Many, many wineries travel through time making important decisions based on cash flow or annual profit percentage or margins calculated by their accountants. They are missing the single most important number, their COGS: Cost of Goods Sold as informed by cost accounting.
Do you know your COGS? Do you know your gross margin per SKU? If not, how do you know if it makes sense to produce this SKU or that SKU? Do you have enough margin to cover expenses and make a profit? Are you a growing winery?
The grapes you buy today will be sold two-and-a-half to three-and-a-half years from now. A growing winery will be accumulating increased costs to support growth in advance of increased sales, thereby increasing demand for more cash while building inventory.
In order to avoid a cash crunch, COGS will give you a good idea of how much cash you will need to support your growth. Then you will have a choice: go and find the resources needed to support your growth or perhaps use price to bring demand in line with supply, and save cash for future growth.
Additionally, COGS inform pricing and/or channel switching in an effort to increase margins. In today’s competitive environment for shelf space in retail shops, and by-the-glass programs in restaurants and bars, does the discounted price to your distributor provide an adequate margin to cover expenses and squeak out a profit? Are one or two of your wines carrying the winery while the other SKUs are creating a drag on profitability? Does it make sense to produce low margin wines in an effort to lower COGS?
It may or it may not, but you do not know the answer to any of these questions without knowing your Cost of Goods Sold.
What if your COGS are too high for today’s market? Sadly, this is the case for many small and mid-sized wineries and failure to pivot is only making the situation worse. Once you know your COGS, you may be able to reduce costs on a few key wines. A few steps to consider:
● Use bulk wines made by wineries with lower costs. Bulk wine can be blended with your own wine in an effort to keep taste profiles within acceptable parameters. Now is a great time to source outside bulk wine given the current oversupply situation.
● Dial back your new oak program; use fewer new barrels. This can make sense in today’s environment of balanced wines and consumer preferences. Consider the use of barrel alternatives such as oak chips, oak staves, etc.
● Consider negotiating lower grape prices with current suppliers or switching suppliers altogether.
Bottom Line… it’s time to get a handle on your COGS!
Ready for some help? Cost of Goods Sold is a subject we know a lot about.
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