“If you’re in the wine business and you’re not making money today, it’s not the industry’s fault. Check your business model”, says this wine-industry-specialist US banker on Forbes. Sound advice, I would say, even if making money in the wine industry is generally regarded to be as elusive as quicksilver. As they often say, “the one way to make a small fortune in the wine industry is to start with a large one”.
Sound advice, I would also say, if the quote referred to any other industry too. After all, unless the circumstances are extraordinary, say as in a deep recession, the fault is rarely the industry’s. That said, there are far too many wine producers in distress as they cannot turn over the cash required to pay their bank’s interest repayments.
An emerging trend, it is quoted in this article, is for asset light transactions. “An asset-light transaction in the wine category means the entrepreneurs ‘don’t own anything but their inventories and a couple of computers. To make wine, they buy juice or grapes that are pressed in a custom-crush facility. It’s a good business model for a younger entrepreneur who doesn’t have a big bank roll” .
Soul Tree was founded on a similar principle a few years ago and continued on this model for a while before switching to own production. This is arguably why, though founded right in the middle of one of the worst recessionary periods of recent times, and though the business focuses on making a place for Indian wine in an enormously traditional and conservative industry in the UK* and elsewhere, Soul Tree managed to start from nowhere and yet achieve so much so quickly.
The business model is, no doubt, affected to an extent by a lower degree of control on quality or price and by a potentially reduced security of supply, but these are an easy price to pay for the advantage of requiring relatively little start-up capital, having a low interest-related cash flow burden (for businesses that are reasonably leveraged), and being nimble-footed and quick to adapt to changing conditions or operational strategies.
Bulk wine prices, the article goes on to say, is a strong indicator for the wine industry, as big harvests with more-than-ample supply open the doors to ‘undercapitalised’ entrepreneurs. Small or difficult harvests increases prices, makes it harder for quality wines to be available in bulk, and concentrates access to bigger, more established players.
The Indian wine industry is still not mature enough to follow these patterns faithfully, though the principle still applies. Prices are still based on cost and are only very loosely linked to quality. Essential economics applies, though, and availability of grapes and their cost do tend to fluctuate with the ebb and flow of demand from the larger players. An interesting case in point was the recent arrival of Moet Hennessy to India, and the sudden addition of an influential and rich player to a very small industry caused sudden upheaval in the vineyards in Nasik.
Soul Tree’s business still continues to straddle the asset-light model and the more traditional own-vineyard, own-winery model, as it moves increasingly towards the latter. Soul Tree’s grapes still come from vineyards that we do not own, and the wine is still produced by our winemaker in custom-crush facilities. The system is based on the strength of contracts, goodwill, and relationships and, when balanced with the obvious advantages of being asset-light, is highly efficient at the moment and allows for focus on the major marketing task at hand – that of putting Indian wines on the global map.
*I would be quick to add that the UK market for wine is arguably one of the most progressive and adventurous in the world