Could You Run a Winery?

The very best wines are the ones that actually get made.

A winery is a kind of farm casino.

Investors (and banks) can invest in all kinds of side bets and specialty propositions. You can bet on barrels (rent or own, old or new), on dirt (vineyard location and soils)— a big favorite is the weather. When will it rain?

What’s the over/under on frost after April 1st?

Better yet, you can invest in the grapes from a particular vintage, and when it comes time to harvest, it sometimes costs more to harvest than you can sell it for. I have driven past hillsides in October filled with rows and rows of grapes that were just left on the vine for that very reason.

That usually happens when there is suddenly a flood of grapes on the market at the same time—big harvest, having to sell to get cash, or just miscalculating how many bottles of Merlot the public can drink at one time (overplanting).

Machinery is a popular bet because it’s tangible—tanks, bottling lines, catwalks, buildings, pickup trucks, harvesters—there’s no end to it. Not to mention raw grapes, raw wine before it’s finished, or bulk wine (finished), or finished bottles of sometimes uncertain ages and less certain provenance.

In my extension courses at Stanford, they told us that one of main ways to fulfill our obligations to the investors is to reduce risk. Good luck with that if you are running a winery. Agricultural businesses are subject to weather, to crop yields, to disease, and to not being able to collect payments from its own sales among other things.

A place where you can bet on things you cannot control is called a Casino.

Investors, i.e. “The Money”

Investors come in from other industries and think they can do whatever they did to make them successful at their last company. “It worked at the concrete company, it’ll work here.”

Like Clint Eastwood said, “ A man’s got to know his limitations.”

Most people never realize the truth of change: doing what you did last time in order to succeed this time is a guaranteed failure. One investor told me that people were interchangeable in a company. Which worked great for him at his last company. He made a fortune. Art and cheese, mostly.

He didn’t want to pay employees enough to live on so they’d leave before they had been there long enough to get significant raises. That keeps your payroll from going up. The idea is that there were always thousands of others that would work for the lower wage.

I don’t have time to tell you how many things that screws up with skilled labor. Do you really think you can replace a winemaker with a chemistry major? Do you really think you can replace a top farming company with a guy on a tractor? Do you really think you can replace your top salesman with some guy who was doing tax audits a week ago?

He went bankrupt in the wine business.

Lest you think that mindset is unusual, that’s exactly what Jeff Bezos at Amazon has said from the beginning about his employees. So far, he’s been right. Under sometimes awful conditions (do you really want to wear a device that tracks your steps from station to station or how long you’ve been in bathroom?). At Amazon people quit and more people line up outside the door trying to get the job.

And, it doesn’t matter whether they know what they are doing or not.

Therefore, very powerful people often fail in the wine business (and life in general) because of overconfidence—just like in a casino— because they don’t know the real odds.

And, they can’t define the real risks.

Rules, rules and more rules. And, after that, some rules.

The winery is also subject to a dizzying array of laws from governments—local, state, national—not to mention banks, county restrictions and Mother Nature that defy the kind of control that is possible in other kinds of (mostly non-agricultural) companies.

Did you know the size of the font on a wine label is prescribed by the federal government? Or, that because you can’t say some things on a front label, some wineries put the label on the back and call it the front?

Probably not.

And, let’s talk about regulations. Not one single person in regulation can actually make wine, or has worked a harvesting crew at 2 in the morning under blinding quartz lamps. Or, how somebody new on the bottling line can screw up that destroys hundreds or thousands of gallons of wine.

Forgetting to sparge the filler with nitrogen, for example. Sparging kills the bugs on the filler heads so they don’t get into the wine.

To give you an example of regulators without a clue, I worked for two years with what was then called the BATF (Bureau of Alcohol, Tobacco and Firearms) in Washington, D.C.

I’ll bet you don’t think those three things are related do you?

Ah, ye of little faith. They are what the government calls, “Sin Taxes.” Just growing grapes has already gotten you in trouble with God. Or at the very least, the Baptist Church.

The biggest single problem we had was that there wasn’t a line on the BATF form for non alcoholic wine. According to the regulators, non alcoholic wine was impossible. Sure we had already sold and shipped 3000 cases but the official U.S. government was absolutely positive that it was impossible.

That line on the form didn’t exist so we didn’t exist…and yet…there I was standing with a bottle right in front of the regulator’s desk.

What to do? Oh, what to do?

One wonders how the government manages to function at all. We finally solved that by calling it “wine without alcohol” so it fit in an existing category—and there weren't too many words to fit on the line.

Word order also matters. And the aforementioned font size. And images.

Don’t get me started on the use of the word “Napa” on a label.

One of the eccentricities of the wine business is that you can sell too much and go bankrupt.

Selling yourself into bankruptcy is curious, but it happens all the time. How that happens involves math and financial statement knowledge that aren’t helpful in this context. But, it’s true.

It’s emotionally very hard to hit a sales level that is profitable and just stay there. Everyone including your mother-in-law tells you that a business has to grow. Banks aren’t going to lend you money if you say you’re going to sell the same number of cases as last year. Or, God help us, fewer cases at a bigger profit.

The thing is, for a manager coming into any new company position, there is no glory in keeping everything the same. If you don’t change stuff how will anybody know how great you are? Especially sales.

You’ll never get a bonus that way.

Banks

To speak of banks we must speak of covenants. Not the Moses or Noah kind of covenants, bank covenants. I’ll pause while you make sure no children under the age of 12 are reading this.

Bank covenants are all the restrictions a bank puts on a winery when the bank loans the winery money. I like to call it the “List of Threats.” Break covenant and the bank can take back the money. And yes, it will.

At one point, I was talking with a banker and he said at that time, 90% of the winery loans were out of covenant, that is to say, 90% of the wineries were in danger of going bankrupt. Some more than others depending on the covenant, but 90% is still unreasonable either because of 1) the winery management or 2) the bank covenants themselves.

This is why bankers can’t sleep at night. Or, winery owners either.

The first thing a winery owner realizes is that they don’t own the winery, the bank does. One of my old partners used to call them “empty shirts.” As in, “We have a meeting with the empty shirts at 1 this afternoon.”

For all but billionaire owners, the banks are making viticultural decisions. I doubt any of those critics rating wines thinks or even knows that.

If I do anything on that list they can take the money back. Since there are maybe four things on the list that I can actually control, the odds run strong that I’ll break the “you can only have one vending machine in the hall and it has to be green” covenant before I reach the bank door on the way out.

It escapes many bankers that one cannot command the grapes to ripen at the best financial time for the bank. One cannot command the frosts to be early or the rains to stop in August before the harvest.

But, I promised the bank I would.

I did try consulting a Tarot Card reader next to the barber shop on the corner but she didn’t do any better than me or the bank either one.

Actually a pile of tractor parts probably has a better idea of whether I can keep the covenants than I do.

Celebrate

These are nowhere near all the factors and skills you have to know to run a winery. I haven’t even started on shipping and storage. Or, fertilizer. Or, illegal aliens. But, these will do for now.

What I suggest to you is that instead of rushing to judgments, you just concentrate on what’s in the glass in front of you. Don’t worry about who made it, or what side of the bottle the label is on, or where the wine came from. Those things matter, but don’t let them get in the way of your own amazement at what lies before you.

The very best wines are the ones that actually get made. The one in front of you made it. Worrying about all the things it doesn’t have just gets in the way of celebrating what it does have.

And, celebration is what wine is all about.