Tips for Success in the Wine Business, from Forbes Magazine

Tips For Success In The Wine Business
Eric Arnold, 07.01.08, 6:00 PM ET, Forbes.com Drink Section.

It's the dream of many entrepreneurs: Get rich, buy a vineyard, kick back on the porch and relax with a glass of your own wine.

Keep dreaming. Wine is a tough, competitive and expensive business that's likely harder than your current day job. Even those who've managed to survive--or thrive--in the wine world are quick to give a warning: Make sure you know what you're getting into. Year-round farm work; complex regulatory paperwork; exhausting, competitive sales legwork--and this is on top of the $1 million-plus investment you'll need to get started and the several years of losses incurred before a single dollar of revenue comes your way.

In Depth: Tips For Success In Starting Your Winery
"[For] people who think they're just going to go sit in the vineyard and live in the house that happened to be on the property, walk through the vineyard, and [have] wine [that] gets made and sold automatically, it is a big surprise," says William Foley, 62, founder and owner of Foley Wine Group. Foley's brands include Foley, Lincourt, Merus, Firestone, Three Rivers and Two Sisters.

Foley is chairman of New York Stock Exchange-listed Fidelity National Information Services, a software supplier and outsourcer for banks, as well as of Fidelity National Financial, a large insurance underwriter and property and casualty insurer. He got into the wine business about 11 years ago when he bought an unplanted 460-acre property in California's Santa Barbara County.

Foley hired teams to rip out the existing vegetation and plant about half the acreage with pinot noir and chardonnay vines. This took roughly a year; it would take a few more years for the vines to grow their first crop.

Foley decided that the next step would be to start construction on a production facility and a tasting room. Neither takes long to build, but winery equipment is expensive, and a tasting room has to look nice and be attractive to visitors. "Before I knew it, I was into it for $15 million," Foley says, laughing. "It was like the blink of an eye. I didn't see it coming at all."

He's not alone. The costs of running a winery are so great--and land prices so high (in Napa, prime producing vineyard land costs about $300,000 per acre)--that many overleveraged, squeezed-by-competition wineries are ripe acquisition targets for the major wine and spirits holding companies, such as Constellation Brands and Brown-Forman Corp..

Foley says he needed seven years to make that Santa Barbara venture profitable. After several recent acquisitions, he now oversees multiple wine brands spanning several regions and price points. Foley's company now makes 250,000 cases a year.

Money Matters
Though not everyone has Foley's ambition, the first major rule of the game--whether you want to make 250 cases or 250,000 cases of wine each year--is the same: You need more money than you think you do. If you start a vineyard from scratch, it can take two to four years before you're producing a commercial crop, and the winemaking process can last a year or two longer. So make sure you've budgeted for a long period of spending without a single dollar of return.

"You tip money into a big hole for a long period of time," says Andrew Harris, the team lead for worldwide commercial development of Viagra at Pfizer.

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He should know. Harris, originally trained as a veterinarian, thought it'd be nice to live and work in New York but also have a foot in his native New Zealand. So in 2002 he bought and developed a 20-acre property in Martinborough, at the southern tip of the North Island. His company, Stonecrop, produces about 1,600 cases a year of sauvignon blanc and pinot noir, and Harris plans to max out at 4,000 cases someday. He's been up and running for six years and says he's on track to be profitable in the next four.

"Ultimately, your costs run to seven figures," says Harris. "It's a long-term proposition."

What makes it such a long haul, primarily, is that growing grapes isn't the same as planting corn or wheat or cabbage, which are replanted and regrow every year. Growing grapes is farming for masochists.

"You buy land, rip and cut it, you plant the vines--that takes a year," explains Foley. Then, depending on the land and the weather, it takes anywhere from two to four years before you grow a quality commercial crop. All the while, you're shelling out for expensive maintenance to the vines.

If you grow pinot noir and chardonnay, like Foley, "you're a year or 18 months in barrel before you bottle [the wine]. So you've got a process of about seven years before you sell any wine after you've started the program."

Selling Out
Once you have the wine, you need to know what to do with it. Small brands need to attract the interest of a wholesale distributor willing to aggressively market and sell the wine to retailers and restaurants. This isn't easy--or akin to normal supply-and-demand enterprises.

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"[San Francisco restaurant] Boulevard had ordered our wine, and I was tremendously excited," recalls Ken Freeman, an executive with Knight Capital Group who founded Freeman Vineyard and Winery in Sonoma with his wife Akiko. "I went back [to the restaurant] two weeks later, and the wine was off the list."

It wasn't that the wine hadn't sold well, according to Freeman.

"In other businesses, if you have a product that flies off the shelf, they just automatically reorder it. But in the wine business, they like to mix things up a little bit," he says. "That was a shocking moment." Freeman realized he was in for a lot more legwork than he'd originally envisioned.

Beware The Red Tape
Then there's the paperwork. Producing and selling an alcoholic beverage in America is a complicated endeavor wrapped in layers of tangled red tape. There are licenses and permissions to be acquired from the Alcohol and Tobacco Tax and Trade Bureau (TTB), and even a long, complex process through which the label for the bottle must be approved by the TTB. That's all before you have to start tracking sales and computing and paying excise taxes. (To see the TTBs long FAQ on winery regulations, click here.)

"The back-office stuff--the regulatory aspects and all that--are daunting," says art collector and venture capitalist Dennis Scholl, co-founder of the Betts & Scholl wine brand alongside Aspen-based master sommelier Richard Betts. "This is very unsexy stuff, but this is what I deal with every day. The nuts and bolts of actually getting stuff off a vine and into a bottle and on a shelf somewhere are daunting. That's the only way to describe it."

Scholl, however, has one advantage: His company makes wine under contract with several prestigious wineries around the world (such as Jean-Louis Chave in France's Northern Rhone Valley) so he doesn't have the monstrous cost of owning vineyards. The business is still expensive--"We thought my investment would be X ... and it turned out to be 100X"--but he's not overleveraged, and his company, he says, is profitable.

If you really have your heart set on making your own wine, it appears to make sense to follow Scholl's example--but start small.

One place to do that is Crushpad, a custom-crush winery in San Francisco. The company offers private customers the opportunity to make a barrel of wine for their own consumption, or even 100 or more barrels for commercial sale--all without the fuss of owning property, equipment, a winery or a warehouse.

Crushpad even handles the regulatory paperwork and order fulfillment. All you have to do is put up the money, pick the variety and vineyard site, work with an on-staff winemaker to decide on the flavor and style you want (such as oaked or unoaked wine), and do the marketing.

"If you think this is something you want to do … before you commit your life savings and taking your wife and kids to live in Napa and selling the house and quitting the job, try it out for a few years, see if you like it; see if you can be successful with a smaller scale," explains Michael Brill, founder of Crushpad. "We're talking about tens of thousands or $100,000 or $200,000--not millions of dollars."

Crushpad has over 650 accounts involving some 5,400 total customers (some are single customers, some are larger groups making wine together), about 140 of the accounts being commercial wine brands up and running or in development--and accounting for 60% of Crushpad's production. Some of those brands make 50 cases a year; some make about 2,000. At either level, however, the competition is tough.

"Wine doesn't sell itself," says Brill. "You have to be good at marketing. [You] have to get out there and sell the wine, form the relationships and tell [your] story over and over and over again," a sentiment echoed by Harris, Freeman, Scholl and, most of all, Foley.

Even though he's arguably the most successful of the bunch, Foley says the complexities of the business of making and selling wine can still be overwhelming. When asked if he sees himself kicking back and relaxing with a glass of his own wine sometimes soon, he doesn't hesitate in his response:

"Not a chance," he says