Winery Location

The best way for a winery to interact with consumers is through a physical winery with a tasting room.  By interacting on a personal level, the consumer is engaged, has a positive social experience, and attains a sense of ownership of the winery and the shared experience.  In a study using wineries that also have urban tasting rooms, it has been shown that such consumers purchase the wines from that winery to a very significantly greater extent than they do at the corresponding urban tasting rooms, despite the proximity of these tasting rooms to the consumers' domiciles, yielding both greater overall purchases and greater purchases per consumer. The wine purchased by a consumer in a tasting room is usually at the full retail price, or close to it. The Lolonis property is located far away from the San Francisco Bay Area, but within range of a day trip.  It offers a winery facility in which to entertain guests and sell wine, on at least an invitational basis.  It is located near other wineries similarly inclined.  From that perspective, it offers the basis for consumers to develop a relationship with GAN EDEN.

Unlike many areas of the USA, California has a robust independent grape-growing industry, and such fruit is easily accessible.  As long as one has a facility available, one can produce wine using purchased fruit, in order to sell as soon as possible.  Other areas of the United States do not necessarily have robust independent grape industries capable of furnishing fruit to independent wineries.  In those areas, the winery must grow its own grapes, the time frame of the first harvest being at least three years down the line.  Other areas of the USA likewise do not typically have existing vacant bonded winery facilities accessible by those wishing to produce wine in quantity.  Thus, one would likely need to purchase land, construct and equip a winery, plant and cultivate a vineyard, and crush the first grapes at least 3 years afterward.  That is, unless one trucked in fruit from independent growers outside of the region, or purchased a fully operational winery and vineyard, likely available only at a considerable premium.  Lolonis Winery offers us the opportunity to enter the industry and develop our brand and marketing almost immediately, and relatively inexpensively.  Surplus cash flow from sales can be used to fund development of our own vineyard and winery facility after the brand has market presence.

It should be noted that because of lack of a Jewish community and other kosher wineries in the area, those visiting would largely be nonJewish and represent the general wine market.  Thus, those who would benefit specifically from the location of the winery would help establish the brand in the general marketplace.  One would hope to by that time be producing under our own bond and brand, and have our own signage so that our brand, not Lolonis Winery, would be the visible trademark.

The best way for a winery to attract people interested in kosher wine would be to place the winery in an area easily accessible by the orthodox, and to a lesser extent, conservative Jewish communities.  The vast majority of Jews in the United States are located on the eastern seaboard in the New York Metropolitan Area, with lesser communities located in other mid-Atlantic communities.  A winery anywhere north of northern Virginia would be in a position to attract Jewish consumers from the entirety of the eastern Jewish communities. This would be the optimal place to have a winery.  However, 1) The climate favors eastern grape varieties and French/American hybrids, which do not have a history of producing premium wine commanding the types of prices we desire to attain, 2) European grapevines (Vitis Vinifera) can sometimes be grown, but are subject to  fungal diseases and cold damage, making such vines expensive to grow, 3) there are few wineries for lease or sale, 4) grapes meeting our specifications will likely only be available if we grow them ourselves, which is an expensive and time-consuming option. 

Be that as it may, there is one existing winery and vineyard estate available in Pennsylvania, which could be attractive.  It would cost considerably more than producing wine at Lolonis, but could have the advantage of accessibility to the Jewish communities of the entire mid-Atlantic and the New York Metropolitan area, and maybe even the Boston area.  Anyone interested in investing in would be given that information.

Assumptions Revisited

Wineries have enhanced some fortunes, laid waste to others.  A poorly run winery, like any other poorly run business, has little hope of success, but a well-operated winery has as much chance of success as any other business.  Like any business the greatest chance of success when expenditures are held very low, and selling prices and growth are maximized.  However, projections must be realistic.

In this case, I believe the assumptions I made are reasonable.  This is an age where $200 bottles are not uncommon. Under $15 per bottle is considered downright cheap, and under $20 is considered almost uniformly to be entry-level. I believe an average retail price of $25 for a premium wine should be achievable.  In fact, I consider it to be low.  It is not uncommon for wineries to provide several tiers of wine to consumers.  In the old days, it was the standard premium product and the reserve level product.  These days, there are often multiple reserve levels.  I consider a $25 average retail level to be reasonable for the standard premium level, in both the general and kosher marketplaces.

The $25 retail price does not mean that the gross return to the winery is $25, unless that wine is being sold entirely on a direct-to-consumer basis.  At this initial proposed production level of 5000 cases, 1000 of which are in each production category of dry white, dessert white, rose', light red and robust red, this should be achievable in the first year, using social media.  At future levels, however this may not be achievable without the addition of a well-located tasting room.  It is far more likely that retailers will play a role in the sale of these wines.  Direct sales to retailers can be performed in California, and a very few other markets.  Most states require the winery to sell through an in-state wholesaler.  Thus, outside of California, access to consumers will likely require sales at a price approximately half of the retail price, while within California, sales will be split between direct sales to consumers and direct sales to retailers, and may reasonably be expected to be around $200 to retails stores, with overall sales in California averaging around $200 per case.  I'm figuring half will be sold to distributors out-of-state, 1/4 to retailers in California and 1/4 direct to consumers nationwide.  The initial production of 1000 cases per variety has the capability of being sold almost entirely direct to consumer.  However, it is worthwhile using it to gain a market presence in stores both within and outside California.  Therefore, for the sake of projections, I am still considering $200/case will be the typical selling price.  The next vintage, there will be 2000 cases of each category of wine.  This can be 2000 cases of the same White or Rose', if the initial one has proven successful, or could be 1000 cases each of 2 different types, if the initial type is unsuccessful.  Fruit for the next vintage could be purchased on the spot market close to harvest, to maximize flexibility. Subsequent vintages, and all  vintages of red, there would be considerable flexibility as well.

As can be seen, there is considerable benefit derived from higher selling prices.  At the $300/case level, the winery breaks even in less than 3 years, and even generates about $3 Million per year after that, even with no further expansion.  Furthermore, it is generating this amount with a bare $2 Million investment.  As $25 per bottle is considered a very reasonable selling price for a premium level of wine, and due to the proposed rapid increase in production levels, it seems reasonable to add a "reserve" level of wine as soon as possible, to generate higher returns, no matter what the actual average return to the winery turns out to be.  It also seems reasonable to enhance direct sales to consumers as much as possible.

Projections

At the $150/case level, it requires an investment of close to $3 Million, and the winery does not break even until the end of the 8th wine production year.  It is not a great investment, and afterwards generating about $500K per year over expenditures.   Clearly this is not worth any investment by a real investor.  However, as a "worst case scenario" (though as I said, there is still the potential to get worse), it is likely that the original principal of the investment could be recovered and even a small profit.  At $200/case, this becomes a very reasonable, though not spectacular, investment.  The winery breaks even before the end of its 5th year, and generates $1.5M per year thereafter, on a total investment of about $2.5Million.  That is enough to temporarily spend a sizable chunk for marketing expenses designed to enhance both the volume and selling price of the wine.

It is here that I point out that none of my business plans have specifically broken out "marketing" as a category of expenditures.  As I explained in my page on "business assumptions", I used very broad categories for expense allocations.  The money for marketing at this initial level of 1000 cases per category is built into the system.  Even at 2000 cases per category, I feel confident that money can be found in the system as part of the very vague categories allocated to expenditures.  At 4000 cases per wine type category, especially if the category is populated by only 1 wine, there will probably be the need to supplement marketing expenditures. especially in the third year (when we are first introducing the 4000 case production level of each category), and especially at the higher price points.  It is highly worthwhile to attempt to sell the wine at as high a price as possible.  Thus, it may be desirable to increase the price of some wines, but not others, in order to maximize the average selling price.  It may be worthwhile to introduce a reserve program of the wines which we feel will be most saleable in such a program.  Here is a cash flow picture to illustrate the desirability of maximum selling prices:

10 years of Projected Running Cash Flows at Various Selling Prices

These are the end-of-year running cash flows projected out 10 years.  The operating expenditures are the same at every price level (not quite true, because after a few years, I decided not to purchase more equipment at the $150/case level, because the cash flows did not justify it).  After the winery reached a stable 20,000 case production and a stable 20,000 cases in sales per year, The difference between income and expenditures projects to $580,008 at $150/case, $1,398,008 at $200/case and $3,398,008 at $300/case.  At $200/case and $300/case, there is easily enough profit for both distributions and for internal investment, perhaps in a vineyard and winery estate.

Hidden Money Discovered!

There is hidden money built into this business plan, but it must be tapped.  The business plan figures 50 cases per ton.  The typical yield, in reality, is 63 cases per ton.  At the initial 100 ton production level, we could have not 5000 cases, but 26% more than that, 6300 cases. I was really looking at a worst case scenario for yields, which I doubt would occur on any sort of regular basis across the spectrum of wine being produced.  Ideally, at least 1000 cases of this "surplus" could be sold at a minimum of $150/case to yield $150,000 in hidden money, with 300 cases being reserved as sales samples and wine for investors' and employee use.  A typical pallet of wine is 56 cases, so that is about 1 pallet per variety.  This extra wine would be available proportionally in each vintage, unless there were very low yields in a given year.  Considering that California is in a long-term drought, there is always the possibility that yields of one or more varieties could be low.  The projections took this into account.  At the 20,000 case production level, this is a potential surplus of 5200 cases, representing close to $1 Million in sales that can be put towards paying accelerating the break-even point, distributed to investors, put towards future investment costs for real estate or other expansion.  It should also be noted that by recovering juice bottoms and lees, an additional "hidden" wine amounting to up to 7 percent of normal production could be available to sell.  Money for purchasing additional equipment remains in the budget for such purposes.

Winery Continuity

It would be inconsistent with the goal of this proposal, that GAN EDEN be an ongoing, permanent fixture in the California landscape of premium wine producers, especially those qualified to be considered kosher by those desiring that qualification, to allow the winery to decay when I am no longer able to operate it.  It is my intention to identify someone with the desire to work by my side, and train that person with the intention of taking on an ever-increasing role in wine production, and potentially in other areas of business operations as well.  The winery should be capable of robust growth in my absence, to the benefit of all investors, my family, and of course, the employees.  I currently have some names under consideration.

Conclusion

The production of GAN EDEN wine has the potential of being a good to great investment opportunity.  The least expensive access to a potentially kosher-dedicated winery is through the lease of Lolonis Winery.  The most time- effective method of establishing GAN EDEN is through use of the Lolonis Winery and its permits and licenses.