January 18 2018
More than one-fourth of Oregon wineries reported poor financial performance in a recent survey, which may actually be related to their success in growing sales and production, experts say.
Oregon wineries expect sales to surge in 2016 but that doesn't mean all of them anticipate a healthy bottom line.
Despite healthy demand for their wine, more than one-fourth of Oregon wine producers reported being in financial distress in a recent survey.
About 28 percent of Oregon wine producers surveyed by Silicon Valley Bank, a wine industry lender, said they were in poor financial health, compared to 16 percent for the industry overall.
According to that same survey, Oregon wineries predict sales will grow 13 percent in value and 9 percent in volume this year.
Experts say this seeming disparity between rising revenues and financial uncertainty isn't necessarily surprising.
"The good news is sales are up, the bad news is sales are up," said Joe Dobbes, a longtime Oregon winemaker.
Rapid growth in sales and production often suppresses profits due to the hefty investment involved, said Christian Miller, proprietor of the Full Glass Research firm, which tracks wine industry trends.
"You're spending more on new tanks, a new crusher, better barrels," he said. "That's certainly been the case in Oregon for the past few years."
Sales of Oregon wine rose more than 14 percent, to $430 million, while wine grape production increased about 40 percent, to more than 78,000 tons in 2014, the most recent year for which Oregon Wine Board statistics are available.
By the time vineyards reach maturity, grapes are harvested and wines are bottled, producers have already spent a great deal of time and money, said Kurt Wittman, a relationship manager and vice president at Northwest Farm Credit Services, who's familiar with the wine industry.
Finding a market for a new brand also isn't immediate, so many wineries experience a "predictable 5-10 year negative cash flow, negative profitability cycle," Wittman said.
"It's a long time line," he said.
The challenge for small wineries is that some expensive equipment is only used once a year at harvest, said Michael Adams, wine business instructor at Chemeketa Community College in Salem, Ore.
"There is an economy-of-scale issue," Adams said.
Oregon has seen a rush of new entrants to the wine industry — the number of wineries climbed about 75 percent, to 676, in five years and nearly tripled over a decade, according to OWB's 2014 statistics.
In light of this influx of newcomers, it's perhaps foreseeable that many still haven't found their legs financially, said Wittman. "Maybe some of that exuberance when they started 10 years ago isn't there anymore."
The precarious economic position of these wineries is likely correlated with another survey finding by Silicon Valley Bank: Owners of Oregon wineries report a greater willingness to sell their operations, said Rob McMillan, founder of the bank's wine division.
Oregon wineries tend to be smaller than average, which may impede access to distribution channels, and many owners are reaching the age when they must either sell the company or transfer it to the next generation, he said.
According to Silicon Valley Bank's survey, 41 percent of Oregon wine producers said a sale is likely or possible, compared to about 25 percent for the industry as a whole.
"I think it has to do with winery size and difficulty in getting distribution," McMillan said.
The California wine industry is larger and more mature, so it's had a chance to undergo changes that are only confronting Oregon producers now, said Dobbes. "There's potentially been a lot of fallout in California that hasn't happened yet in Oregon."
Oregon's climate is associated with lower grape yields compared to California, which cuts into producers' profit margins, said Tom Danowski, executive director of the Oregon Wine Board.
"There's very few winemakers driving Maseratis in Oregon," he said.
However, Oregon wineries can still be profitable with the right business system, which explains the investment capital pouring into the state, Danowski said.
Several large companies have bought Oregon wineries or expanded their vineyard acreage in the state in recent years, which may also give smaller wineries ideas about selling, he said. "They see more of it going on around them."
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