Your winery costs are ever growing: labor expenses, workers
compensation, and the cost of selling in a crowded marketplace.
Meanwhile, your revenue growth is less vibrant than before. With
these pressures, how do you beat margin erosion? Your choices: you
can improve performance by applying better management practices
and/or you can adopt a different business strategy.
You cannot cut, outsource, or downsize your way to economic
success you have to grow. Growth, very simply, is the one
business imperative, stipulates an April 2003 article in Fast
Company. This is a very provocative position, especially if you
check out businesses that actually grow during tough times in an
industry or an economy, businesses such as Hondas Pilot SUV;
John Deere Landscaping; Cardinal Health; and Joseph Phelps Vineyards
(St. Helena, CA).
These businesses have at least one thing in common: they carefully
developed and implemented innovative strategies with the intention
of growing when other companies were cutting and downsizing their
Some of these companies may not be familiar, but they are all focused
on creating revenue, profits, and shareholder value by mobilizing
assets that reflect their history and experience to make a compelling
product offering and direct it toward a unique customer segment
or market niche. Joseph Phelps Vineyards example demonstrates
what it takes to embrace an approach to growing your winery more
profitably in todays marketplace.
constitutes growth and why grow?
Fourteen winery participants recently pondered this question in
a quarterly CEO Forum led by Scion Advisors (Napa, CA) and MKF Group,
LLP (St. Helena, CA). These CEOs represent a cross-section of wineries
in Napa, Sonoma, and Monterey counties. Their conclusions tell an
interesting story that is pretty much in agreement with the Fast
Growth is the process of expansion or evolution. Growth produces
a different mindset consider how hard it is to manage stability.
Forward momentum can absorb market setbacks more readily, keep core
brands vital, stimulate high performers in organizations, increase
profits so you can become who you are, and force you
to properly manage your wine product through its product lifecycle.
Traditionally, wine industry growth strategy has been production-driven
and focused on volume growth dictated by availability of grapes.
Production-driven strategies are no longer working successfully
for many wineries.
The combined dynamics of channel consolidation and increasing competition
(characterized by severely declining numbers of wine distributors
and by an escalating number of wine SKUs on the U.S. market) have
made it much harder for wine businesses to market and sell wine.
Eating into winery profits, sales and marketing costs are escalating
by 20% to 30% annually, and each year wine inventories require considerable
pushing through the wholesale system.
Distributors and retailers are exacting costly favors.
Marketing directors invest larger and larger sales allowances into
sales programming, distributor management, and bonusing, and sales
teams direct an ever more significant effort into building key account
relationships. This environment is particularly detrimental to smaller
wineries that have very little muscle with three-tier distribution
How best to grow profits Do you
underscore volume or price?
Volume growth, the preferred choice for fueling winery profits for
many brands, is haunting countless winery owners who have underestimated
the cost of higher volume production and especially the expense
of higher volume sales and marketing. The highest quality, highest-priced
producers appear most impacted.
Business simply has become overly complex for the (typically) smaller
producers to successfully sell increasingly higher volumes of wine
through a three-tier system already overburdened by brand proliferation
and distributor consolidation.
This distribution bottleneck is placing unbelievable pressure on
wine industry leadership to become more professional in how they
compete in the marketplace, more disciplined in managing costs and
pricing, and to seek out innovative business strategies focused
on what they do best. Some winery CEOs, adopting new options for
growth, are showing signs of being well ahead of their competition.
In response to this more complex environment, a few wineries are
growing profits by actually getting smaller in volume. One of the
most visible of these is Joseph Phelps Vineyards. In 1991, the winery
was annually producing in excess of 120,000 cases of wine and had
26 products in its portfolio.
Today, production is slightly under 90,000 cases and more than 80%
is in three wines that are sold only through the three-tier channels.
The three wines are Le Mistral ($25 retail), a Syrah/Grenache blend
from Monterey County; Napa Valley Cabernet Sauvignon ($45); and
Insignia ($125), a Bordeaux blend. But because of a strategy extremely
focused on advancing quality, dollar sales have more than tripled
and profits have soared an unusual result among todays
We were very sure that, in order to remain both very independent
and very successful, we had to find a distinctive niche, explains
Shelton. We all agreed that our niche would be at the top
of the luxury wine segment, and that we would be the benchmark winery
in that rarified niche. Once we determined that was to be our goal,
then we could focus on every effort it would take to get there and
This winery case study is fascinating in that the winery leadership
team made classic decisions about strategy and stuck to its plan
through implementation the trademark of successful companies
in just about any industry. This team also demonstrates an uncanny
ability to recognize its mistakes, learn from them, and relentlessly
correct them. The following documents Joseph Phelps Vineyards master
plan and its successful implementation.
Owners culture, vision Assess
your environment realistically
In early 1994, the Joseph Phelps ownership team (comprised of Joe
Phelps, company president Tom Shelton, and winemaker Craig Williams)
took a long hard look at the strengths and weaknesses of the winerys
operations, wines, and market position. When the ownership team
committed to changing its business strategy to grow profits, team
members also factored in personal goals. They had neither the desire
nor the expertise to become higher volume producers and marketers.
We are not in the same business as Kendall-Jackson, Beringer
Blass, and Robert Mondavi Winery, reflects Shelton. These
other wineries have totally different business models and are extremely
efficient at the higher volume, mid-price tiers. Focused on lower
volume, Joseph Phelps Vineyards has a huge investment in the highest-quality
vineyards and production.
business strategy Build on history and expertise
Figure I illustrates succinctly how the owners of Joseph Phelps
Vineyards approach their challenge. They articulate long-term profitability
goals, design business strategies to match real market opportunity,
and then carefully align the right people, structures, and systems
to support proper execution.
We realized fairly quickly that the only place we could be
competitive and make money was at the top of the luxury wine segment,
notes Shelton. We also realized that our expertise is our
unique ability to build-out the quality of our wines. This absolutely
is our core capability.
The Joseph Phelps Vineyards plan to grow smaller in product mix
and total production and larger in revenues incorporates three unassailable
strategies. These strategies are inextricably linked. Constrained
by a nominal marketing budget, Shelton understands that all three
have to be in place for the growth plan to be successful. If one
of these strategies does not work, profitability goals will not
- A total commitment to quality reflected in product price.
- Product positioned for leadership in a distinct market niche.
- Product identity that is differentiated by wine style and brand.
Very simply, in order to be profitable in a business that incurs
very high product, sales, and marketing costs, the Joseph Phelps
pricing strategy needs to target the highest price tier in the luxury
Execution excellence The right decisions surface
What is interesting about this winerys story is that Joseph
Phelps Vineyards has been successful in execution. All too often,
a business starts out with a compelling plan and good intentions,
but at the first bump in the road or at the first opportunity; the
leadership team changes strategy and later wonders why it never
achieved its objectives. In fact, research shows that most successful
companies have two things in common: a strong leadership team and
an unwavering commitment to implementing their core business strategy.
For a leadership team to succeed at least two criteria have to be
met: it must have the right skills and a process that yields good
decisions. Internally, the Joseph Phelps Vineyards team came together
as a strong group, capable of making tough decisions that were aligned
with its goals.
Fortunately in the early 1990s, with Sheltons arrival, the
Joseph Phelps leadership team was extremely strong in each functional
area of the business; Craig Williams in winemaking, Damian Parker
in wine production, Dave Lockwood in financial operations and planning,
and Shelton in marketing, sales, and general management. And, they
each realized that mutual respect and trust for each others
abilities in his area of expertise was at the core of their ability
to demonstrate balanced decision-making. This balancing act was
soon put to the test.
First, they gave up some sacred cows and seriously pruned their
wine portfolio. Joseph Phelps Vineyards had built a reputation on
product innovation. In the early days, the winery had established
a market position around Chardonnay, Riesling, and Sauvignon Blanc.
Over 30 years, it had expanded into the Rhône category, building
out a portfolio of 26 wines.
In the 1980s, the Joseph Phelps Vineyards foray into fighting varietals
almost brought the whole ship down. But in the 1990s, the winery
was at the end of its innovation cycle, and the team soon became
concerned about how to maintain category leadership as a mature
brand while demonstrating margin growth.
The wine market does not reward innovation, and we were finding
it difficult to be a leader in this industry with innovative wines,
says Shelton. We were ever so aware of our weaknesses surfacing
around underperforming vineyards and brands. Decisions we made years
ago were extremely costly to get out of, but I am utterly convinced
wed be in a very different position today if we had focused
all of our energy years ago on what is now our core business.
Shelton describes a phenomenon that is not unusual in this asset-intensive
industry, where winery owners, faced with costly decisions, must
make hard choices that inevitably commit them to an unalterable
Sometimes a decision yields long-term gains and sometimes it becomes
an asset trap and straps profitability. This asset trap is illustrated
by an all-too-familiar story. A small family estate vineyard owned
700 acres planted to seven different varietals and supplied grapes
for wines mostly in the $7 to $12 category and some in the $15 to
A glut undermined their grape sales, and the family decided to diversify
into winemaking, eventually producing 15,000 cases of wine with
a portfolio of 22 wines in the same price categories. Their objective
was to grow to 100,000 cases and reduce their dependency on grape
sales, a much less profitable and predictable business. However,
they soon realized that they were actually losing money on their
lower priced wines, which represented 80% of their volume. They
were faced with the recurrence of their original problem: no profits.
Unfortunately, the potential solution was severe. They needed to
transition their winemaking operations away from the low-end to
higher priced wine production by replanting a significant portion
of their vineyard to their best-selling, highest-priced varietal,
to reduce their portfolio to two or three wines, to shift their
growth strategy to emphasize profits not volume, and perhaps even
to sell off non-strategic land assets to properly capitalize the
These are difficult, costly choices of the sort that Shelton recognizes
all too well. As a result of such painful lessons and mindful of
what it takes to get out of a bad decision, his team is more cautious
in its choices and decisions and spends much more time weighing
the outcomes and understanding how and where the winery can be successful.
Distribution channels Never rest
on your laurels
Shelton readily admits wineries large and small in this industry
have been forced to share the same, mandatory three-tier distribution
infrastructure, which is proving to be quite dysfunctional for smaller
brands. Shelton has faced a considerable challenge in communicating
the Joseph Phelps Vineyards strategy to distributors.
The issue is one of differing objectives. Distributors are incentivized
by consistent volume box sales, and by necessity, the strategy forced
on many luxury producers is an allocation model constrained by production
variability. This lack of predictability in availability of their
wines has made it tough on their distributor relationships.
Every winery experiences challenges during plan execution. For Joseph
Phelps Vineyards, the 2000 vintage was such a challenge. The Insignia
brand was built for the wine collector market, which is greatly
influenced by gatekeepers Robert Parker and the Wine Spectator.
Though Insignia received a 91 rating from Parker, the 2000 vintage
overall was panned, and the impact on the Meritage luxury category
was unfortunate. Sales slowed considerably.
Sheltons team, relying too heavily on the wine collector market,
had not built out additional channels to broaden the wines
exposure across the market. In response to this oversight, the team
has since made a major push into the on-premise market.
In late 1990s and early 2000s, it was easy to be seduced by
multiple years of easy markets, recalls Shelton. We
were focused on too many things and not paying attention to our
Fortunately, the winerys strategy focused on profitability
provides them with margin for error, so they are able to sustain
such bumps in the road with a certain degree of elegance.
Good plans take time Plan during
When we started working on the plan in 1994, we could have
easily rested on our laurels, since the winery was doing so well,
remembers Shelton. Demonstrating foresight, the team started implementing
the plan, bought land in Sonoma County and started planting 100
acres five years ago 80 acres in Pinot Noir and 20 in Chardonnay
with the same commitment to quality and the luxury wine segment
now demonstrated in Napa.
Half-way through 2004, Joseph Phelps Vineyards, on the cusp of taking
its 1994 plan to market, continues to build brand equity through
product quality and telling its story. Through commitment to its
long-term strategy, this privately held winery expects to maintain
sustainable profitability and a highly differentiated position at
the top of the luxury segment.
When queried about his concerns vis-a-vis the overnight arrivists
in the luxury category, Shelton responds: The wine market
values and rewards newcomers. In fact, the barriers to entry are
very low. But the honeymoon tends to be short. These newcomers dont
typically exhibit staying power. The long haul takes commitment
and single-minded focus on quality.
In fact, Robert Parker in his recent newsletter paid homage to the
venerable estates of Joseph Phelps Vineyards, Chateau Montelena,
and Shafer Vineyards, all of which have clearly risen above the
heap and continue to successfully demonstrate staying power
consistently building product quality and brand equity.
Lessons learned from Joseph
Phelps Vineyards case study
Does one strategy fit all?
Do not try this without adult supervision!
Imagine going to your doctor, and before youve had a chance
to describe your symptoms, the doctor writes out a prescription
and says, Take four of these two times each day, and call
me in 10 days. But I havent told you
what is wrong, you say. How do I know this will help
me? Why wouldnt it? replies the doctor,
It worked for my last two patients.
No competent doctor ever practices medicine like this, nor does
any sane patient accept such treatment. Yet some consultants routinely
prescribe such generic advice, and some managers routinely accept
such therapy in the belief that, if a particular course of action
helped other companies succeed, it ought to help theirs too.
Not all wineries have the appetite or the ability to follow the
Joseph Phelps Vineyards strategy. Only a blessed few have
the capacity to become the category leader, command top prices,
and maintain this position over the long run.
However, a number of wineries are adopting a similar strategy,
growing average revenue per case by reducing overall volume and
actually shifting emphasis from growing their wholesale channels
to committing significant resources to developing their more profitable
Some of these same wineries have succeeded in doubling and tripling
operating income within three to five years. These strategies
are also about growing profitability, but these wineries are emphasizing
channel-mix over pricing. They are shifting more products to more
profitable distribution channels, rather than claiming prices
in the top rank of the luxury category.
What Joseph Phelps Vineyards and these wineries are learning is
that you can show improved performance by growing smaller and
more focused in product mix (see PWV September/October 2004, Prune
Your Portfolio). You can use the resources youve freed
up to make your brand stronger in all channels and more attractive
to customers. Thus, a growth-strategy focused on margin-growth
and not volume is potentially within reach of many smaller wineries.
When clients of Scion Advisors are contemplating a change in business
strategy, we advise them to consider at least four critical steps.
These steps parallel the ones embraced by Joseph Phelps Vineyards.
Get clear on your family/ownership goals
Business owners need to define business goals that specifically
support their personal needs. The process of scrutinizing goals
is particularly important for families in transition, principally,
when a new generation decides to participate in the family business.
Family goals can include the explicit need to take profit out
of the business to fund education or pay down the purchase of
the business from elders. They may include the assessed investment
requirements for funding future growth in shareholder value.
The wisdom behind goal-setting is simple: If you aim for
the tree, there is a good chance you will hit the tree. But, did
you really want to aim for the tree? A well-defined set
of goals gives your strategic plan integrity and is the basis
for evaluating performance and making decisions about the future.
For example, if you are looking to grow profitability and brand
equity by emphasizing upwardly mobile pricing, your goals might
be stated as: grow to $270 average price/case at a volume of 75,000
cases, yielding an operating income of $3 million in 2008. An
important component of goal setting is a well-articulated vision
that focuses the business on something family and business participants
are motivated to be part of, is everlasting, and helps the organization
survive change to endure beyond the bumps in the road.
Conduct a reality check and assess your
You may need to appraise the strength of your winerys operations,
wines, and position in the marketplace by seeking to understand
the essential building blocks of the business: what are the style
and quality of the wines and what is the potential for product
improvement, at what cost; what is the value proposition to each
customer tier and how should this change in the future; and what
are your competitive position and points of differentiation and
how can these be more effective?
Third party assessments of your operations, your position in your
market, and your wine style can help you gain a more balanced
perspective of the health of your business. By assessing your
business performance against other like-businesses,
you may discover your strong margin growth is not as strong as
Corporate-speak from your distributor may lead you
to reduce your prices, but a robust survey of your retail and
restaurant accounts and consumers helps you understand who your
competitive set actually is.
Your house-palate may lead you to believe your wine
is of the right quality to compete in the $30 Cabernet category,
but an invited group of outside tasters reveals you
have overestimated its quality at that price point.
If your winery has the right building blocks in place, you have
increased opportunity to implement more innovative strategies.
If not, your business may not be strong enough to successfully
absorb an aggressive growth plan.
Set in place your core business strategy.
The plan you develop must be geared toward achieving your stated
family and business goals. At a minimum, your plan must identify
strategic goals against a timeline and address the key ingredients
that are necessary to achieve these.
Consider answers to these essential questions: What can you leverage
from your past to achieve your goals? What existing core strengths
can you leverage into a competitive position in the future? How
will you compete in your target market? What are your cornerstone
strategies to developing the future business?
Execute with excellent people, processes,
Before you are ready to move out with your plan, you
will need to consider your enterprises ability to support
its execution and to identify important organizational gaps. Companies
that over-estimate leadership, organization, and process/system
readiness are frequently off dramatically from plan projections
by years and by millions of dollars in revenues and expenses.
Leadership readiness, a large component of organization readiness,
has been dramatically under-valued by many CEOs in the wine industry.
Many a winery struggles with the issues around hiring new, more
professional staff, or showing loyalty to past employees through
investing in their development needs. The cold reality is that
some of these employees may take years to develop. The winery
ends up missing a critical window of opportunity and spending
much more in soft and hard development dollars than if it had
hired higher priced, qualified leadership.
A gap analysis conducted at three levels helps you assess the
cost and timing of implementing the proper delivery infrastructure.
- Leadership team skill set and know-how,
- Organization strategy and structure,
- An appropriate underpinning of reporting, planning, and employee
development processes and systems.
By characterizing enterprise-readiness to execute the plan, you
increase your probability of achieving your profit goals on time.
Scion Advisors founding partner Deborah Steinthal,
a professional advisor, helps family-owned wine businesses prosper
in an increasingly crowded and complex marketplace by improving
management and leadership practices. In partnership with MKF, Deborah
also leads the Winery CEO Forum, an executive program for an exclusive
group of winery CEOs who seek stimulating discussion focused on
critical leadership challenges. Deborah can be reached at email@example.com
or by calling 707/258-9130.