Ever dreamed of owning a winery? Join AIDV Canada on January 17th for this 60 minute webinar and hear from four independent winery owners who produce wine in BC\’s Okanagan Valley. This promises to be a fascinating session in which you will get the “inside scoop” on the issues related to entering the wine business. Full information and registration is here: Issues Facing Canadian Independent Winery Owners
![\"\"](\"https://winelaw.ca/wp/wp-content/uploads/2022/12/wholesalemarketW.jpg\")
Recent substantial increases in the input costs for producing wine have caused consternation and concern for most wineries in North America. There will be obvious and consequent effects on the bottom line for producers when they look at their annual financial statements. But should wineries wait to assess the impacts? We believe that wineries should take more proactive steps to ensure that their business models are not being quietly eroded. One useful metric is for a winery to calculate its per bottle production costs for each product in its range and ensure that pricing and production strategies are still sound given increased costs.
Our consulting work often provides us with visibility into the financial statements of wineries. While larger wineries have accounting departments that constantly monitor financial issues, many smaller producers do not. Recently, we have noticed that some wineries do not regularly track the “per bottle” production cost metric. In some cases, we have observed that this information can be useful in revealing surprising realities regarding the profitability of certain products and growth strategies.
The basic idea is to conduct an accounting exercise that will identify “direct costs” (e.g. grapes/juice, bottle, label, cork), “indirect costs” (e.g. winery overhead such as rent, labour, utilities, administrative costs) and “selling costs” (which may vary depending upon what channel the wine is sold in but for on-site sales would include the costs of running your on-site store) and then allocating these costs amongst your production such that you can generate a cumulative cost of production for each wine product. There may be some arguments about how to allocate certain costs, but with some creative math, you should be able to divide all of the costs of running the winery amongst your annual production such that you can see how much revenue is needed from each product in order for you to break even.
A few years back, I asked one winery owner about this. He ran a local winery that would be categorized as small to medium sized in BC (which means small on a global scale). He had tracked this metric and provided the following information that showed the profitability of one white wine that they produced:
| Retail Price (DTC) | $22.00 | |
| Profit | $2.59 | |
| Taxes | $2.64 | |
| Selling Costs | $3.86 | |
| Indirect Costs | $6.20 | |
| Direct Costs | $6.72 |
As you can see from the above the “direct costs” for this wine were $6.72. The “indirect costs” totalled $6.20 and the selling costs were $3.86. The profit margin for the winery was slim, only $2.59. Other products in the winery’s range were more profitable and the winery was profitable overall. In our recent experience, these numbers have been quite typical for smaller producers located in BC. We have seen a number of wineries where the calculations ended up in a similar range (e.g. about $10 per bottle for combined indirect and selling costs). The numbers may well be lower (or a lot lower) in other places since BC’s production costs are generally quite high and production is small, but the principles will be the same.
Nevertheless, in this example, you can see that even a small increase in the winery’s costs would have rendered the production of this particular wine unprofitable at this price point. We are concerned that this may be happening surreptitiously for many wineries since significant input cost increases have occurred in the past year or so. A relevant analogy may be that of the frog who placidly sits in a pan of water while the heat slowly rises. The frog does not notice the gradual increase in temperature until it is too late and it has expired. Similarly, while wineries will be well aware of increased costs, they may not have tracked the effects back to individual products and may discover rather late that they could have changed pricing or production strategies to minimize the damage.
More broadly, this metric can be useful for a winery’s strategic planning. Obviously there will be tensions and adjustments related to production levels for each product and an assessment of pricing tolerances within the consumer marketplace as well as how a particular product fits within the winery’s overall growth strategy and production. However, if indirect costs are relatively high at a particular annual production level, then it may not make sense to focus on low margin products … the path to profitability may lie only in products which produce better margins or for which you can, at least, cover your costs.
![\"BC](\"https://winelaw.ca/wp/wp-content/uploads/2022/04/wineindustryreportbanner.jpg\")
An updated and expanded version of our BC Wine Industry Report for 2022 has now been published on the related TTGV Advisors web site. This report covers off the 2021 vintage as well as industry developments and insights for 2022 including investment activity, winery/vineyard sales and pricing, growing season conditions, input costs, regulatory changes and market observations.
See: BC Wine Industry Report Spring 2022. Also available in PDF version.
Much of my professional life revolves around work related to liquor policy and regulation. Because of this, I am intimately familiar with the policy rationales and approaches that created Prohibition about a hundred years ago … and which also led to its well-chronicled failure. One might think that Prohibition and the Covid pandemic have little in common. However, I am increasingly coming to think that they do … and that our collective failure to learn from the history of Prohibition is causing society to make similar mistakes in our responses to the pandemic, particularly at this later stage.
Let me explain. Prohibition was implemented in order to deal with societal problems that stemmed from the over-consumption of alcohol. It was recognized that some people drank too much and that this resulted in harm to family life, social life and work. At the time, some governments (mostly in North America) determined that the most appropriate policy response to this issue was to ban the sale of alcohol to everyone.
Some refer to this as a “noble experiment”. While there may have been good intentions on the part of the proponents, it is now universally recognized that the effort was a colossal mistake which resulted in significant economic damage to the hospitality industry, a massive disruption to social life, and widespread non-compliance with laws that were viewed as unfair and inequitable by many who had consumed alcohol in moderation for years without issue. Due to inequitable enforcement of the laws, there was significant reputational damage to the justice system.
The root of the problem was the mismatch of the policy response to the nature of the problem. A minority of people had a problem with alcohol consumption … but government responded by banning the sale of alcohol to everyone which was both an “over-reaching” response (i.e. affecting far more people than those who actually had a problem) and a “nanny state” approach wherein the state decides what is good for you rather than letting you decide for yourself. Indeed, many would argue that it made the problem worse for those with addiction issues … since they continued to drink illegally, often at greater expense and with unregulated and unsafe products.
While there are some obvious differences between alcohol-related problems and an infectious disease, I am worried that our societal response to Covid has become tainted by similar thinking. At the beginning of the pandemic, we didn’t understand the nature of the threat. Back then, it was justifiable to create broad sweeping restrictions to try and stop the problem while we figured out exactly what we were dealing with. But two years into this, we now know infinitely more about the nature of the problem and the risks to people. Effective policy responses should target the problem and not create unnecessary collateral damage that will damage society and harm our quality of life.
We now know that the risks posed by Covid are dramatically weighted toward certain age groups. Like it not, this is a discriminatory virus that threatens some demographics much more than others. In addition, vaccination has miraculously transformed the nature of the threat and the attendant risks for nearly all groups. Indeed, the New York Times recently reported on a detailed British study (in the peer-reviewed British Medical Journal) which concluded that the risks for fully vaccinated people under the age of 65 are now less than those posed by influenza. As such, the nature of the problem has changed significantly during the past two years.
Many governments, businesses and organizations seem to be having trouble creating measured responses that both recognize and target the present risks related to Covid while minimizing unnecessary collateral damage. Sometimes the balance between these two measures is so off kilter that ‘the cure may have become worse than the disease’. It seems to me that a new approach to pandemic era policy making may be needed which is informed by our historical experience with liquor policy making. For example, wouldn’t it make more sense to learn from the past and consider the following.
Make Sure That the Policy Response Accurately Targets the Problem. Governments, organizations and businesses should not create over-reaching responses that fail to hit the target (as they did during Prohibition). For example, a federal Canadian “global travel advisory” on Covid recommends that Canadians avoid all travel, everywhere in the world without taking into account the prevalence of Covid at the destination, the means of travel, or the individual circumstances of the traveler, all of which are directly relevant to whether or not there is, indeed, any real and appreciable risk to either the traveler or to Canada upon that individual’s return. This policy is both over-reaching and reflective of a “nanny-state” mentality. Many businesses and organizations have similar policies.
React to Changed Circumstances. During Prohibition, governments stayed the course even when it became clear that the ‘solution’ was producing little positive results and lots of negative ones. Effective policy responses to the pandemic also require critical thinking and nimble reaction times. If it has become clear that the risks related to Covid have changed then governments and organizations should adjust policy responses accordingly. For example, any consideration of moving school or university on-line should recognize that there is little to no appreciable risk (in terms of serious illness or death) for younger age groups.
Do Not Automatically Revert to or Continue Earlier Responses. Throughout Prohibition, successive governments simply ‘inherited’ the (failing) policy response and continued with it. Effective crisis management requires constantly re-thinking our responses and adapting them. Many governments and organizations are not doing this. For example, the government of Quebec just re-introduced a province-wide curfew, a measure that virtually ensures indoor socialization while limiting people from congregating outdoors where it is safer. Have we not learned from the early stages of the pandemic that this did not work and likely made things worse?
Question Policy Responses Based on Ideology or Dogma. Initial policy responses will often be based on an assessment of what works and a strident commitment to doing that despite predictable opposition. Sometimes this is helpful in the early days as it makes it clear to the public or your customers where your government or organization stands. However, it’s important to realize that in the face of rapidly changing science or societal effects, you can be proven to be wrong. If you’re wrong, it’s important to come clean and admit it. You will lose trust if you doggedly pursue a policy response once everyone else realizes that it makes no sense. This happened during Prohibition … and is starting to happen again for certain pandemic responses. For example, here in my home province of BC, our (mostly sensible) provincial health officer adopted a determined position against rapid testing early in the pandemic which continued until about a week ago. A recent swamping of the BC testing system by Omicron cases forced the government to replace (the previously unassailable) PCR tests with (the previously questionable) rapid tests. The about-face would have looked better if it included an acknowledgement of earlier error.
Do As I Say Not As I Do. During Prohibition, there were many examples of authority figures breaking the rules, or even profiting from them. Here in BC, the Prohibition Commissioner was arrested for bootlegging. We have already seen this happening throughout the pandemic with numerous politicians and business leaders. It’s important to create policies and rules that everyone can reasonably follow, including the rule makers. It is disastrous to create unworkable policies that no one respects and everyone dodges.
I am optimistic that society will get a handle on the pandemic in 2022 and that things will improve significantly. However, just like the post-Prohibition period in North America, there is a real danger that governments and businesses may prolong the societal pain and disruption if they do not change the nature of their policy responses and act more quickly to changing circumstances and reduced risks. Here in BC, it took almost 100 years following the repeal of Prohibition for restaurants to be allowed to have a “happy hour”. Hopefully, that is not an indicator of how long we’ll be forced to endure pandemic related travel restrictions. I used to love flying!
Globally, the wine industry has suffered through one of the most challenging years ever due to the continued effects of the pandemic, consequential supply chain disruptions and numerous extraordinary climate-related events. The BC wine industry has not escaped the turmoil and continues to face challenges on multiple fronts. This report summarizes and highlights some of the issues, particularly those related to harvest and grape prices.
Input Costs & Grape Prices
The cost of producing wine in BC continues to rise, posing challenges for producers. Input costs have risen considerably over the past year fueled by labour shortages, shipping cost increases and strong demand for grapes. As a result, prices have risen for everything from glass bottles to oak barrels. Grape prices continue to be robust, benefiting independent growers and rewarding wineries who own their own vineyards.
Review of prices last year (in 2020-2021)
According to the BC Wine Grape Council, in 2020 the two highest volume red grapes produced in BC were Merlot and Pinot Noir. The two highest volume white grapes were Pinot Gris and Chardonnay. The average short ton price for Merlot in 2020 was just over $2900. The average short ton price for Pinot Gris was just below $2300. While prices will vary widely depending upon varietal, vineyard and farming practices, generally, the average prices for most red vinifera varieties was in the range of $2900-3200. For whites, the average price was in the range of $2200-2700.
Anecdotal evidence 2021
2021 was a challenging year for grape-growing due to wildfires and labour shortages. In addition, the “heat dome” in early summer contributed to below optimal fruit set resulting in lower than average crop yields. Nevertheless, the weather was good and quality appears high. Producers are still assessing the manner and extent to which wildfire smoke in certain areas may have affected the vintage. Anecdotal reports from the field indicate that this year’s grape prices will either be consistent with last year’s, or in many cases, higher due to demand. Indeed, for vintners dealing with smaller lot production (e.g. “esoteric” grape varieties or grapes farmed organically), their grape costs may be considerably higher than the averages noted above.
Average Bottle Price and Sales
The average retail price for BC VQA wine in 2021 is about $19.20 according to Wine Growers of British Columbia (based on an average wholesale price of about $16 and retail markup of 20%). However, this number would include a large amount of wine produced by the “big 3” major players who have significant vineyard holdings of their own and/or long term leases (and thus who would be less affected by grape price changes).
In contrast, analysis by Paul Rickett (of VARketing!) indicates that the average current price for 100% BC wine produced by independent wineries is somewhat higher: $18.19 wholesale (estimated $21.28 retail with that same 20% markup). More specifically, it breaks down for BC red wine to $21.70 wholesale (estimated $26.04 retail). And for white wine it is $15.68 wholesale (estimated $18.82 retail). Paul has produced a detailed report on BC wine pricing which could prove invaluable to wineries who wish to delve into these comparisons in greater detail (contact: pdrickett@hotmail.com).
1% Rule
There is a “rule of thumb” in the North American wine industry that in order to recover production costs and generate a reasonable return for the winery, 1 ton of grapes ought to be priced at 100 times the retail price of the wine bottle that those grapes produce. So for example, a purchase of Pinot Gris grapes at $2300 a ton, should produce wine that retails for about $23 a bottle. If one uses that test on the grape cost averages above, it indicates that most BC reds should retail between $29-32 and whites between $22-27. Those projected prices are higher than the actual averages just noted. Even if one adjusts the retail margins upward to 30-35%, the numbers come closer but are still below the “100 times” metric. This would suggest that some, or perhaps many, BC wineries are not obtaining the pricing for their wines that would put them in line with North American winery average returns.
Indeed, anecdotal evidence from some wineries confirms that production costs have risen to the extent that price adjustments may be necessary. At the very least, this would indicate that there is some considerable advantage for producers to own their own vineyards and control their production costs. We understand that, in many cases during this harvest, producers purchasing stock from growers received far fewer grapes than they were expecting. Presumably this may also contribute to decreased returns and additional cost pressures for some wineries.
Winery and Vineyard Prices
Despite the pandemic, the North American wine industry has seen continued acquisition, consolidation and investment activity. South of the border, there has been some very significant activity including the sale of Ste Michelle Wine Estates and a successful IPO by Duckhorn Wine Co. In BC, the activity has generated less headlines but has continued (e.g. Wild Goose, Stoneboat, Joie, Unsworth). Al Hudec reviewed some of this activity during a recent AIDV Canada webinar (https://www.aidv.ca/aidv-updates/).
Pricing remains strong, particularly for wineries with significant vineyard holdings. Recent activity indicates that planted vineyards in prime areas are fetching about $300,000 per acre. Prices have been consistently edging upward with growth of about 2% per month which is reflective of strong demand from existing producers and relatively new entrants, such as Frind Estate Winery which now has hundreds of acres of BC vineyard holdings, rivaling the established “big 3”.
We expect to see continued acquisition and investment activity throughout the remainder of this year and into 2022.
A PDF version of this report is available for download here.
Contact:
Mark Hicken: mark@ttgvine.com 604 868 1375
Tania Tomaszewska: tania@ttgvine.com 250 220 1745
![\"\"](\"https://winelaw.ca/wp/wp-content/uploads/2021/10/groundwaterlicensing.jpg\")
BC wineries that use groundwater in their operations should be aware that they need to register their water wells before March 1, 2022 … or face potentially disastrous consequences including a potential loss of their water supply (thanks to Al Hudec for reminding on this). The registration requirement is a result of the Water Sustainability Act, which originally became law in 2016. However, the new law\’s time extensions for registration run out in just over 4 months, at which point, those who have not registered could be severely disadvantaged.
The basic structure of the registration system is as follows:
The failure to register by the deadline could have very significant consequences for a winery or vineyard business:
There is more information on the registration system in this PDF: Licensing Groundwater in BC. Additional information and the application process is here: New Requirements for Groundwater Users. There appears to be a lack of awareness of the upcoming deadlines. See this article for more detail: 15,000 Water Wells Could Be Declared Illegal in 2022.
Please contact me if you need any assistance with registration.
BC\’s Provincial Health Officer has posted two new Public Health Orders which now require (as of September 13th) most wineries and liquor manufacturers to verify a customer\’s vaccination status before serving them: Food & Liquor Serving Premises Order and Gatherings and Events Order. I note that the orders make a distinction between manufacturer facilities that have seating (such as a tasting lounge) and those that do not (e.g. customers standing at a tasting bar for samples). The former are treated the same as restaurants and bars (and thus, proof of vaccination is required). The latter are treated like retail stores and are exempted from the order by the wording in paragraph M. I note that the requirement to provide proof of vaccination is necessary for the customer to be served … so it should be sufficient to ask for that proof once a customer is seated (i.e. not at the door) which may make logistics easier. More details on the vaccine card requirements are here: BC Vaccine Card.
![\"\"](\"https://winelaw.ca/wp/wp-content/uploads/2021/06/n-bench.jpg\")
A complimentary virtual conference for the BC wine and spirits industry will be held on June 24th at 230 pm. The \”BC Wine & Spirits Summit\” will include two mini seminars and a round table discussion. Topics of interest to be addressed will include recent liquor policy changes related to Covid, liquor licensing and compliance issues, ALC and zoning issues, as well as a general assessment of the current industry landscape. The event will wrap up with a round-table discussion. The event is sponsored by Rising Tide Consultants. Speakers will include Bert Hick of Rising Tide, Tania Tomaszewska and myself. Free registration and more info is here.
Next week is the 100th anniversary of the repeal of Prohibition in British Columbia. The last day of Prohibition in BC was June 14th 1921. The next day, June 15 1921, the \”government control\” system for liquor distribution and sales began with the opening of the first government liquor store (now \”BC Liquor Stores\”). Prohibition had only lasted in this province for 3 years and was repealed after a referendum which asked citizens to choose between maintaining prohibition or the implementation of a government control system. The government control option won handily: the vote was 92,095 to 55,448. The only areas of the province that voted in favour of prohibition were Chilliwack and Richmond. Both Vancouver and Victoria voted in favour of government control by margins of two to one.
![\"\"](\"https://winelaw.ca/wp/wp-content/uploads/2021/06/princegeorgeliquorstore.jpeg\")
The government then set up a system of control which was initially very strict. Early government liquor stores did not have windows (see photo above) and all product was kept behind counters. In order to purchase product, customers had to buy an annual or one-time permit … and logs were kept of how much liquor was purchased by individual customers. One legal expert at the time warned that the switch to government control would create problems because a system that \”swell(ed) the profits of the government monopoly\” would lack \”any moral or popular psychological backing\”. Nevertheless, that is what the people had chosen and government control went ahead, becoming a significant source of government revenue from that point onward. Eventually, and over the decades, the constraints were relaxed but the legacy of the system lives on today. There is still monopoly control over the wholesale distribution of liquor in BC. A significant portion of retail sales is still made through government stores … and government collects large amounts of revenue from the liquor business. Indeed, it was only last year that government permitted hotels/bars/restaurants to buy alcohol at wholesale prices – almost a hundred years later.
Of course, efforts continue to \”modernize\” the liquor system and to remove lingering aspects of the control system. Nevertheless, in the mean time, BC\’s citizens can \”celebrate\” the anniversary next week … by opening a nice bottle. Cheers!
The WTO has announced last week that a \”mutually agreed solution\” has been found for the Australia-Canada wine trade dispute which involved challenges to various measures related to the sale of wine in British Columbia, Ontario, Quebec and Nova Scotia. As such, this long-running trade dispute has come to an end. The formal announcement is here: Report of the Panel. The final \”report\” does not provide much information on the settlement of the dispute although aspects of this were discussed in my earlier post here: Federal Excise Tax Exemption & Certain Provincial Preferences for Canadian Wine To Be Eliminated. In addition, the EU has posted a lengthy submission that relates to this dispute and which sheds light on many of the issues and positions of the parties which is discussed further here: Uncorking Canada\’s Import Measures on Wine. As discussed in this article, it is possible that these long-standing issues may well reappear in future trade complaints involving Canada.