The Economics of Running a Winery

Vivian Giang

Contributor at Fundera
Vivian Giang is a freelance journalist who covers strategy, leadership, organizational psychology and gender issues for Fast Company, Marie Claire, Fortune, Slate, among others. Previously, she was the lead entrepreneurship editor at Prior to that, Vivian launched the Careers vertical at Business Insider, which focused on the evolving office, emerging industries, and the most current employment trends. You can find her on Twitter at @vivian_giang.

Dreams of owning a winery is definitely a romantic, artisan kind: buy a vineyard, grow some grapes, make some wine, sell your wine, maybe make a fortune, and all the while proudly savoring the wine that you made.

Unfortunately, the wine-making business is a tough one and these dreams are rarely a reality. If there was an industry that really tests you, owning a winery might top the list. Not only are you sweating through years of drudgery work, you also have to be willing to lose large investments for a few guaranteed long, hard years. This kind of prerequisite is only meant for someone with complete determination.

Just take a look at the success story behind Russell Bevan of Bevan Cellars. In 2013, Bevan got his first 100-point Robert Parker score, the popular numeric wine rating system, for his 2011 Cabernet Sauvignon. Shortly after, his mailing list went from 500 subscribers to 3000 in two days. Bevan saw a positive turnaround in the company’s bank account for the first time since he bought his first 10-acres in Napa Valley’s sought-after Sonoma County in 2004.

Between 2004 and 2013, the grape-growing, wine-production lifestyle didn’t always taste so good. There was a time when Bevan’s family stopped returning his phone calls because they knew there was a good chance he was calling to borrow more money, he tells Fundera.

“I cashed in my 401K and I had a quarter of a million dollars in credit card debt at one point in time,” he remembers. But when asked what he would tell his younger self if he could, Bevan says he only wishes he’d left his corporate job sooner for the wine-making business.

Bevan’s dreams are the same ones luring more would-be vinters as of late—especially as sales of wine hit all-time highs. In 2012, sales reached nearly $35 billion, according to wine industry consultant Jon Frederikson. Land prices are soaring and full production requires a lot of money, time, and intensive, detail-oriented labor. This doesn’t even cover the headache that comes from endless permits and licensing.

Still, the allure is strong enough for those like Bevan, whose fate with winemaking has been years in the making from playing “Guess the Wine” games with his wife, Victoria De Crescenzo, back when they were dating in the mid-90s to getting involved with a group of wine lovers when they moved to Minneapolis to a stint writing a wine column for the Minneapolis Star Tribune. It took three years to find their first plot of land. Then, a friend, Kal Showket, who owns a vineyard in Oakville, offered the couple a ton of Cabernet Sauvignon grapes from his own vineyard and the seed was planted.

“I had 15 people help me handpick every grape off of every cluster,” says Bevan. “It took us 12 hours.”

“We put the plump grapes in one bin, slightly dimpled in another, and desiccated grapes in the third. We fermented them separately. They were so incredibly different and dynamic three days later that I knew my life had been changed.”

Today, Bevan owns 40 acres in Oakville, has a 35-year lease on a 62 acre parcel on another vineyard in Oakville, works with 22 vineyards, and produces around 8,000 cases of wine annually.

If you have wine-making dreams like Bevan did, below are a few factors to keep in mind:

Be prepared to lose a lot of money in the beginning

You don’t have to own a vineyard to have a winery, but for many winemakers, it can be tough to own just the “brand” and not have control over production.

For Bevan, being “all in” is crucial to long-term success.

“You can’t be an absentee owner and have a good brand,” he explains. “It requires everybody paying attention to virtually every detail. And you live your job. You can’t have a life outside of your winery.”

Being “all in” oftentimes means owning a vineyard, but this kind of aspiration doesn’t come without a hefty price tag.

William Foley, founder of Foley Wine Group, says it didn’t take long before he ended up spending $15 million in a “blink of an eye” after purchasing 460-acres in California’s Santa Barbara County nearly 20 years ago.

“I didn’t see it coming at all,” he told Forbes in 2008.

Since then, the vineyard prices have only gone up, especially in regions like Napa Valley where land is scarce. Vineyards in the area currently sell for around $300,000 per acre and in prime locations, like Oakville where Bevan’s main vineyard is located, prices can reach $350,000 per acre. In the next 30 years, the price tag is predicted to reach $1 million per acre. Outside of Napa, you can get a vineyard for around $100,000 per acre.

After purchasing your plot of land, you also have to think about the annual establishment costs needed to keep those vines alive, which adds around $15,000 to $20,000 per acre in the first three years. Again, keep in mind that you still don’t have any grapes yet at this point to make your wine. Next, vineyard owners have to invest in machinery equipment, which doesn’t come cheap. Lastly, most vineyard owners want to build a production facility and tasting room, since 90% of revenue will come through your tasting room, according to TheStreet.

However, keep in mind that you also don’t have to start something from scratch; you can start a winery (with a vineyard) by purchasing an established winery and vineyard, but this will probably end up costing you more than buying a plot of land and turning it into a vineyard.

Be prepared to spend a lot of time waiting while you lose money

As mentioned above, all that time you spend getting your vineyard up and running requires a lot of patience and care.

A best case scenario, set forth by Jerry White of Cornell University, is that it takes five years to plan, order vine, and establish and develop your vineyard until mature yields are seen. Then it takes another year to produce the first vintage and two or three more years to get your marketing plan in gear.

White says, “If you start with a vineyard, it takes a minimum of 11 to 13 years to get into a positive net income position if you are marketing only the wine that you produce from your own grapes.”

White’s conclusion is basically proven true in Bevan’s case who purchased his property in 2004, but didn’t see a turnaround from negative cash flow until 2013.

Consider an alternative business model

If you’re not falling for the romance that comes from owning a vineyard, consider being a “virtual wine maker,” like Cannonball Wine Company ,which started in 2006 in Healdsburg, Calif. Rather than shelling out millions for a vineyard and processing facility—not to mention being hit with negative cash flows for years to come—Yoav Gilat decided to build a brand with much less. The company received financing from family, friends, and a SBA small business loan.

“It’s not that romantic story of owning a vineyard,” says Gilat. “Unfortunately, I didn’t inherit a vineyard, so I have to do it in a different way. I also wasn’t wealthy enough as a lawyer to buy a vineyard.”

For many years, Gilat worked in hospitality in every role from bar manager to floor manager before joining the Israeli army and then moving to the UK for law school. After practicing law for three years, he found that his passion for the hospitality business never dwindled.

So, Gilat eventually moved to the Bay Area with his wife to get an MBA from Berkeley. He soon met his co-founder Dennis Hill who has been in the winemaking business for 35 years and was a top winemaker at Blackstone Winery and other co-founder, Greg Ahn, who is also a veteran winemaker in Sonoma county for many years.

“I literally try to get smarter people and people with more experience on my team,” reveals Gilat. “That amount of knowledge and experience … you can’t buy with money.”

The company has three brands under its belt—Cannonball, Angels and Cowboys, and a joint venture with a New Zealand brand.

“The goal was to create a really great wine under $20,” says Gilat, whose wine sells to fine wine stores and restaurants.

“Even though it’s not an expensive Robert Parker 98-point wine, we really try to give a good value.”

Cannonball is currently in 60 markets worldwide, but the company is basically “virtual” because it doesn’t own a brick-and-mortar winery per se or a vineyard. It doesn’t even have a tasting room (although the company can set one up if you ask!).

To build its brand, Cannonball has existing family growers harvest the grapes and then Cannonball’s winemakers will make the wine in rented equipment.

“We have our own tanks and barrels, but we use a facility where we pay them per case for the wine that we make,” says Gilat. “And we pay them for the storage and if we crush the grapes—and fermentation—then we pay for the equipment.”

According to Gilat, that is what being in the wine-business is all about: having fun, being engaged, and creating good value wine that you can share with friends.

Know when to ask for assistance

The wine-making business is so complicated, there is no way you’ll become a success on your own. To make his wine business a reality, Gilat got much more experienced co-founders on his team. To learn about planting, Bevan worked with a vineyard management company from the beginning to come up with “a nice base roadmap.” He’s also worked with geologists and other experts through the years as his business expands and the roadmap has definitely “gotten more complicated as time goes,” says Bevan.

When it comes to licensing and permits, there are so many layers that there are companies that do nothing else but help wine-makers navigate regulations. If you’re selling across state borders, it gets even more complicating as some states have their own laws (some allow you to ship directly and others don’t).

Aside from being hard to obtain, permits are also costly—reaching as much as $2 million for a commercial winery with a tasting room. If you want to plant a vineyard, that’s another permit and if your vineyard has slopes, that’s another permit.

Like all dreams, reality is often quite different and this is definitely true in the wine-making business. The reality is, not everyone is going to make out like Italian-American Robert Mondavi who opened his winery in Napa Valley in 1966 with a small investment of $1,000 per acre and sold to Constellation Brands for $1 billion in 2004. Nonetheless, those lured by dreams of making good quality wine are completely aware that a lot of sweat, tears, and money goes into having a label with your name on it.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Vivian Giang

Contributor at Fundera
Vivian Giang is a freelance journalist who covers strategy, leadership, organizational psychology and gender issues for Fast Company, Marie Claire, Fortune, Slate, among others. Previously, she was the lead entrepreneurship editor at Prior to that, Vivian launched the Careers vertical at Business Insider, which focused on the evolving office, emerging industries, and the most current employment trends. You can find her on Twitter at @vivian_giang.

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