BY Deborah Steinthal, Scion Advisors

Your winery costs are evergrowing: labor expenses,worker’s compensation, andthe cost of selling in a

crowded marketplace. Meanwhile, yourrevenue growth is less vibrant thanbefore. With these pressures, how doyou beat margin erosion? Your choices:you can improve performance byapplying better management practicesand/or you can adopt a different busi-ness strategy.

“You cannot cut, outsource, or down-size your way to economic success —you have to grow. Growth, very simply,is the one business imperative,” stipu-lates an April 2003 article in FastCompany. This is a very provocativeposition, especially if you check outbusinesses that actually grow duringtough times in an industry or an econ-omy, businesses such as Honda’s PilotSUV; John Deere Landscaping; CardinalHealth; and Joseph Phelps Vineyards(St. Helena, CA).

These businesses have at least onething in common: they carefully devel-oped and implemented innovativestrategies with the intention of grow-ing when other companies were cut-ting and downsizing their organiza-tions.

Some of these companies may notbe familiar, but they are all focused oncreating revenue, profits, and share-holder value by mobilizing assets thatreflect their history and experience tomake a compelling product offeringand direct it toward a unique customersegment or market niche. JosephPhelps Vineyards’ example demon-

strates what it takes to embrace anapproach to growing your winerymore profitably in today’s market-place.

What constitutes growth and why grow?

Fourteen winery participantsrecently pondered this question in aquarterly CEO Forum led by ScionAdvisors (Napa, CA) and MKF Group,LLP (St. Helena, CA). These CEOs rep-resent a cross-section of wineries inNapa, Sonoma, and Monterey coun-ties. Their conclusions tell an interest-ing story that is pretty much in agree-ment with the Fast Company article.

“Growth is the process ofexpansion or evolution. Growthproduces a different mindset —consider how hard it is to manage‘stability.’ Forward momentumcan absorb market setbacks morereadily, keep core brands vital,stimulate high performers inorganizations, increase profits soyou can ‘become who you are,’and force you to properly manageyour wine product through itsproduct lifecycle.”Traditionally, wine industry growth

strategy has been production-drivenand focused on volume growth dictatedby availability of grapes. Production-driven strategies are no longer workingsuccessfully for many wineries.

The combined dynamics of channelconsolidation and increasing competi-tion (characterized by severely declin-ing numbers of wine distributors andby an escalating number of wine SKUson the U.S. market) have made it muchharder for wine businesses to marketand sell wine. Eating into winery prof-its, sales and marketing costs are esca-lating by 20% to 30% annually, and eachyear wine inventories require consider-able pushing through the wholesale sys-tem.

Distributors and retailers are exactingcostly “favors.” Marketing directorsinvest larger and larger sales allowancesinto sales programming, distributormanagement, and bonusing, and salesteams direct an ever more significanteffort into building key account relation-ships. This environment is particularlydetrimental to smaller wineries that havevery little muscle with three-tier distribu-tion channels.

How best to grow profits —Do you underscore volume or price?

Volume growth, the preferred choicefor fueling winery profits for manybrands, is haunting countless wineryowners who have underestimated thecost of higher volume production andespecially the expense of higher volumesales and marketing. The highest qual-ity, highest-priced producers appearmost impacted.

Business simply has become overlycomplex for the (typically) smaller pro-ducers to successfully sell increasinglyhigher volumes of wine through athree-tier system already overburdenedby brand proliferation and distributorconsolidation.

This distribution bottleneck is plac-ing unbelievable pressure on wineindustry leadership to become moreprofessional in how they compete inthe marketplace, more disciplined inmanaging costs and pricing, and toseek out innovative business strategiesfocused on what they do best. Somewinery CEOs, adopting new optionsfor growth, are showing signs of beingwell ahead of their competition.

In response to this more complexenvironment, a few wineries are grow-ing profits by actually getting smaller in

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PROFITS BY GETTINGSMALLER

PREVIEW

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volume. One of the most visible of theseis Joseph Phelps Vineyards. In 1991, thewinery was annually producing inexcess of 120,000 cases of wine and had26 products in its portfolio.

Today, production is slightly under90,000 cases and more than 80% is in threewines that are sold only through the three-tier channels. The three wines are LeMistral ($25 retail), a Syrah/Grenacheblend from Monterey County; NapaValley Cabernet Sauvignon ($45); andInsignia ($125), a Bordeaux blend. Butbecause of a strategy extremely focusedon advancing quality, dollar sales havemore than tripled and profits have soared— an unusual result among today’s mar-keting schemes.

“We were very sure that, in order toremain both very independent and verysuccessful, we had to find a distinctiveniche,” explains Shelton. “We all agreedthat our niche would be at the top of theluxury wine segment, and that wewould be the benchmark winery in thatrarified niche. Once we determined thatwas to be our goal, then we could focuson every effort it would take to get thereand stay there.”

This winery case study is fascinatingin that the winery leadership team madeclassic decisions about strategy andstuck to its plan through implementa-tion — the trademark of successful com-panies in just about any industry. Thisteam also demonstrates an uncannyability to recognize its mistakes, learnfrom them, and relentlessly correctthem. The following documents JosephPhelps Vineyards master plan and itssuccessful implementation.

Owners’ culture, vision —Assess your environment realistically

In early 1994, the Joseph Phelpsownership team (comprised of JoePhelps, company president TomShelton, and winemaker CraigWilliams) took a long hard look at thestrengths and weaknesses of the win-ery’s operations, wines, and marketposition. When the ownership teamcommitted to changing its businessstrategy to grow profits, team membersalso factored in personal goals. Theyhad neither the desire nor the expertiseto become higher volume producersand marketers.

“We are not in the same business asKendall-Jackson, Beringer Blass, andRobert Mondavi Winery,” reflectsShelton. These other wineries havetotally different business models and areextremely efficient at the higher volume,mid-price tiers. Focused on lower vol-ume, Joseph Phelps Vineyards has a hugeinvestment in the highest-quality vine-yards and production.

Innovative business strategy —Build on history and expertise

Figure I illustrates succinctly how theowners of Joseph Phelps Vineyardsapproach their challenge. They articu-late long-term profitability goals,design business strategies to matchreal market opportunity, and thencarefully align the right people, struc-tures, and systems to support properexecution.

“We realized fairly quickly that theonly place we could be competitive andmake money was at the top of the lux-ury wine segment,” notes Shelton. “Wealso realized that our expertise is ourunique ability to build-out the qualityof our wines. This absolutely is our corecapability.”

The Joseph Phelps Vineyards planto grow smaller in product mix andtotal production and larger in rev-enues incorporates three unassailablestrategies. These strategies are inextri-cably linked. Constrained by a nomi-nal marketing budget, Shelton under-stands that all three have to be in placefor the growth plan to be successful. Ifone of these strategies does not work,profitability goals will not be met.1. A total commitment to qualityreflected in product price. 2. Product positioned for leadership ina distinct market niche.

3. Product identity that is differentiatedby wine style and brand.

Very simply, in order to be profitable ina business that incurs very high product,sales, and marketing costs, the JosephPhelps pricing strategy needs to target thehighest price tier in the luxury category.

Execution excellence —The right decisions surface

What is interesting about this winery’sstory is that Joseph Phelps Vineyards hasbeen successful in execution. All toooften, a business starts out with a com-pelling plan and good intentions, but atthe first bump in the road or at the firstopportunity; the leadership team changesstrategy and later wonders why it neverachieved its objectives. In fact, researchshows that most successful companieshave two things in common: a strongleadership team and an unwavering com-mitment to implementing their core busi-ness strategy.

For a leadership team to succeed atleast two criteria have to be met: itmust have the right skills and a processthat yields good decisions. Internally,the Joseph Phelps Vineyards team cametogether as a strong group, capable ofmaking tough decisions that werealigned with its goals.

Fortunately in the early 1990s, withShelton’s arrival, the Joseph Phelpsleadership team was extremely strongin each functional area of the business;Craig Williams in winemaking,Damian Parker in wine production,Dave Lockwood in financial opera-tions and planning, and Shelton inmarketing, sales, and general manage-ment. And, they each realized thatmutual respect and trust for eachother’s abilities in his area of expertisewas at the core of their ability todemonstrate balanced decision-mak-ing. This balancing act was soon put tothe test.

First, they gave up some sacred cowsand seriously pruned their wine portfo-lio. Joseph Phelps Vineyards had built areputation on product innovation. Inthe early days, the winery had estab-lished a market position aroundChardonnay, Riesling, and SauvignonBlanc. Over 30 years, it had expandedinto the Rhône category, building out aportfolio of 26 wines.

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Strategic PlansFinancial Plans

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Copyright 2004 Scion Advisors

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Lessons learned fromJoseph Phelps Vineyardscase studyDoes one strategy fit all? Do not try this without adult supervision!

Imagine going to your doctor, andbefore you’ve had a chance to describeyour symptoms, the doctor writes outa prescription and says, “Take four ofthese two times each day, and call mein 10 days.” “But — I haven’t told youwhat is wrong,” you say. “How do Iknow this will help me?” “Why would-n’t it?” replies the doctor, “It workedfor my last two patients.”

No competent doctor ever practicesmedicine like this, nor does any sanepatient accept such treatment. Yet someconsultants routinely prescribe suchgeneric advice, and some managersroutinely accept such therapy in thebelief that, if a particular course ofaction helped other companies suc-ceed, it ought to help theirs too.

Not all wineries have the appetite orthe ability to follow the Joseph PhelpsVineyards’ strategy. Only a blessed fewhave the capacity to become the cate-gory leader, command top prices, andmaintain this position over the longrun.

However, a number of wineries areadopting a similar strategy, growingaverage revenue per case by reducingoverall volume and actually shiftingemphasis from growing their whole-sale channels to committing significantresources to developing their moreprofitable consumer-direct channels.

Some of these same wineries havesucceeded in doubling and triplingoperating income within three to fiveyears. These strategies are also aboutgrowing profitability, but these winer-ies are emphasizing channel-mix overpricing. They are shifting more prod-ucts to more profitable distributionchannels, rather than claiming prices inthe top rank of the luxury category.

What Joseph Phelps Vineyards andthese wineries are learning is that youcan show improved performance bygrowing smaller and more focused inproduct mix (see PWV September/October–2004, “Prune Your Portfolio”).

You can use the resources you’ve freedup to make your brand stronger in allchannels and more attractive to cus-tomers. Thus, a growth-strategyfocused on margin-growth and notvolume is potentially within reach ofmany smaller wineries.

When clients of Scion Advisors arecontemplating a change in businessstrategy, we advise them to consider atleast four critical steps. These stepsparallel the ones embraced by JosephPhelps Vineyards.

GET CLEAR ON YOUR FAMILY/OWNER-SHIP GOALS AND VALUES. Business

owners need to define business goalsthat specifically support their personalneeds. The process of scrutinizinggoals is particularly important for fam-ilies in transition, principally, when anew generation decides to participatein the family business. Family goalscan include the explicit need to takeprofit out of the business to fund edu-cation or pay down the purchase of thebusiness from elders. They mayinclude the assessed investmentrequirements for funding futuregrowth in shareholder value.

The wisdom behind goal-setting issimple: “If you aim for the tree, there isa good chance you will hit the tree. But,did you really want to aim for thetree?” A well-defined set of goals givesyour strategic plan integrity and is thebasis for evaluating performance andmaking decisions about the future.

For example, if you are looking togrow profitability and brand equity byemphasizing upwardly mobile pricing,your goals might be stated as: grow to$270 average price/case at a volume of75,000 cases, yielding an operatingincome of $3 million in 2008. Animportant component of goal setting isa well-articulated vision that focusesthe business on something family andbusiness participants are motivated tobe part of, is everlasting, and helps theorganization survive change to endurebeyond the bumps in the road.

CONDUCT A REALITY CHECK AND ASSESS YOUR CURRENT SITUATION.

You may need to appraise the strengthof your winery’s operations, wines,

and position in the marketplace byseeking to understand the essentialbuilding blocks of the business: whatare the style and quality of the winesand what is the potential for productimprovement, at what cost; what is thevalue proposition to each customer tierand how should this change in thefuture; and what are your competitiveposition and points of differentiationand how can these be more effective?

Third party assessments of youroperations, your position in your mar-ket, and your wine style can help yougain a more balanced perspective ofthe health of your business. By assess-ing your business performance againstother “like-businesses,” you may dis-cover your strong margin growth is notas strong as you thought.

“Corporate-speak” from your dis-tributor may lead you to reduce yourprices, but a robust survey of yourretail and restaurant accounts and con-sumers helps you understand whoyour competitive set actually is.

Your “house-palate” may lead youto believe your wine is of the rightquality to compete in the $30 Cabernetcategory, but an invited group of “out-side” tasters reveals you have overesti-mated its quality at that price point.

If your winery has the right build-ing blocks in place, you have increasedopportunity to implement more inno-vative strategies. If not, your businessmay not be strong enough to success-fully absorb an aggressive growthplan.

SET IN PLACE YOUR CORE BUSINESSSTRATEGY. The plan you develop

must be geared toward achieving yourstated family and business goals. At aminimum, your plan must identifystrategic goals against a timeline andaddress the key ingredients that arenecessary to achieve these.

Consider answers to these essentialquestions: What can you leverage fromyour past to achieve your goals? Whatexisting core strengths can you leverageinto a competitive position in thefuture? How will you compete in yourtarget market? What are your corner-stone strategies to developing thefuture business?

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In the 1980s, the Joseph PhelpsVineyards foray into fighting varietalsalmost brought the whole ship down.But in the 1990s, the winery was at theend of its innovation cycle, and theteam soon became concerned abouthow to maintain category leadership asa mature brand while demonstratingmargin growth.

“The wine market does not rewardinnovation, and we were finding it dif-ficult to be a leader in this industrywith innovative wines,” says Shelton.“We were ever so aware of our weak-nesses surfacing around underper-forming vineyards and brands.Decisions we made years ago wereextremely costly to get out of, but I amutterly convinced we’d be in a very dif-ferent position today if we had focusedall of our energy years ago on what isnow our core business.”

Shelton describes a phenomenonthat is not unusual in this asset-inten-sive industry, where winery owners,faced with costly decisions, must makehard choices that inevitably committhem to an unalterable path.

Sometimes a decision yields long-term gains and sometimes it becomesan asset trap and straps profitability.This asset trap is illustrated by an all-too-familiar story. A small family estatevineyard owned 700 acres planted toseven different varietals and suppliedgrapes for wines mostly in the $7 to $12category and some in the $15 to $20category.

A glut undermined their grape sales,and the family decided to diversify intowinemaking, eventually producing

15,000 cases of wine with a portfolio of22 wines in the same price categories.Their objective was to grow to 100,000cases and reduce their dependency ongrape sales, a much less profitable andpredictable business. However, theysoon realized that they were actuallylosing money on their lower pricedwines, which represented 80% of theirvolume. They were faced with therecurrence of their original problem: noprofits.

Unfortunately, the potential solutionwas severe. They needed to transitiontheir winemaking operations awayfrom the low-end to higher priced wineproduction by replanting a significantportion of their vineyard to their best-selling, highest-priced varietal, toreduce their portfolio to two or threewines, to shift their growth strategy toemphasize profits not volume, and per-haps even to sell off non-strategic landassets to properly capitalize the busi-ness.

These are difficult, costly choices ofthe sort that Shelton recognizes all toowell. As a result of such painful lessonsand mindful of what it takes to get outof a bad decision, his team is more cau-tious in its choices and decisions andspends much more time weighing theoutcomes and understanding how andwhere the winery can be successful.

Distribution channels —Never rest on your laurels

Shelton readily admits winerieslarge and small in this industry havebeen forced to share the same, manda-tory three-tier distribution infrastruc-

ture, which is proving to be quite dys-functional for smaller brands. Sheltonhas faced a considerable challenge incommunicating the Joseph PhelpsVineyards strategy to distributors.

The issue is one of differing objec-tives. Distributors are incentivized byconsistent volume box sales, and bynecessity, the strategy forced on manyluxury producers is an allocationmodel constrained by production vari-ability. This lack of predictability inavailability of their wines has made ittough on their distributor relationships.

Every winery experiences chal-lenges during plan execution. ForJoseph Phelps Vineyards, the 2000 vin-tage was such a challenge. The Insigniabrand was built for the wine collectormarket, which is greatly influenced bygatekeepers Robert Parker and theWine Spectator. Though Insigniareceived a 91 rating from Parker, the2000 vintage overall was panned, andthe impact on the Meritage luxury cate-gory was unfortunate. Sales slowedconsiderably.

Shelton’s team, relying too heavilyon the wine collector market, had notbuilt out additional channels tobroaden the wine’s exposure across themarket. In response to this oversight,the team has since made a major pushinto the on-premise market.

“In late 1990s and early 2000s, it waseasy to be seduced by multiple years ofeasy markets,” recalls Shelton. “Wewere focused on too many things andnot paying attention to our knitting.”

Fortunately, the winery’s strategyfocused on profitability provides them

EXECUTE WITH EXCELLENT PEOPLE, PROCESSES, AND SYSTEMS. Before

you are ready to move out with yourplan, you will need to consider yourenterprise’s ability to support its exe-cution and to identify important orga-nizational gaps. Companies that over-estimate leadership, organization,and process/system readiness are fre-quently off dramatically from planprojections by years and by millionsof dollars in revenues and expenses.

Leadership readiness, a large com-ponent of organization readiness, has

been dramatically under-valued bymany CEOs in the wine industry.Many a winery struggles with theissues around hiring new, more pro-fessional staff, or showing loyalty topast employees through investing intheir development needs. The coldreality is that some of these employ-ees may take years to develop. Thewinery ends up missing a critical win-dow of opportunity and spendingmuch more in soft and hard develop-ment dollars than if it had hiredhigher priced, qualified leadership.

A gap analysis conducted at threelevels helps you assess the cost andtiming of implementing the properdelivery infrastructure. Assess: 1. Leadership team skill set andknow-how,2. Organization strategy and structure,3. An appropriate underpinning ofreporting, planning, and employeedevelopment processes and systems.

By characterizing enterprise-readi-ness to execute the plan, you increaseyour probability of achieving yourprofit goals on time.

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with margin for error, so they are able tosustain such bumps in the road with acertain degree of elegance.

Good plans take time —Plan during an up-cycle

“When we started working on theplan in 1994, we could have easilyrested on our laurels, since the winerywas doing so well,” remembersShelton. Demonstrating foresight, theteam started implementing the plan,bought land in Sonoma County andstarted planting 100 acres five yearsago — 80 acres in Pinot Noir and 20 inChardonnay — with the same com-mitment to quality and the luxurywine segment now demonstrated inNapa.

Half-way through 2004, JosephPhelps Vineyards, on the cusp of tak-

ing its 1994 plan to market, continuesto build brand equity through productquality and telling its story. Throughcommitment to its long-term strategy,this privately held winery expects tomaintain sustainable profitability anda highly differentiated position at thetop of the luxury segment.

When queried about his concernsvis-a-vis the overnight arrivists in theluxury category, Shelton responds:“The wine market values and rewardsnewcomers. In fact, the barriers toentry are very low. But the honeymoontends to be short. These newcomersdon’t typically exhibit staying power.The long haul takes commitment andsingle-minded focus on quality.”

In fact, Robert Parker in his recentnewsletter paid homage to the venera-ble estates of Joseph Phelps Vineyards,

Chateau Montelena, and ShaferVineyards, all of which have clearlyrisen above the heap and continue tosuccessfully demonstrate stayingpower — consistently building productquality and brand equity. ■

Scion Advisors founding partnerDeborah Steinthal, a professional advisor,helps family-owned wine businesses pros-per in an increasingly crowded and com-plex marketplace by improving manage-ment and leadership practices. Inpartnership with MKF, Deborah alsoleads the Winery CEO Forum, an execu-tive program for an exclusive group ofwinery CEOs who seek stimulating dis-cussion focused on critical leadershipchallenges. Deborah can be reached atdeborah@scionadvisors.com or by calling707/258-9130.

Reprinted from:

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