State's boom in small wineries is at risk
Washington state has been enjoying a boom in small wineries. Might that boom be a bubble?
The state had 19 wineries in 1981 and 163 in 2000. That grew to 534 by 2007. Today, Washington has 739 wineries and about 350 vineyards. The bulk of the boom has been in small wineries, and roughly 700 of today's wineries are boutique operations. Small businesses traditionally have small cash reserves, so they struggle when the economy (or the weather) turns adverse.
Statistics on the failures of small wineries are lacking. Washington's wine economists don't have such figures, although they say qualms about a boom in new wineries peaking out are valid. The federal government subsidizes little wine industry research, reports Michael Brady, an assistant research professor specializing in agriculture and viticulture at Washington State University. "There's a lot of opportunity for breaking new ground in studying the economics of wine production," he adds.
Andy Perdue, editor of Wine Press Northwest magazine, says he has heard of three or four wineries going out of the business in 2011, in some cases because the owners wished to retire. "I still think there's room to grow. I don't know how much there is," comments David Volmut, co-owner of Sequim's three-year-old Wind Rose Cellars.
In April, the Washington State Wine Commission released an economic report that voiced optimism, but also pointed out hurdles for the state's wine industry. The study's highlights:
• Washington's wineries produced 11.2 million cases in 2010, selling for more than $1 billion.
•The state's five largest wineries produce at least 70 percent of Washington's wine The next 30 largest wineries produce 20-25 percent. That means the remaining 704 wineries produce 5 percent to 10 percent of the state's wine. Boutique wineries are a tiny slice of Washington's gross wine production.
•Washington is unusual in that much of the actual winemaking is far away from the vineyards that grow the grapes. With 95 percent of the grapes grown in Eastern Washington, they are routinely trucked four hours across the state to wineries — an expense that adds to costs. For example, King County has 117 wineries, hosts the state's wine-distribution networks, and produces 17.2 percent of the state's wine, despite having only a few vineyards. Walla Walla County has the most wineries in the state at 123, up from seven in the mid-1990s. But Walla Walla County produces only 3.6 percent of Washington's wine. Benton County's 64 wineries produce the most in Washington at 41.6 percent of the total.
•Small wineries are handicapped by lack of capital (it takes a minimum of two years before before the first bottles can be sold), a lack of economies of scale, and less access to major distribution networks. "It's a slow-paying job," Volmut said. Boutique operations depend on tasting rooms, such as roughly 80 wineries and tasting rooms clumped together in Woodinville, plus one-to-one relationships with restaurants and small groceries. Perdue said a seven-year-old state law allowing wineries to have two instead of one tasting room has helped boutique wineries by letting them open those extra establishments around Seattle.
•Washington has a wide variety of wines, which complicates national marketing. The large selection is good, but effective marketing themes are normally based on specialties and brand-name vineyards.
•At least 30 percent of Washington's wines are sold within the state. The state's wines also make up 3 percent to 5 percent of the national market. Warner notes that the nation's wine production rises at a rate of 3 percent annually. He believes Washington's production has the potential to rise 5 percent a year.
•Overall, Washington's wine industry has weathered the recession well because the bulk of the wine sells for $15 or less per bottle, the report concludes. However, Mike Veseth, an economics professor specializing in the global wine industry at the University of Puget Sound, says many small wineries' business models are designed to produce high-priced wine. Meanwhile the recession is forcing down prices and cutting into profits.
Experts and the study agree that the state's wine industry has plenty of room to grow in terms of raw volume. In 1991, Washington's vineyards totaled 8,263 acres. In 2010 that figure was 43,849 acres. Steve Warner, director of the Washington State Wine Commission, says another 10,000 acres could be easily added, likely by existing vineyard owners.
How much of the extra grapes would go to the major wineries that have the resources to absorb the additional grapes and how much would end up in the boutique operations? Regardless, expansions of vineyards will likely be done by expert growers, providing a sound grape crop for the state's big and small wineries. "Any winemaker will tell you that if you start with good grapes, it's hard to screw up," Perdue notes.
Small wineries operate with a different bottom line, often. They're not expected to make a lot of money, often just enough to get by. Many small wineries are started by retirees, people who have made their money elsewhere, or people with spouses in other full-time jobs. Such owners are attracted by a country-gentry lifestyle of exploring drink and food. Perdue estimates at least half of boutique winery owners fit that description. "I describe them as passionate artists. They see what they do as an art," Warner observes.
"There is a romantic side to it. This became a passion later in life. Wine has a lifestyle that makes you slow down and appreciate the things in the world," adds Volmut, 43, a former information technology designer, whose partner in his winery is his 36-year-old wife, Jennifer States, who is a wind energy researcher for Battelle's nearby lab at Sequim. Her job pays the bills. Volmut took winemaking courses at Yakima Community College and practiced the craft at some Yakima Valley wineries.
They started Wind Rose Cellars in their semi-rural barn-like garage in 2009 with a roughly $100,000 worth of equipment. They hope to produce 800 to 1,000 cases this year, with a goal of 1,500 cases annually. With his wife's help, Volmut works 60-hour weeks squeezing, fermenting, storing, nurturing, and marketing to restaurants and small groceries. "You're basically slow cooking it for two years. If you don’t keep an eye on it, it'll spoil," Volmut says. Wind Rose wine sold its first batch last year, has already won some awards, and is getting close to breaking even financially.