Financials of Vineyards/Wineries?
Currently on vacation in Napa Valley hitting the tasting tour circuit, and got curious about there financial numbers of a commercial vineyard. Is there anyone here with experience in large/brand name wine production? I’m under the impression that the actual wine makers often differ from the growers, and talking with several owners and operators in the Valley has seemed to indicate that there is an entire market around trading grapes and vines.
To your point about trading grapes and vines, yields often come out lower than expected. Multitude of reasons really, anything from weather anomalies to not having enough experienced "growers" (idk what the terminology is). Some of the more established ones are really good at this and they end up wholesaling to the ones who aren't.
It seems from the conversations I’ve had with the winemakers here that some of the biggest and most well-renowned names in Valley are not the owners of the labels but the owners of certain plots that sell their grapes to be made into wine. Being able to grow a really good varietal is held in higher regard than owning a wine production facility apparently.
Good rule of thumb is that the sexier the asset the worse the returns
Are these vineyards basically trophy properties for the wealthy then? I know a lot of Chinese money has come in over the last decade. Just based off of the capital expenditure on the buildings it seems like PnL is essentially meaningless.
Except hotels and hotel development. A lot of money to be made there
Sure, but on a risk-adjusted basis your average Residence Inn is going to pencil out better than a Ritz or some luxury boutique flag.
There is a huge secondary market for grapes and/or vines. If a smaller vineyard has a down year or the grapes don't turn out tasting the way they expect, they have to buy grapes from someone who has a surplus. From what I understand, this is a business model in itself. There are plenty of vineyards who are just grape suppliers. The best growers do not always make the best wine and vice versa.
Also, a lot of the vineyards out on the North Fork of Long Island, NY actually had to purchase their original vines from Napa Valley or similar, proven locations. This helps shorten the "learning curve" of growing your own and provides immediate credibility to the new label.
Like any business, much more goes on behind the scenes than what you see at a commercial vineyard.
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As an investment, certain wines can yield 10% to 13.6% annually, sometimes more than the S&P 500 and not subject to market whims. There are actually wine funds where investor capital is used to buy and store fine wines that appreciate value over time. Personally, I don't drink, but vintage wine does seem like a solid investment.
Agriculture is an entirely different beast, and yield/revenue/cost/profit per acre is the standard metric. So you have yield, which is apparently 3 to 5 tons of grapes per acre. According to market reports, California Sauvignon Blanc yields $2,485 per ton and Cabernet Sauvignon yields $7,941 per ton. So that's anywhere between $7,455 per acre and $39,705 per acre revenue.
Investment costs are $300,000 to $400,000 per acre of growing land in Napa, not counting the cost of the house and facilities or labor. Operation costs per acre are $5,600 according to Napa growers, giving us $1,855 to $34,105 per acre net profit for growing wine in Napa, not counting the very expensive initial land investment, which is often passed down through families for generations.
To compare, corn is about $365 profit per acre, while cannabis has ranged between $120,000 and $1.1M per acre, the most profitable crop to grow in the United States right now. Can't feed a nation on weed and wine though so that's why we have subsidies. Agriculture can be extremely profitable, especially for specialized crops like wine, tobacco, cannabis, and other "vice" crops or even medicinal crops. However, it is also essential to feed humanity, despite being like many other businesses with inputs and outputs.
Can't eat money.
I’ll add a data point I heard: one of the winemakers I was talking to at Robert Mondavi said that their Cab Sauv grapes sell for upwards of $50,000 a ton, and that most of the premier Cab Sauv grapes in Napa sell upwards of $15,000 per ton.
But thanks! Really appreciate the info.
Wow, that's incredibly high. I would reason that fine wine is a Veblen good, meaning its demand increases with price. Vineyards in general are a proven business model that is literally thousands of years old, like raising cattle or merchant shipping. I understand the soil, climate, and even angle of the land is crucial. My understanding is that most valuable wine comes from hilled regions with temperate climates, such as the famous wines of Italy or California. Paired with those Cab Sauv grapes, you have a very expensive recipe for ideal success. Worth considering for an American is the Appalachian region. Land is far less expensive and it is proven wine-making territory.
SVB has a specialty credit practice for wine. They are actually a big player in the space!
I recall one newish vineyard telling me that they needed to grow the grapes for 5 years before they can sell them or make an independent wine. Regulations to prevent new entrants.
The literally said it was grow and destroy every year until then.
Granted, this was in palisade CO. But I imagine there’s similar rules out there. Just an FYI.
I'm pretty sure you misheard, or this person was misinformed... or was trying to make a political point about "regulations"
New vines don't produce grapes worthy of vinification. This is why many European (and increasingly American) wineries charge a premium for older vines - the idea in the wine world is that stress on the vines is what produces a more complex product in the bottle/glass. Vines whose roots have to work through limestone or schist (or clay, or what have you) tend to be more expensive and better regarded than the opposite.
So when the wine maker tells you they can't sell grapes for five years, it isn't because they are prohibited from doing so, but because there isn't really a market for it, since new vines don't yield the grapes that vintners want.
So prestigious dude
congratulations
One of our clients owns a winery. Perhaps it was because he was clueless about the business model/industry when he bought it but he's managed to lose over $500K a year since he bought the business and can't seem to turn it around. He got a good chunk of land, some buildings, and some equipment but they've barely managed to produce enough to break even, let alone make money.
Our other clients who own agricultural businesses generally lost a bit of money for a few, if not several, years until their crops were old enough to yield produce.
I went to school in the Champagne region for a bit and got to take a class on the business of champagne. I dug into my notes and found the following (all of which just pertains specifically to the Champagne region). Land values in the region range from 900,000 - 1,700,000 million euros / hectare. The average size of vineyard land is approximately 2.2 hectares -- which is small, but produces a potential gross income of approximately 130,000 euros / year, making it still financially viable. I also remember learning that almost all land is passed down and not on the market + sales are regulated by the gov., so to get a Champagne House most people overpay, are born into it, or marry into it. Here is a copy-paste of my notes on the players within the Champagne market:
The Players of Champagne
Winegrowers
-20,000 champenoise (people that come from Champagne) own land that is demarcated for vineyard use
-16,000 are actual wine growers and the other 4,000 have their land managed by someone else or not at all
-The average size of vineyard land is approx. 2.2 hectares – small but with a potential gross income of approx. 130,000 euros/year, making it still financially viable.
-16,000 wine growers and between them they own 90% of the vineyards
-They craft wines that represents the personality of each terroir
-They make use of traditional growing techniques that
(a) promote quality and
(b) protects the vines
Champagne Houses
-Champagne owes its prestige and popularity to the talent and expertise of the Champagne Houses.
-Members of the ‘Union des Maisons de Champagne’ (UMC) are the grand marques: literally the “big brands” (in name and in quantity)
-Their wines are blended from ‘bought-in’ (contracts) grapes from selected vineyards that contribute to the style and ethos of their specific brand
-Their unique talent lies in the ability to create cuvees with a timeless style
-Cuvée refers to the FIRST FRATION that is extracted from the FIRST PRESSING
-The second pressing is referred to as the ‘taille’
-The Cuvée can either be selected from pure varietals, like Chardonnay or it can be a mix – blend – of varietals like Chardonnay and Pinot Noir and Meunier (which are the three main varietals)
-Every cuvée – or blend – draws on the different strengths and particular grape varietals, vineyard classifications and vintages.
Cooperatives
-Of the 16,000 growers:
-11,000 are members of one of the 137 cooperatives
-Cooperatives were founded during the agricultural depression, and were created to provide financial support / capital to small scale farmers
-Cooperatives are MUTUAL ORGANIZATIONS where each member that sells grapes has an equal share of the organization and the vote
-These members have contracts with the cooperative / champagne houses who are obliged to buy the grapes from those growers at harvest time.
Cooperatives and the different contracts
Currently there are five ways of handling the grapes:
The Vigneron Independent
-The remaining 5,000 growers, sell Champagne under their own label
-Vigneron Independent are not allowed to buy in any grapes
-The Vignerons Independent conforms to certain industry rules:
(a) 100% vineyard ownership
(b) Harvest the grapes at harvest time
(c) Work and care for the vineyards
(d) Grapes have to undergo the process of vinification on the Estate premises
(e) Bottling, maturing of the wines and the final labelling needs to be done at the Estate
(f) Certain Vignerons Independents distribute their Champagne(s) directly, or make use of smaller boutique stores / delivery services
(g) They have to be respectful of the traditional approaches, processes, and teaching practices
.
I dont know the depths of the wine business like some others here, but one of our RE clients has a small vineyard in Virginia. They mentioned they barely make anything on the sale of wine, but theyre able to scrape together a moderate profit due to weddings and other events they host.
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