The last quarter has probably showed some signs of life. You were up over last year and maybe even up over plan, although you probably felt like you were on the road the whole last quarter.
We do not know if this a bump in the road from an economic standpoint or is it a new normal. What I can suggest is to reframe your assumptions and run a new long range plan (LRP).
The timing is right to reassess your future in the wine business, your long term goals, and then run some scenarios around those goals to see if they match up with your needs.
Here is what I mean:
- Reassess your goals. Ask yourself what got you into the wine business in the first place and what your original volume and profit goals were. Given what you know today, do those goals seem realistic and attainable? Do you need to reset the bar?
- Scrutinize pricing and profitability assumptions. Take a look at your brand or varietal portfolio. Has it expanded past your original intentions? Are you sure all your varietals are profitable or will be profitable within a reasonable amount of time, say 3 to 5 years? Ask yourself the question, ‘what is my business known for?’ In a tough environment, it’s often best to stick to what made your name in the first place. It allows you to focus on your strengths and not confuse your consumer.
- Revisit your use of assets. What does your asset make up look like? Do you need all the vineyards or grape contracts you have given a revised set of goals? Is your winery at capacity or is it now too big for a realistic growth target.
- Fine-tune your “go to market” structure. Has your wine club grown the way you thought and has your effort to keep and expand this business changed? It's probably time to re-assess how your direct to consumer business is working and invest in systems. Technology and innovations in this channel are evolving every day. You may want to look for new ways to expand reach with new consumers.
- Revitalize your team. Is your team structured appropriately for how you need to go to market in this environment, i.e. more travel? Are you maximizing your direct to consumer business and do you have the properly trained and experienced staff to get you there?
Once you have some answers to these questions or at least some thoughts on some possible answers, it’s time to update your LRP. I would probably not go out more than 5 years. I would normally suggest 3 years but this environment is still volatile enough that it may be another year before the economy settles down into whatever its new mode is.
I would run at least three scenarios, call it ‘good, bad, and ugly’ to bracket some possible outcomes. The good should be your BHAG (big hairy audacious goal) where get to where you want to be. The bad should probably be around flat with little growth. And the ugly, well make it ugly – continued declines or flat volume growth or a combination of the two for the plan length.
Here’s what you will learn from this exercise:
- Understand your varietal profitability drivers. I have suggested how to do this in another article which you can access on our website: Future Scenarios: Discover and quantify your business potential. The standard rule of thumb still applies – your cost per ton of grapes by varietal should be less or equal to your retail bottle price. If it’s more you probably have an issue.
- Assess your pricing and your gross margin options. While it will be tough to raise price in the short term but maybe not in a few years, you can improve pricing and gross margin by shifting more business to direct to consumer channels. This also has its costs and limitations but the margins are definitely better than in national distribution. You can also improve gross margin by eliminating or restructuring unprofitable varietals or brands. We have also discussed some target gross margins by price range in another article on our website: How to stay competitive in a down market.
- Manage operating costs. “A” players in a normal environment average about 35% of revenue. However, they are probably seeing a shift to more sales and marketing spending in order to reach and pull consumers to their brands. This means you will have to incurr that cost elsewhere. Ask: What does that mean to your current staffing? If you have to absorb a higher cost structure without changing your structure, it will be hard to make your BHAG.
- Don’t forget the balance sheet. You will need to take a hard look at your assets and how the various scenarios affect them. As I have said, do you need everything you own or contract for? What is the cost of selling an asset or getting out of a vineyard or barrel contract? It’s not the best time to sell assets but paying off that bank debt may be more important.
- A good profit target would be 15 – 20%. This should be earnings before interest and taxes (or EBIT) divided by revenue. It may take you a number of years to get there but that’s okay. It’s more important to get you to the profitability and cash flow that supports your long term goals than to hit a specific target.
Finally, this exercise does not have to be perfect. What you are trying to do is bracket some possible outcomes.
The benefit of this LRP redo is that as you move to execution, you’ll be able to compare what you learn to your scenarios. You can then see what adjustments you will have to make more quickly to your business to achieve your personal and profit goals.
If you need help call us. We can answer your questions and get you going, fast. Better yet, hire us and we’ll help you through the process. Good luck and remember, ‘it’s not what you make, and it’s what you keep that counts.’
Best regards,
Hank Salvo, Partner
Scion Advisors®
Hank@ScionAdvisors.com; 925.915.1289 |
