Profit a Key Ingredient of Fine Wines

Dennis Groth prices his Napa Valley Cabernet Sauvignon to sell for $13 retail. That price, he said, will net his family’s young winery here just 34 cents a bottle in profit.

Groth is far from complaining, mind you. After all, he points out, 34 cents represents a 5.2% return on the $6.50 he collects from distributors. “That’s about midway among the Fortune 500 companies and a fair return on my investment.”

However prosaic such calculations may seem in contrast to the moonlight-and-roses image of wine making, they come naturally to Groth, a certified public accountant. Before he and his wife, Judith, entered the business in late 1980, Groth was for 13 years a partner with Arthur Young & Co., followed by seven years as head of Atari’s international operations before finally leaving Silicon Valley four years ago to devote full attention to Groth Vineyards & Winery.

But coupling that background in number crunching with the grape-crushing talents of veteran vineyard manager Nils Venge produced a profit in the second half of 1986, barely two years after the company released its first bottle, a Sauvignon Blanc. Such early profitability is rare in the capital-intensive wine business, and it came even earlier than Groth’s carefully developed business plan had forecast.

Leaving the wine making to Venge, who studied viticulture and wine making at the University of California at Davis, the Groth family has focused on the task of establishing an unknown new brand, whose sales today are divided nearly equally between so-called white-tablecloth restaurants and retailers. The most recent release, 5,500 cases of a critically acclaimed 1984 Cabernet Sauvignon, sold out in just 10 days during March.

While Venge makes the wine and manages operations, the Groths market the product and handle costs, always carefully maintaining that 5.2% profit margin while positioning the winery’s Cabernet Sauvignon and Chardonnay toward the upper end of what wine consultant Jon Fredrikson calls the “super premium” segment of the market, where 750-milliliter bottles retail for from $7 to $14. There, Groth competes well, Fredrikson said, with the more expensive bottlings known as “ultrapremiums.”(The Groth Sauvignon Blanc is retails at $6.50.)

According to Groth, the $13 retail price of his Cabernet Sauvignon provides for a 34-cent profit and 34 cents in federal and state taxes. Payments on the loans taken out to acquire the 165 acres of vineyards take $1.46, and he figures another $1.43 to cover the cost of growing and harvesting the grapes. Producing the wine itself costs $1.19, and marketing it adds $1.74. That, at any rate, is the way Groth allocates the $6.50 wholesale price he receives from his distributor.

The distributor, in turn, will typically take $2.17 for bringing the wine to market, where the wine merchant will add $4.33 to promote and sell the bottles to the public, producing an undiscounted retail price of $13.

“To survive,” Groth said, “I have to be successful at that price. Nobody in the Napa Valley will survive on producing the low-end wines. I want to be in the top third of the marketplace.”

That choice of market is no accident. While the U.S. wine market has been relatively flat in recent years, the premium category grew 20% last year, according to Fredrikson, president of Gomberg, Fredrikson & Associates in San Francisco. And that category produced more than 45% of all wine-sales revenue. In comparison, generic jug wines represented 80% of the gallonage but only 55% of sales revenue, Fredrikson reported in his Winedata newsletter.

And within the premium wine category, Groth Vineyards & Winery is enjoying more than mere survival. It shipped 21,000 cases of wine last year, up 48%, and expects to ship more than 25,000 cases this year, he said.

“Their sales are booming,” Fredrikson said, “and they’ve had rave reviews.”

Groth has been able to hold the line on his prices despite a substantial increase in the price of premium grapes, thanks to the 165 acres divided between the Oakcross and Hillcrest vineyards, which provide most of the fruit needed for production. Eventually, he said, he and Venge will produce nothing but “estate-bottled” wines--vintages grown and produced entirely under Venge’s care, from rootstock to bottling. The winery that will make that possible--already pictured on the Groth label--will be built next year on Oakville Cross Road, which bisects Napa Valley.