Sales focus on groceries; manager tracks logistics

By MATEUSZ PERKOWSKI
Capital Press

When the depth and breadth of the U.S. economic crisis began making itself apparent about a year ago, Willamette Valley Vineyards president Jim Bernau knew he had to react.

The winery near Salem, Ore., relied on sales to higher-end restaurants, which typically don't thrive during times of high financial anxiety.

"The consumer is clearly changing his behavior," Bernau said.

Bernau directed his sales force to emphasize sales to grocery stores, winning new customers that would benefit from "down-trading" among consumers.

The strategy has paid off. By increasing sales and cutting costs in 2009, Willamette Valley Vineyards has nearly doubled its profits so far this year.

"Being small gives you the ability to be far more adaptive," Bernau said.

The company increased its total sales by about $405,000, to $7.7 million, while reducing costs by about $75,000, according to filings with the Securities and Exchange Commission.

After interest payments and taxes, the firm has netted about $419,000 so far in 2009, up more than 90 percent from this time in 2008.

Apart from boosting sales to grocery stores, the winery was able to save money by eliminating "significant shrinkage" of its products, Bernau said.

At some point in the process, a lot of wine was disappearing from inventory but wasn't actually being sold, he said. "These bottles are fairly small and very tasty."

Bernau hired a new manager to track logistics and revamped the firm's system of storing, handling and delivering product -- essentially separating the company's sales function from its inventory management function.

Also, by streamlining the winery's accounting system, Bernau was able to generate more accurate financial data.

That reduced the amount of money spent on independent auditors, which Willamette Valley Vineyards must hire as a publicly traded company.

Bernau expects expenses to keep dropping as the company further refines its accounting system.

"There could be a number of overlapping software problems," he said. "It's like untangling a huge fishing line."

At the other end of the size spectrum of the wine industry, behemoth Constellation Brands saw sales drop 17 percent, to $1 billion, in the first quarter of its 2010 fiscal year, compared with the first quarter of its 2009 fiscal year.

Its net income for the first quarter dropped to $6.5 million in fiscal 2010, down from $44.6 million in the first quarter of fiscal 2009.

The drop was largely caused by increased income tax provisions related to the sale of subsidiaries, according to SEC filings.

In all, Constellation brands reported a net income loss of about $300 million in fiscal 2009, which ended in February.

Ann Gilpin, a beverage industry analyst with the Morningstar equity research firm, said a David vs. Goliath comparison is appropriate.

Constellation is saddled with more than $4 billion in debt and has had to "write down" the value of several brands by more than $1 billion in the past two fiscal years, reducing its total assets, Gilpin said.

Such write-downs basically acknowledge that the brands were not worth as much as Constellation paid for them, she said.

"They overpaid, they over-expanded and they're way over-leveraged," Gilpin said.

Small companies like Willamette Valley Vineyards can perform well despite the overall economic recession largely due to the peculiarities of the wine industry, she said.

For one, the market is very fragmented compared with other alcoholic beverages, Gilpin said. Wine consumers enjoy buying small, new and relatively obscure brands, whereas beer drinkers usually go for established brand names, she said.

"People want something special and different. If it gets too popular, it loses its cachet," Gilpin said.

Secondly, the complexities of wine-making also don't lend themselves to the kind of efficiency usually achieved by large-scale consolidation, she said.

That prevents a major manufacturer like Constellation from significantly reducing the capital-intensity of the process despite its size, in contrast to beer producers, Gilpin said.

"You can't have mass production with this type of model," she said. "Anheuser-Busch doesn't make seasonal varieties of Bud Light. They make the same kind of beer over and over again on a huge scale."

Cheryl Gossin, vice president of corporate communication at Constellation, had a different perspective.

The firm has been able to pay off $1 billion in debt over the past 15 months with money from divestitures and income from sales, she said.

With the recession, consumers are more apt to go with a trusted name at a reasonable price rather than risk money on exploring unknown brands, she said.

"We're seeing a benefit from our strategy," Gossin said. "We're seeing these longstanding brands are performing well."

Bernau said the wine industry is conducive to the strength of small brands, particularly since federal law prohibits alcohol manufacturers from paying for retail shelf space.

"Size is not an advantage for obtaining real estate," he said.

Nonetheless, Constellation's size allows it to hold power over distributors, so the company's strength should not be discounted, Bernau said.

"Constellation wields a tremendous amount of influence," he said. "When the economy improves, they should take off like a rocket because their distribution is so effective."

Staff writer Mateusz Perkowski is based in Salem, Ore. E-mail: mperkowski@capitalpress.com.