August 29, 2011
Top 5 Success Factors and Challenges in Operating a Winery
by Dr. Liz Thach, MW and Dr. Janeen Olsen
Given the drastic fluctuations in the economy over the past few years, coupled with strange weather patterns resulting in large and small wine grape harvests, it is difficult to understand the best way to run a successful wine business. However, there have been some positive examples of wineries that have done a good job of weathering the various storms that have beset our industry.
Now a new study, conducted by the Wine Business Institute at Sonoma State University, illustrates what the top five success factors are and also identifies key challenges. The research, which was conducted during the Spring of 2011, included responses from 149 wine businesses, of which 90% were in California. In terms of size, 59% produced under 10,000 cases, 22% ranged from 11 to 100,000 cases, and 19% were over 100,000 cases.
Top 5 Factors for Winery Success
Participants were give a list of 24 factors that are important in operating a winery and asked to rank them on a scale of 1 to 5, with 1 being not important and 5 being critical. The results, illustrated in Table 1, show that understanding how to sell wine directly to consumers has now risen to the top spot – especially for small wineries. While this was important in the past, it has become increasingly more so with continued distributor consolidation and an extremely competitive marketplace.
The second most important factor is development of a strong business strategy. This has always been important, but is particularly so during tough economic times. Development of strategy includes continual assessment of both external and internal environments in order to respond proactively, rather than get caught in a reactive response to market changes. Third place is development of a strong wine brand, which is quite challenging in such a saturated market place, however, this, can be achieved with a clear understanding of how brands are built and sustained. Managing winemaking costs ranked above viticulture costs (#7), most likely because these types of costs are often higher, however this can change with fluctuations in grape supply. Finally understanding and keeping up with changes in compliance and regulatory issues has always been an important success factor in the wine industry.
Top 5 Challenges in the Wine Industry Today
The survey also asked wine business leaders to write down the two or three most pressing challenges they see in the wine industry today. A totally of 397 responses were collected. These were analyzed using a qualitative coding process and grouped into 23 categories which were ranked by frequency. The top 5 categories are illustrated in Figure 1 and show that concern for increased competition is the most challenging issue. Most respondents mentioned competition from imports as well as the growth of third-party labels.
The second most cited challenge was regulatory and compliance issues. “Way, way, way too many government regulations & taxes!” wrote one respondent. Managing all of the marketing and sales issues in operating a wine business was ranked as the third largest challenge. “Finding creative ways to sell within distribution channels, retail outlets…and direct to consumer” was an example of comments in this category. Controlling high costs to achieve decent profitability margins was mentioned frequently. As one winery leader stated “controlling costs while improving quality,” is very challenging. The fifth major challenge was understanding wine consumers and keeping pace with all of the changes in wine fads. “Adapting to the new trends in wine consumption,” was a common sentiment in this category.
Next Steps – Setting a Wine Business Research Agenda
The information from this survey will be used to help prioritize wine business research studies at SSU. As the only university in the US offering both a Bachelors and an MBA in Wine Business, Sonoma State University and its wine business professors want to make sure they respond to the needs of the wine industry which they serve.
About the Authors: Dr. Liz Thach, MW (email@example.com) is the Korbel Professor of Wine Business and Management and Dr. Janeen Olsen (firstname.lastname@example.org) is Professor of Wine Marketing They both work full-time at Sonoma State University’s Wine Business Institute in California.