The wine industry is growing nicely in the United States. This can be seen by the fact that the Industry is up about 2% from last year. Meaning there are now more than 7000 wine firms selling to over 100 million consumers per year(Thornton). That number makes the United States one of the highest consumers of wine in the world. Going into the future, building a successful winery will depend on many economic factors. Important factors to consider will be rising competition, financing, pricing strategies, and possible substitutes that could affect the success of the business.
I've lived in the Finger Lakes my whole life, specifically on Seneca Lake. When I was growing up, there seemed to be a few new wineries popping up around the lake each year. These new wineries all provided something a little different to the region. Some of these new wineries became a part of the Seneca Lake wine trail. The wine trail is a string of over 35 wineries that work together to bring new customers to the region. The wine trail was started in 1986 to bring a sense of community to “rivaling” wineries. At the time it was founded, there was wasn't even a dozen wineries apart of the group. Now, like mentioned above, there are over 35 establishments. Those are just members of the Wine Trail. There are around 40 other wineries surrounding the lake choosing not to partake(Seneca). This region is quickly becoming a world-renowned area for wine. The area surrounding the Finger Lakes is a terrific place to grow many species of grapes. Everything from Riesling and Chardonnay to Catawbas and Gervertaminer grow wonderfully on the sloping hills around the lake, the valleys and hills surrounding the Lakes are prime real estate. Specifically, Seneca Lake is the largest of the Finger Lakes might just be the best for growing grapes. Because it is the largest Lake, it is the only one that does not freeze during the winter. This means that Seneca Lake will slightly moderate the surround air temperature for grape vines neighboring the lake. Normally, grapes do not appreciate the blisteringly cold weather. Nor are they very fond of bone-chilling gusts that upstate and western New York are known for. Seneca Lake actually keeps it a few degrees warmer in the winter, and a little cooler in the summer. The deep valleys also block much of the wind that would freeze the plants to death in the winter. This gives the area similarities to the classic wine growing areas in France and Germany. Another benefit is that the grapes get more evenly watered because groundwater is able to move down the slopes instead of pooling and oversaturating one area. This is a very important factor when looking at the economics of a winery particularly because it all starts with the crop. Having a premium place to grow grapes is influential on the quality and success of the wine. Having great geography is how places like Napa Valley became so famous.
The economic success of a wine firm comes down to selling lots of wine, apparel, and memorabilia. To do this, a winery accomplish five, reasonably controllable, factors. The first will be to produce and sell great wine of all types. The goal will be offering many different wines so that everyone who visits is able to find something they really enjoy. The next factor is providing a positive, memorable experience to costumers. Consumers are looking for an experience today more than ever. Building an experience is first and foremost because even if the wine isn't fantastic, people will come to have to good time over everything else. If the customer had a genuinely good time, they will come back. And this leads into the fourth factor which is a great staff. Employees that are going to work hard, push sales, and foster a positive experience. The fifth and final factor is good marketing. All of the current wineries are producing very low-quality looking commercials. This an obvious issue good because marketing will bring wine-tourers into the building. But bad marketing will make the business look like a joke and is, therefore, a waste of money.
The U.S. is the 4th leading wine producer in the world. As of 2008, the U.S. produced 411 million hectoliters of wine. The U.S also places second to China in total wine consumption. The United States drank an impressive 37.21 million hectoliters of wine(Morss). Above all that information, the highly respected “Wine Spectator” posted an article stating that the National Association of American Wineries measured the economic impact of the wine industry in the United States and found that it will generate close to $219.9 billion in 2017(Balter). The Finger Lakes region is growing rapidly as stated above. Wineries and Vineyards are continuing to surface all over the area. The area is a tremendous place to grow grapes and shows that It can bring in tourists. However, will the Wine Trail become over saturated in the years to come? This is a question almost every person living in the Finger Lakes is asking themselves. Increasing competition will become very prevalent for entrepreneurs looking to get into the wine business.
Increasing competition will cause less control over product pricing. While the area could eventually become overpopulated, Increased competition during the next five to ten years might help bring in more possible consumers. Wine touring is a huge part of the industry and looking to expand. Most customers come to the region to visit a plethora of wineries in the area. So when news breaks that a new one is opening up, customers have increased incentive to come to the region and stop at others along the way. They could also find a winery that keeps them coming back to the area where they will continue to visit other wineries as well. An important note is that there are two main roads that wrap around the lake known as Route 414 and Route 14. If an company is located off of these roads, it will be at a huge disadvantage because it decreases the odds of wine tourers visiting. This is why location plays such a huge role in having a successful business.
This area operated under a company-controlled environment in the past. In recent years, it has transformed into much more of a market-controlled environment with higher levels of completion. With this being said, the wine industry is pretty flexible in regards to some products. Some wineries excel at making Bold dry reds, others excel in making fruity, sweet wines. This specialization has allowed consumers to choose which wineries to stop at based on the winery's reputation and the customers' personal tastes. Most wineries offer both but aren't necessarily “known” for both. Firms that sell fantastic aged reds can hike up prices of the same 750ml bottle that some places sell for much less. Consumers are looking for quality when they come to the region to purchase wine. This is where pricing is still company controlled in a way. However, other wineries could influence pricing offering promotions or simply selling at a lower price.
In general, the firms with the most features can charge the highest price, so research what your competitors are selling and try to out-do your competitors if possible. In the wine industry, this means having either the best product, the most variety, or both if possible.
“Core features of all the products should be similar, if not the same, so you need something special to raise the price of your product. If, instead, you would rather be the cheapest, let that be your special feature and leave everything else out(Thorton).”
Under the strength of the wine trail, micro-breweries have started popping up all over the wine trail. Micro-breweries are could be the next big thing in the area. Some wineries have capitalized early and combined with micro-breweries advertising themselves as a one-stop-shop for your alcohol needs. I have been asking a lot of tourists at my current summer job in the area. Many couples are looking for both and need to make a winery stop and a brewery stop along the way. A very established winery near the other end of the lake called “Three Brothers” has a brewery called “War Horse” attached. People seem to rave over the duo which leads me to believe maybe adding a brewery or reaching out to the smaller breweries when a winery gains momentum.
Griffin has a very different strategy. He states;
“Figure out what market your competitors are targeting, and pick a different one. Even though the products are similar, you can charge more if you design for a specific group. Certain markets will always pay higher prices or are willing to pay for the perceived exclusivity, so take advantage of that in your marketing strategy(Griffin).”
His strategy says to differentiate your company by picking a different product. Well, what do you do when Wine is your product and more established wineries have already figured out what works? Well, for example, A winery could incorporate a sparkling wine to the area which there is a lack of at the moment. Another option would be to not go with a combined brewery and go for hard cider or distilled liquor. This would certainly bring in more customers who prefer this type of alcoholic beverage.
Financing a Start-up business can be the most difficult part of the entire operation. There are a few different ways to finance a start-up. Financing can be done with either debt or equity. Mark Abell writes:
“I'm here to tell you, there are no pat answers. And even worse, it can be a life and death decision: More than 500,000 businesses are established in America annually but half of them fail within five years. The No. 1 reason for failure is a bad strategy backed by surplus optimism, but the next biggest cause of failure is a lack of funding(Abell).”
To combat the failure of lack of funding, there are some ways to add funding to your start-up.
The first, and most difficult, is Bootstrapping. This means you take on personal debt through credit cards and such to fund your business. Using credit cards results in high-interest debt that can often be crippling later on down the road. Especially if you run into roadblocks along the way. Credit cards probably wouldn't be the wisest way to start a winery because it requires so much money to start. Credit could be used to buy appliances like dishwashers or cash registers but for the most part, credit cards should be avoided. Another way to fund a start-up would be venture capital. This would be finding a private equity company to loan money to the cause to get started. Venture capital or angel venture capital is a much better way to finance a start-up. Unfortunately, according to Abell “venture and angel capital combined make up less than 2 percent of all small business financing”. Taking out Bank loans is probably the best option for a winery start-up. Special Business Administration loans can be taken out to provide more flexibility to the process. However, these loans still have interest that might prove difficult to pay back. Getting a large bank loan will prove problematic for young adults. Try getting parents to help finance. When it comes to financing a start-up, personal or family savings should be used first. A great way to get money upfront is to ask a parent or relative. They will probably give you a break when it comes to interest rates. Commonly, personal and family savings don't cover the total amount needed to finance a start-up. In this scenario, both personal savings and loans need to be taken out. It is important to remember that a sole proprietorship means that the owner is personally responsible for the company's debt. So, if the owner falls behind on payments, it can affect the owner's personal credit.
Wine has been around for thousands of years. It is an established part of dinners and social events. The use of marijuana is becoming more and more widespread with dispensaries opening up in Colorado, Vermont, Maine and even a few more. Will the legalization pose a threat to the aggregate demand of alcohol? The answer is a bit more confusing than a simple yes or no. Will drinking alcohol beverages go down because people will decide to substitute cannabis for alcohol? Or, will drinking increase because drinking alcohol and smoking are done together frequently? Some do believe that drinking will increase due to the complimenting relationship the smoking and drinking have. One study conducted by the University of Connecticut and Georgia State studied alcohol sales at convenience and grocery stores. The study showed that between 2006-2016, alcohol sales dropped almost 15%(Kilmer). This number is not very reassuring for winemakers and brewers alike. Another study conducted by Alex Good under the supervision of Professor William Evans at the University of Notre Dame found a much less significant substitute effect. Using The Behavior Risk Factor Surveillance System, or (BRFSS), the study shows that marijuana could result in only 5 to 10% less alcohol consumption(Kilmer). He points out in his analysis that this research was conducted before dispensaries are as prevalent as they are now. Either way, aggregate demand for alcohol may decrease in the future with the legalization of all forms of marijuana. However, people in many states now are already allowed to consume and possess marijuana but people might still feel uncomfortable getting or possessing it. Dispensaries and smoke shops could certainly increase the use of marijuana because consumers might feel more comfortable walking into an official store rather than going to a stranger on a corner.
While people were still legally allowed to consume and possess marijuana in 2012 and 2013, it became much more widely available and accessible in 2014. The expansion of marijuana into retail outlets would likely cause a larger increase in consumption because people feel more comfortable walking into a store. With this being said, it's too soon to tell for sure and will not affect the market for at least a few more years in the state of New York. It is inevitable that complete legalization of marijuana will decrease aggregate demand for all alcoholic beverages such as wine. Studies conducted by multiple parties believe this. The discussion is more about how much will they affect the demand. On another note, a way for wineries to get around this might be to embrace the change and sell marijuana on site as well. This will certainly bring in more people that might just fall in love with the wine as well!
Another harmful substitute to the wine industry is Micro-breweries. Along with Wineries, these establishments are taking over and doing very well. This is a major concern for any winery in the United States. USA Today reports that craft brewing production volume has increased by 4.9 million barrels from 2013 to 2015. Reports also estimate a healthy future for the industry.
“New small breweries and brewpubs continue to open. At the end of June, there were 3,739 breweries in the U.S., the Brewers Association said. That's 699 more than at the same time last year and there are 1,755 additional breweries in planning. At that rate, the number of U.S. breweries could hit a record high in the coming months, topping the 4,131 breweries open back in 1873(Snider).”
The craft beer industry could decrease aggregate demand for wine much more than the legalization of marijuana. This can already be seen in the Finger Lakes and should definitely be taken into account when considering a winery start-up. A few wineries have already covered the move by incorporating a brewery into their winery. This is a smart move on the wineries part. The problem for a start-up is that to build both a winery and a brewery will almost double the startup cost since most of the equipment and land cannot be utilized for both grapes and hops. Once established, adding a brewery aspect to the winery is a much better way to keep debt down.
The Wine industry in the United States and, specifically, the Finger Lakes is an industry that has been steadily growing for many years now. It is important to recognize factors like rising competition, financing, possible substitutes, and pricing strategies. With all of these in mind, starting a winery will not be easy. As demonstrated, the cost to start a winery is very high and difficult for young entrepreneurs to acquire. Winery start-ups also have to be aware of the increase in demand for substitutes like marijuana and craft beer. However, all of these factors are present, in some way, with any business endeavor. Therefore, a winery start-up in the Finger Lakes is not impossible. Demand is still high and has no sign of dropping dramatically due to substitutes.
...(download the rest of the essay above)