From March Issue of Wine Business Monthly.

There is no doubting that the last 2-3 years have been a veritable “perfect storm” for the wine industry. A number of our clients have done extremely well during that time whilst some of their competitors have suffered the humiliation of very public announcements about profit downgrades etc.

What have the best performing businesses done to weather the storm ?

We canvassed clients widely on this. Some of what they told us was what we expected. (You would hope so given that this is what they pay us for). Some provided us with fresh insight, once again proving the value of having a good network.

The best performing wine businesses, in WBS’ view after talking to successful clients, are the ones that:

Have a very clear but adaptable business plan. This might sound like we’re spruiking for work but these are our clients’ words not ours. Forecasting tools for the wine industry have become a lot more accurate and sophisticated. Those using them can adapt quickly, responding to opportunity, adjusting inventories and avoiding waste.

If sales slow, operating overheads get adjusted. Those that simply sell off bulk wine and keep spending soon find that their margins erode and their cashflow / business value gets heavily impacted.

Understand their optimal size. It is critical to right size your business around its oppourtunity and not pursue growth for growth’s sake. One of the best ways to stop bleeding cash is to stop growth and raise prices. You can’t shrink to greatness but the most important decision you can make is around – “where are we, what do we do here, how much wine is that, how much of that can we expect to own for ourselves, what resources do we actually really need to make that happen and will all of that make us happy?”

Have only pursued business that can be done at sustainable margins. It amazes me that people I meet still fight the Deloitte benchmarks because the sample isn’t statistically significant or whatever. It is not the benchmark that matters. There is a common sense reason why the number is 50% across your business (unless you are producing more than about 100,000 cases after which your operating overhead costs you less by proportion). If you can manage 20% EBITDA, you are going to have to pay 4-7% (most likely) to the bank and the tax man is going to take 30%. That barely leaves enough to cover most business’s cost of capital. We do have clients that run very low overheads and don’t need that 50% gross margin. If any deal leaves your business with less than 20% EBITDA, however, it's then time to “just say no”!

Have paired back inventory and operating costs. This is always the hardest part (letting go of your beloved winemaking creations at hard to swallow prices or saying goodbye to people) but it must be done and the earlier this gets addressed, the better.

Have paid down debt and are not beholden to their bank. Most of us, in taking money from the bank, are not thinking about paying it back but that is, after all, what the bank expects. Those who do not have a plan in place to show the bank how they will do this put their business at great risk. The banks, generally, have no appetite for extending credit to the wine industry whatsoever. In some ways this is a good thing as it will reduce competition from new entrants. You don’t want to be on the wrong side of the bank at this time, however.

Are not dependent on government rebates for survival. This is a controversial one but all of my best performing clients are taking the WET rebate as a bonus and are investing it in things that will help their businesses in the long run. They are not using it to fund gaps in cashflow that the business would sink without.

Know how to do business with multiple retailers if they have to. Coke does it, Kelloggs do it and Colgate Palmolive does it too. You can dance with the devil. You just have to be extremely smart about not letting him take your soul.

Have channel strategies that strike the right balance between achieving sales and protecting brands. I still run into people every day who believe what supermarket buyers tell them. Even the biggest companies fall for this. For example, I was told that 7 people in the UK buy 92% of wine. My question was 92% of what wine? Supermarkets are 80% of Off-Premise sales which constitute 80% of the market. That leaves you with about 60 Million cases of imported wine that those guys are not squeezing suppliers to death for…

Run strategies that reduce reliance on individual customers and place as little business as possible with multiple retailers. In times of oversupply, retailers are always going to have the upper hand. In markets like the UK, Australia and New Zealand where large scale wine retail is relatively new to supermarkets, those buyers are not letting suppliers make money. In Europe and the US where they’ve been doing this for longer, it is possible to find multiple retailers with a more long term view of client relationships. Diversified markets mitigate currency risk. Diversified channels will not only reduce risk but help build your brand if well implemented. A diversified offer gives you flexibility but that must never be at the expense of focus.

For those of you who have already done all of the above and who have the possibility to seize oppourtunity as it presents itself, this should be the ideal time to position your business for profit growth. For those who have not, time to get busy. We’d of course would love to help if we can.