NORTH COAST – While many local grape growers have taken a huge hit this year with problematic weather impacting the harvest, the industry as a whole may have benefited from the smaller harvest, said Rob McMillian, founder of the premium wine division at Silicon Valley Bank.
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“Is it bad? That is a local question. If you lost your zinfandel, it is bad,” he said. “But, this is the equitable way to smooth out the bulge. For the industry today, it is not such a bad thing to have a short harvest. It gets us that much closer to balancing supply and demand.”
He said with the large overhang of inventory, this year will level things out.
“When the market crashed, distributors started cutting out all small producers,” he said.
But when the distributors can’t get what they are looking for, prices will firm up.
Nonetheless, lenders said it remains a challenging environment for growers and wineries to obtain financing.
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“My experience dates back to the ‘70s in lending to the wine industry when banks were chasing the industry,” said Brian Kelly, president and chief executive officer of Charter Oak Bank in Napa. “Ag land seems to be coming back in value, but the cash flow is just not there due to the grape crop. Prices are not at a premium, and that is not helpful … either.”
Mr. McMillian said that if you have an estate and your yields are off 20 percent, it still costs the same to produce it but your cost per ton goes up.
“And you can’t necessarily get more from your bank. Then the higher priced tons have to get sold and it squishes your profitability,” he said.
If a grower or winery is cash flow negative, it will have a hard time getting a loan through a bank, he said.
“But if you talk about the negatives of cash flow being tight, you have to talk about the positives, too,” he said.
He said there will be even more direct-to-consumer sales, and wineries will have to shore up their customer relationship management tools. He said there are methodical metrics about who your top 20 buyers are, where they live, how often you talk to them and what they buy.
“You track your success rate of the promotional campaign. That stuff is out there, though there is no one that is truly an expert at that. Social media and CRM has not been working together long enough for there to be experts.”
Also, he said, for wineries and vineyards that are doing OK, picking up a brand or a certain property they have wanted, now may be a time when they can get it.
He said about 7 percent of the wineries say they are hurting.
“I wouldn’t expect all those to trade, but maybe cut that in half is a reasonable estimate of brands that may already have or will change hands,” he said.
In the North Coast that would be about 30 wineries.
There are many transactions being made in the area, however, and not all are being done through traditional lenders.
Zepponi & Company is a one-year-old company that provides transaction advisory services to the wine industry. It just announced that in the past 12 months it has helped close more than $100 million in deals.
What they are seeing are a lot of deals financed with a combination of equity from the acquiring party and debt financing provided by an outside lending institution like a bank.
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“In some instances, the seller also provided financing via a short-term note. The debt financing provided typically ranged from 50 percent to over 75 percent of the transaction value in the deals that we advised on this year,” Matt Franklin, one of the three partners, said.
He also said the activity level has picked up for buyers a lot in the last year.
“A year ago we were aggressively going out and trying to find buyers, now they are coming to us,” he said. “If you find an asset that you like, this is likely a good time to get into it.”
He said they are expecting transaction activity to speed up through the end of the year.
“We think given the challenges of the harvest, that transaction will pick up,” he said.
