers need to follow nematicide recommendations suited to their own practices and location and not necessarily those for elsewhere in the state.
With methyl bromide no longer an alternative, growers are left with Telone II, Enzone, and metam sodium for preplant nematicide application.
While Telone II is able to move deeper into the soil through the air between soil particles, Enzone and metam sodium need water to reach the depth to control nematodes.
Enzone and DiTera were recently registered for postplant use on grapes. Enzone releases carbon disulfide gas in the soil, and DiTera produces a toxin produced by fermentation similar to Bacillus thuringiensis insecticides. The two products, since they have different modes of action, can be rotated to delay loss of control.
Loss of control in this instance, Westerdahl explained, is not due to nematodes developing resistance but because of a buildup of soil bacteria which degrade the nematicides.