Risk

Wine CFO Hedges Pinot to Manage Growth, Demand

Wine by Joe, a top Oregon winemaker, is fueling its growth with Pinot grapes and added financing. But supply is a constraint, says CFO Lance Spears.
Marielle SegarraApril 9, 2012

“It’s thin-skinned, temperamental, ripens early. It’s not a survivor like Cabernet, which can just grow anywhere and thrive even when it’s neglected. No, Pinot needs constant care and attention. Only somebody who really takes the time to understand Pinot’s potential can then coax it into its fullest expression.”

This love letter to Pinot Noir, delivered by Paul Giamatti in the 2004 film Sideways, makes the popular red wine sound like the sort of high-maintenance product most CFOs would run from screaming. But the line that follows reveals the potential payoff for the brave winemakers that harvest and bottle Pinot.

“Oh, its flavors, they’re just the most haunting and brilliant and thrilling and subtle and . . . ancient on the planet,” Giamatti opines.

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In the year after the movie’s release, sales of Pinot Noir jumped 16%, boosting profits for small winemakers like Wine by Joe, a 30-person branded wine, custom winemaking, bulk wine, and control label (private label wines made for a certain geographic area) business in Oregon that specializes in the popular varietal.

Eight years later, demand continues to grow, says Lance Spears, CFO of Wine by Joe. But ironically, one of the reasons Giamatti’s character gives for his love of Pinot — its rarity, stemming from its demand for “constant care and attention” — may be a roadblock for a company with its eye set on growth.

A Tricky Business
Last fall, Wine by Joe had its largest harvest ever, and it is considering buying more grapes from other vineyards as demand for its wines exceeds supply. In September, the company also got a boost in capital from investment firm Bacchus Capital Management, and it is hoping to use the money to ripen its high-end branded wine business.

But expanding the company’s supply could prove challenging, says the finance chief. “Pinot Noir is a very difficult varietal to grow at any sort of a high crop level,” says Spears. “You can only have relatively small crop yields to get it high quality. You’re constantly battling with Mother Nature to get as much as you can out of the fruit and still maintain quality and grow at the same time.”

Because of natural weather fluctuations, the grape yield from each acre of vineyard can change 100%, year-over-year, potentially crushing profits, Spears says. “If you assume that cost is relatively constant, there’s obviously a dramatic impact on the company’s profitability from year to year based on factors beyond our controls,” he says. As it is, Pinot grapes are more expensive to produce than varietals like Cabernet or Chardonnay, because they yield fewer tons per acre of vineyard.

To mitigate some of the risk of a bad harvest, the company contracts out some of its land and buys raw materials, including grapes and bulk wine, from other vineyards. It also builds up a cash nest egg during healthy years.

But Wine by Joe’s growth may eventually hit a plateau. “I don’t think there’s any limit to how big we want to get,” says Spears. “But there aren’t enough grapes being grown in Oregon for us to be as big as we dream we can be. There are additional plantings going on as we speak, but the plantable grounds are limited. You can’t just grow and triple and quadruple as fast as you want, because the grapes just won’t be there.”

What Goes Up . . .
Supply isn’t Wine by Joe’s only concern. There’s also always a risk that consumer preference will swing the other way. Demand for wine is tied to the whims of customers.

Like Pinot grapes, consumers can be a fickle bunch. “Change in consumer preference is always a concern,” says Spears. “To change the supply chain to match that demand is quite a chore. I try to relate to people that wine is somewhat like fashion. There’s emotional attachment to it and those emotions can change.”

Indeed, a significant, rapid shift in consumer demand could be disastrous for the company, because Wine by Joe budgets over periods of five to seven years — the amount of time it takes to go from planting the grapes to aging and bottling the wine.

“By the time [the wine] gets to the consumer, you’ve made a bet that you know where their desires are going to be five to seven years from now,” says Spears. “You have to keep a very close eye on [consumer demand], because if you see a major shift and you’re caught off guard, there’s a strong price to pay, because you’re stuck with an inventory that isn’t valuable.”

Still, it seems like a lack of interest will not be a concern in the near future: “We’ve been very fortunate that our category, our price point, and the quality that we make [have] never been an issue.” The size of the Oregon market is small enough that “even if the market changes a little bit one way or the other, we’re still considered to be . . . a scarce product,” he says.

The company also faces strict regulations over alcohol distribution. Under federal laws, it can only sell its branded wines directly to consumers through its wineries or websites. To sell the bottles in stores, shops, and restaurants, it has to sell through distributors for about half the price. That cuts into profits.

One upside of its new partnership with Bacchus: the investment firm will be able to leverage its own relationships with distributors to help boost Wine by Joe’s restaurant and store sales.

Forging Ahead
Despite its constraints, Wine by Joe is set to ride Pinot’s popularity and expand its branded wine business, the company’s cash cow. “The branded side of the business,” Spears says, is “definitely the most profitable.”

Because consumers become attached to branded wines, the company is “able to charge more money, and [the wines] have a higher profit margin. But the question is, how do we build brand equity and scale it up with the resources that we have?” he says.

For his part, Spears says he can’t “sit in the office and count dollars all day” if he wants Wine by Joe to be successful in this venture. Rather, a company so vertically integrated needs a CFO willing to get his hands dirty in operations, he says.

During the crucial time when grapes are crushed, “I’m on the production floor, I’m in the tasting room; if I go out to dinner, I bring the wine with me and I act as a salesman to [the] table next to me and get them to try the product,” Spears says. “It’s a deep dive. Once you’re in this industry, you’re constantly a representative of the brand.”