Wine industry observers say changing economics have left Napa County’s small wineries more dependent than ever on attracting potential customers to their doors.
Three of these observers delivered their message to the Napa County Planning Commission on Wednesday. The commission decides whether new wineries can be built and old ones expanded, as well as how many visitors they can have.
“Most small wineries in Napa County wouldn’t survive without direct-to-consumer sales. It’s a no-brainer, ” Rob McMillan, executive vice president of Silicon Valley Bank’s St. Helena-based wine division, told commissioners.
During the public comment period, commissioners heard from members of Vision 2050. The group is concerned that too much tourism and an advent of wineries as event centers could destroy the rural qualities that attract people to Napa County.
“There’s a certain sustainability of the county that wasn’t discussed this morning,” Vision 2050 President Dan Mufson told the commission.
Planning commissioners held a winery business study session. Presenters were McMillan, wine law expert Richard Mendelson of Dickenson, Peatman and Fogarty and Craig Underhill, a certified public accountant with Brotemarkle, Davis and Co.
Mendelson described how the end of Prohibition in 1933 resulted in various local, state and federal alcohol regulations, rather than only federal regulations. This led to a “three-tier system” of selling wine that consisted of producers, distributors and retailers.
“The wineries were able to abide by this three-tier distribution system by finding a distributor in every state,” Mendelson said.
But times have changed. In 1995, there were 1,800 wineries nationwide and 3,000 distributors. Now there are 8,600 wineries and only 675 distributors, with the the top four distributors controlling 60 percent of the sales, he said.
McMillan told commissioners that baby boomers fueled an increase in wine consumption in the 1990s. But wholesale distributors ended up with too much fine wine inventory by 2000 and dropped many small wineries.
“That was almost overnight like a switch,” he said. “It changed the nature of the wine business.”
Today, 39 percent of Napa County sales are through distributors and 56 percent of sales are through tasting rooms and wine clubs, with the remainder through Internet and phone sales. Wineries use tasting room visits as a way to attract wine club members, McMillan said.
The wholesaler situation does not work for local small wineries, McMillan said. They have no choice but to emphasize direct-to-consumer sales.
“If you don’t need direct as much, why would you do it?” McMillan said. “You’d rather sell by the pallet than by the bottle. That’s just the way it is. It’s really just because of the market conditions that wineries go direct now.”
Customers want value, and that involves more than price for a luxury good such as wine, he said.
“There’s an experience that takes place as well,” McMillan said.
Underhill talked about the business model for small wineries. Wineries might spend $200,000 to $300,000 on bottling line equipment used only three weeks of the year. They wait several years from the time wine is put in barrels until it sells.
“This is a very complex industry that exists in Napa Valley,” Underhill said. “The wine industry is one of the most complicated business models ever to exist and frankly, I don’t know why anyone does it. There are a lot easier ways to make money than being in the wine business.”
County Planning, Building and Environmental Services Director David Morrison touched on the complexities of starting a winery. Someone just buying their land faces spending a year or two years to obtain county permits and another year building the winery.
A new winery starting from scratch could take seven years to 10 years to turn a profit, Underhill added.
Mufson broached what he called the “apocalyptic vision” of Napa Valley having too many tourists and commuters. That’s an issue that concerns many residents as they hear about new wineries and expansions, he said.
Vision 2050 will sponsor a forum of its own with speakers on April 1 titled “Understanding the Tourist-Based Economy.” Go to http://napavision2050.org for details.
Gary Margadant of Vision 2050 said the quality of the Napa Valley visit is important. He asked whether problems associated with too much direct-to-consumer marketing could end up driving sales down because people no longer want to come here.
Planning commissioners at some point will have to decide if another winery is needed based on the county’s ability to support that winery, he said.
Resident Patricia Damery said she supports direct marketing. But she wondered if there’s a model that’s not so hard on the hillsides and back areas, such as having tasting rooms in downtown Napa.
McMillan said cost is a consideration for wineries in remote areas when it comes to building tasting rooms. They are probably not going to have that many visitors.
“You probably can have a very good experience selling wine on top of a plank held up by two barrels in the tasting room,” he said. “To actually spend money on that tasting room in a remote area probably doesn’t make financial sense.”