Although we are seeing signs of general economic recovery, the last year has been a hard slog for small winery and vineyard owners. In an economic downturn, the luxury good, hospitality, and travel industries are often the hardest hit. Among our associates, chins are held high and stories of silver linings abound. But industry vendors and salesmen are telling a different story--one of back payments requiring COD status, higher returns, downtrending sales, and equipment foreclosures.
Now more than ever, it's important to have a clear-eyed view of your business' health, ratios and sales trends. In a climate where bankers are looking at every new loan application with a jaundiced eye, and subjecting renewals to greater scrutiny, it's important to be able to identify and address each of the signs that your bankers will be looking at. Even if you feel that your sales and bottom line are healthy, you may be surprised to see your business in a different light by applying some of the ratios below. And if your business really is healthy, then you should be able to present these ratios with pride and explain what you are doing to protect and increase them.
A white-paper article by Debra Ellis of Wilson & Ellis Consulting describes the Ten Hidden Signs Your Company Is Sinking and Some Life Preservers. We'll discuss each of these ten issues in a little more detail, including what you can do to improve your business health, but here is the list in simple form:
- Customer attrition exceeds acquisition.
- Your best customers are buying less.
- Buyers are not completing the life cycle.
- Your vital signs are erratic.
- You have more back inventory.
- Costs are not aligned with sales.
- Analytics are trending down.
- You are avoiding innovation.
- Employees are unhappy.
- You have lost your passion.
1. Customer attrition exceeds acquisition.
Don't fool yourself (or your bankers) with this one. Keep your wine club lists free of non-buying members--they increase your cost-to-sales ratio and give you a false sense of security, not to mention an unrealistic cash flow projection. Instead, move non-responsive members to your email list and try to lure them back. You should work hard to maintain a healthy email list and contact your list monthly with attractive and alluring messages. If tasting room traffic has been down over previous years, work that email magic to lure local and state people to visit or order from your winery.
2. Your best customers are buying less.
Now is not the time to wait for customers to come to you. Make sure all your top buyers are not just in your wine club shipping list but also on your email list for mothly updates and winery news. Sometimes it requires just a little tickle to remind them to order wine--it doesn't even need to be a full-blown sales message. A chatty blog entry or friendly email contact is frequently just as effective. People with disposable income are, by nature, busy people. So you need to stay on their radar.
If your best customers are spending less than before, then you need to find out why. Are they spending the same amount on wine, but spending it somewhere else? If so, you need find out why and recover that income stream.
3. Buyers are not completing the life cycle.
All customers begin as a single purchase or wine club sign up. Ideally, they return for more purchases or order online, hopefully upgrade to the wine club or larger repeat orders, remain loyal, and eventually drop off. If customers are not returning or upgrading at the same rate as they used to, then something is wrong.
Don't make the mistake of blaming slack sales on an economic downturn. There are always going to be customers for your product--although you may have to work harder to find them now. A slow economy does not directly cause a drop in sales, but it will expose the holes in your sales techniques. Now is the time to find those holes and renovate your entire approach.
4. Your vital signs are erratic.
"The key vital signs for a multichannel business, according to Ellis, are turnover, lifetime value, average order value, average lines per order, method/channel of incoming customer contact, productivity rates, initial and final fill rates, employee accuracy, costs, returns, and margin. Radical, rapid fluctuations up and down among any of these metrics indicates that you need to take a closer look at the affected areas."
While it may be cumbersome for a small winery to track all of the above, it is not at all difficult to track certain key concepts on your winery budget, which you should be reviewing monthly. For instance employee efficiency can be measured as a simple line item showing the ratio of your employee salaries to total tasting room sales. If that ratio suddenly gets out of whack, it means you need to look at your staffing and workflow. Get those tasting room assistants on the phone to make chatty sales calls. Delegate work that takes up your own time, and which could be more productively spent on developing new wholesale channels or handling top tier clients. Can your sales staff do cost-comparisons for supplies? Write the monthly emails? Answer customer emails? Post articles and photos on the blog? Handle some of the wine club maintenance? Do filing? I bet they can.
The lifetime value and average order size can also be easily tracked using most modern point-of-sale systems. If these numbers have dropped significantly, then you should create some kind of loyalty program to retain customers and encourage larger orders--and make sure your customers know about it.
5. You have more back inventory.
When talking with your bankers, you'd better have something better to say than, "it's the economy." While they may nod in understanding, here's what they're really thinking: you knew we were headed for an economic slump, so what efforts have you made to expand your wholesale channels, and what retail innovations have you implemented?
Another mistake commonly made by wineries is waiting for the back inventory to sell before increasing production. Because it's the nature of wine sales, those backed up case goods are just going to become harder to sell with every passing month, and therefore become degraded in terms of saleable value. By the time you finally offload that back inventory, you've got more wine to bottle that is still older than your competition's wine lists.
If you can afford it, this is a good time to expand production. You can take advantage of pricing cuts and opportunities, but the main reason is to provide enough fresh inventory to recover the losses you encountered in a bad year. If you can't afford to expand, at least don't delay your bottlings. Stay on schedule and pump that wine out. Of course, this also means that you need to polish your silver tongue--work on new and existing distributors to take more inventory, open new regions, and develop cross-promotional opportunities with neighboring businesses.
6. Costs are not aligned with sales.
Due to the capital-intensive nature of winemaking, when sales droop it doesn't necessarily mean that your cost base lowers as well. This creates a dismal picture of cost-to-sales for your bankers. A gray cost-to-sales ratio combined with back inventory that is not moving as fast as it used to is a double doom indicator for small businesses.
You can overcome this by having a strong sales program in place with new innovations (a phone sales program, implementing email blasts, a new loyalty program, new distributors, etc.). And you can assuage the ratio by trimming fat elsewhere to reduce your cost base. Cut out unprofitable events, unnecessary supplies, and unproductive sales junkets. Go through your entire P&L line by line and do cost-comparisons with various vendors (your under-utilized sales staff can help you with this). Negotiate better rates on your loans and leases. In short, be prepared to show your bankers and investors that you are taking a double-pronged approach to remedy a ratio spike--by increasing sales and cutting costs wherever possible.
7. Analytics are trending down.
As advised in the article, don't analyze your data in a vacuum. Look at the rate of your sales growth over the last 3, 5 and 7 years. If you are not continuing to grow at the same rate, then you need to address that now. Think of it as eating well for health and performance. If your previous growth rate was an average of 10% per year, and now it's only 6%, then 4% of those nutritious new customers are going to feed your competition.
Even if your production is limited, you need a healthy growth rate to cover attrition and to allow you to attract and retain customers who will buy at higher prices and lower discounts, and in larger quantities (thus decreasing the average cost to fill each order).
8. You are avoiding innovation.
If you previously produced new blends or varietals each year, and suddenly stop in an effort to cut costs, then you lose the opportunity to attract customers with a unique product, and you are left competing on price and reputation. In a highly competitive market, it's not a good idea to limit your options or feel too confident of your status in the market.
And when the market gets really tough, it's also important to look closely at your packaging, your branding, your sales messages and your hospitality. What needs improvement? What are your competitors dong better? What can you offer that is different and unique?
9. Employees are unhappy.
"And unhappy employees are less productive than happy ones. What’s more, their negativity can spread to other workers, your vendors and partners, and your customers. If your staff is unhappy, ferret out the causes; don’t assume that the employees are malcontents."
So true. Most employees want to be happy at work. If your emloyees are dissatisfied, complaining, or engaging in passive-aggressive behavior, then you need to find out why. Solutions are often very simple and can range from reassigning work loads (everyone has strong skills and weak spots), to engaging employees more in the decision process, giving them more interesting work, or complimenting them more. A truly passive-aggressive employee needs to be identified and let go. For reasons we'll discuss in a later post, these employees just end up costing you money and goodwill.
10. You have lost your passion.
Wherever you look, articles that list the symptoms of a failing business always end with this one. If you no longer love what you do, if you dread and detest the work instead of reveling in the challenge, then it's time to turn over the reins to someone who does care, either through advancement of an employee or family member, or by selling the business. Don't wait until you've ridden the horse to death.
It's generally best to cut the cord entirely. Otherwise, you just end up muddying the efforts of the new leadership and aggravating yourself, with no loss of stress levels or time to do something new. If you don't want to sever ties, at least find a new enterprise that is challenging enough to revitalize that entrepreneurial spark.