California North Coast wine businesses lean on cash amid uncertainty

North Coast vintners and wine grape growers want more clarity about where costs and sales are headed in the months to come, according to bankers that serve the industry.

There’s a mixed bag of indicators. There are promising signs from reopened restaurants and tasting rooms from coronavirus pandemic restrictions, a big start to the rainy season after two years of drought as well as a dramatic turnaround from the grape and wine glut that loomed over the industry before the emergence of the virus.

But then there are disappointing developments such as the rise of more virulent viral strains like delta, a worsening of the labor shortage that predated the pandemic and the forecast for potentially a third year of drought.

As a result, companies have fallen back on the “cash is king” adage of recessionary corporate finance in the past 20 months, according to Rob McMillan, founder of Silicon Valley Bank’s premium wine division

“When the pandemic hit, a lot of wineries started putting cash reserves aside,” he said. “Outright cash on the balance sheet is higher than I’ve ever seen.”

When fear of the economic unknowns looms, companies tend to draw on their credit lines and hold the cash, giving them options to maneuver quickly, he said. That has allowed vintners to try to find out what works — increase or jump into digital marketing and online sales — to reach consumers amid the restrictions and disruptions to the typical restaurant-centric path of fine wine to market.

And such funds could help with bringing on marketing and sales talent as well as making up-front purchases of key supplies such as glass bottles amid sporadic hiccups in the supply chain.

“We’re through that period of fear, so the expectation is that in the next year we will see cash balances return (to previous levels), and they will pay down debt,” McMillan said.

But cost escalation for grapes and labor remains a concern for industry lenders. Before the pandemic, the wine business already had problems finding skilled workers in the vineyard amid a pull of higher wages in construction and cannabis.

And with restrictions on tasting room operations up until early this year, a number of vintners are facing challenges in getting back the skilled hospitality workers they had to let go.

Long-term concerns about drought and major wildfires are also turning growers and estate wineries to want to put more money into water management such as well-drilling and into fire prevention like large-scale removal of woodland debris and installation of permanent fire-fighting equipment.

“There will be a shaking out when growers are forced to renegotiate prices when they see the costs of production and the ability to service debt,” said Steve Herron, who heads commercial lending for Exchange Bank. The Santa Rosa-based community bank’s winery client portfolio is skewed toward smaller producers, making less than 10,000 cases annually and many fewer than 5,000 cases.

Heading into last year, the North Coast wine business was on the cusp of oversupply. The surge in retail sales in the early months of the pandemic cleared out a lot of excess wine sitting in the tanks of large-volume vintners. Then came the 2020 North Coast wildfires, which cut the volume of grapes harvested in Sonoma County by roughly one-third and in Napa County by nearly half. Some growers and vintners in the region skipped the vintage completely out of concern about smoke damage.

"We’ve had conversations with growers in the past year that even if they had (crop) insurance that covered 50% to 85%, that still leaves a shortfall in margin-pinching segment (of the business),” Herron said. “I’m not predicting gloom and doom, but wine prices and grape prices have risen up so much that if we are heading into an inflationary period, it will not help.”

These questions are limiting the capital expenditure plans vintners and growers are bringing to their lenders for new vineyards and wineries.

“Other than tanks and replacement items, it might be another few more years before we see new development other than (tenant improvements) for tasting rooms,” Herron said. “I cannot imagine there will be a lot of crushpads being expanded right now, unless you’re talking about a big producer, because of the pressure on margins to justify the capital.”

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.