The median case volume of wineries that sold > 75% via DTC was < 5000 cases
The advantage of this channel, the pricing and product mixflexibility afforded to producers, can be seen in the averagerevenue per case, as well as in the changes in average revenueper case from 2007 to 2008. While increases were seenacross the board, and a 2% increase was experienced overall,the producers who sold more than 75% of their wine throughthe direct-to-consumer channel increased revenue per case bynearly 10%.
As expected, the three-tier-distribution-focused producerswere close to the industry gross margin median of 45% anda clear upward trend in gross margin is visible as the focuson the direct-to-consumer channel increases. Wineries sellingmore than 75% of their wine in the direct-to-consumer channelshowed a dramatic 20-point advantage in gross margin relativeto the industry.
The most surprising element of this analysis, however, isthe pattern of operating expenses. Essentially all of the grossmargin advantage enjoyed by producers in the greater than75% category versus the industry was offset by higher operatingexpenses. While the industry spent 33% of sales on operatingexpenses, the producers who sold more than 75% of their winethrough the direct-to-consumer channel spent 65%, indicatingthat the operational costs associated with a direct-to-consumereffort can be substantial and require a thoughtful approach.In fact, the analysis shows that the highest operating marginswere actually enjoyed by the “middle” group of producers whosold somewhere between 25% and 75% of their wine direct-toconsumer.
What if:We sell the same amount of wine at the same price but we spend an extra $20,000 in operating expenses to shift 10% of our sales (750 cases) from BC LDB to DTC?A/R days increase from 15 to 21 to reflect additional credit salesEverything else remains the same
Uncorking Provincial Borders
Uncorking Provincial BordersWill the long awaitedchanges resultingfrom Bill C-311 helpBC Wineries thrive?
What is Bill C-311?• The Federal Importation of Intoxicating Liquors Act (IILA) from 1928 prevents shipment of alcohol between provinces unless it is arranged through provincial liquor agencies• Bill C-311 is an amendment to the IILA
What Bill C-311 allows• The importation of wine from a province by an individual for personal consumption – Not for resale or commercial use – “brings the wine, or causes it to be brought into another province”• In quantities as permitted by the laws of the destination province
Bill C-311: Where are we at?• On June 28, Bill C- 311 became law• Federal law now allows individuals to import wine between provinces for personal use• Subject to law/regulation of the destination province
Dragging theProvinces kicking & GOVERNMENTscreaming MONOPOLY•BC adopting a weak BILL C-311“let’s let the ProvincialLiquor Boards work itout” attitude. PROV.•Ontario implementing a LIQUOR BOARDStask force•Wording of Alberta andManitoba law alreadyallows importation forpersonal use FREE TRADE•See WINELAW.CA for BETWEEN PROVINCESongoing updates
The Opportunity• Canadian per capita wine consumption continues to grow but we are just now approaching the world average• In BC, sales of BC VQA wine still only represent <20% of all wine sold• Canadians are drinking more wine and there is room for Canadian wineries to capture more of the growing domestic market• Because of the IILA, only a small fraction of BC wine labels are currently sold outside BC
Profitability of Dtc sales vs other sales channels SOURCE: M. Hicken – “FreeTheWine” website (2008)
Out-of Prov. Winery VisitorMore winery Online visitors Customer DIRECT TO CONSUMER More online Shares with orders / Out-of- others (word- province “fans” of-mouth)
DTC (Direct to Consumer) wine sales – US numbers• DTC sales accounted for 3% of total wine sales for the year ended April 2011• Breakdown of 3%: – Phone, internet, clubs 40% – Wineshop sales 60%• DTC more important to smaller wineries• DTC grew by 11.6% - over twice the overall rate of wine sales growth in the US (SOURCE: ShipCompliant & WinesVines DATA)
What do DTC sales mean for a small to medium sized winery? • Moss Adams study (no Canadian study available) • CA, WA & OR wineries • 2007 & 2008 data • 71% of respondents < 50,000 cases
Findings regarding Sales Channel StrategySmaller wineries are more reliant on DTC sales than larger wineries
Findings regardingSales Channel Strategy Wineries that sell more wine DTC tended to have better revenue per case sold
Findings regarding SalesChannel StrategyWineries that sell more wine DTC tended to have better margins
Findings regarding SalesChannel StrategyWineries with a higher proportion of DTC also tended to have higher sellingand admin cost
What does DTC growth mean for a BC Winery?ASSUMPTIONS• $1,500,000 wine sales from 7500 case volume• Retail prices: reds = $26.00; whites = $21.50• Sales mix 58% red; 42% white• Sales channel mix BCLDB 40%; LRS stores 30%; DTC (wineshop) 30%• Margins & balance sheet ratios = StatsCan 2010 data for BC wineries < $5 million in sales
10% shift from BC LDB to DTCBefore AfterGross margin = 53% Gross Margin = 54.85%Pre-tax earnings = $40,000 Pre-tax earnings = $81,500RONA = 4.0 RONA = 5.4Interest coverage = 1.62 Interest coverage = 2.25Net revenue/bottle = $16.67 Net revenue/bottle = $17.35Valuation* = $945,000 Valuation* = $1,318,500 * Assuming a EBITDA multiple of 9
Worth the Effort?• An investment of $20,000 generated an after tax return of $35,978; ROI = 180% in first year!• By shifting sales from government stores to DTC, your winery keeps significantly more of the retail price.• Incremental costs are fairly minimal, therefore most of the increased margin falls right to the bottom line• In our example, this one change increased the value of the winery by over $370,000
SUMMARY• Canadians are drinking more wine• Bill C-311 should make it easier for BC wineries to sell more wine DTC in other provinces• The DTC sales channel is the most profitable for BC wineries• Selling more wine DTC vs. Government stores improves profitability & ultimately value for BC wineries
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