The end of self-deception

When talking to Diego Weber, the management consultant quickly gets to the point: "Very few winemakers know their own production costs," he reports from his experience, "they generally don't know how much money is involved in producing a bottle. But they still have to set the sales price. Many a winery makes a permanent loss." This leaves too little profit to live on. Or the winegrower pays extra.

Weber has advised around 70 wineries in Germany and internationally. "The fact that wineries have no idea what the wine they produce costs is an almost universal pattern." Winegrowers work with very few key figures, such as annual turnover. "Nobody knows the proportion of costs attributable to a single bottle," explains Weber.

Between mixed calculation and lack of reserves

However, the first step would be to set a price that the winemaker can (survive) with as an entrepreneur. A classic example of this is the entry-level wine: the price for a litre bottle is often below a certain threshold, such as five euros - or even less. Many winegrowers have long known that they are selling below their production costs. Shrugging their shoulders, they therefore usually speak of "mixed calculation". For Weber, this is "another word for: I have no idea about my production costs".

Many winegrowers assume that they have to offer the litre wine cheaply so that their customers will also buy the better bottlings. The result is often that businesses with an annual turnover of between 100,000 and one million euros do not have sufficient - or any - capital cover. "Of all the businesses I have advised, only a few had a reserve of 100,000 euros or more. Some had enough for two to three months, many had nothing in reserve at all."

The market waits for no one

In addition, many wineries simply produce too much, "often 130 per cent of what they can sell," says Diego Weber. This figure is in line with the general situation on the German and global market. There has long been too much wine globally, up to 30 million hectolitres in some years. Large producers in central Spain or South America, who have thousands of hectares at their disposal, are selling wines for around 50 cents per litre - and can at least live with this for a while because their production is so cheap. Added to this are inflation, climate change, fear of the future, labour shortages, war, Covid, cost increases, unemployment: all these fears are leading to less wine consumption. New generations are also taking a critical view of alcohol and consuming less. Many German winegrowers only realise that all these negative factors are also affecting them when they look at current bulk wine prices. Riesling, the leading German grape variety with the highest economic potential, is traded for just 75 cents per litre in Rheinhessen and the Palatinate. "A specialised bulk wine business can just about work for that. A small winegrower pays more," says Weber.

According to the Federal Ministry of Agriculture and Food, there were 15,200 wineries producing wine in Germany in 2020. In the decade before that, around a quarter of them had given up. The number of smaller wineries has almost halved from 6,000 to 3,600. In contrast, the number of larger wineries remained stable. This means that wineries in Germany need to become larger. The average cultivation area of 6.5 hectares is no longer profitable enough. More insolvencies will therefore follow. "There are around 8,000 smaller direct marketers in Germany, mostly the size of a family business. These lone fighters are at their limit," says Weber, outlining the situation.

"Where does the euro come from?"

These businesses in particular could do with some help. There is plenty of marketing advice and agencies at wine community. But those who are at their economic limits are not served by advertising concepts and PR stunts. "The question is simple: where does the euro come from?" Weber explains his approach.

A system that records all costs and allocates them to the products would be much more appropriate. In short: full cost accounting. "Winegrowers learn this superficially between the ages of 19 and their mid-twenties at vocational school," explains Weber, "but they don't need it in a family business until their mid-thirties. That is the age at which parents usually hand over the business. "At university, on the other hand, cost accounting is too theoretical and too complex for them," says Weber, outlining the gap.

Weber has developed a model calculation for self-marketers that, in simplified terms, covers all the costs of the business. This alone is an eye-opener for some winegrowers who would never have thought to include the family estate, including the house and land.

The total costs are allocated to different product groups. The production of Pinot Noir single-vineyard wines with old vines on steep slopes requires significantly more field work than litre wines, for which there are no costs for barriques. The depreciation models for the vehicle fleet, land and winery equipment are also not based on tax depreciation periods, but on the actual and individual useful life.

It's getting harder to cheat yourself

Some costs, such as new planting, can be estimated according to the prices charged by contractors. Weber determines the actual hours worked step by step "in dialogue with the management and the workers according to their weekly, monthly or seasonal hours".

"This is the first time that many winegrowers understand how high - and how different - the costs are for individual vineyards and wines," he says, summarising his approach. With concrete figures in mind, it becomes difficult for them to lie to themselves with the same old phrases about mixed calculations, entry-level prices and customer loyalty. Or, as Weber puts it: "It makes it possible for the management to carry out a valid full cost calculation. It is the basis for key strategic decisions."

In any case, the winegrower already knows how to set his sales price. He can even compare exactly how much he has invested over the year and how much he has earned down to the cent. "It often happens that individual wines are in deficit. In the next step, we determine where there is potential for savings. Sometimes our eyes get big."

We deal with full cost accounting in the winery in three parts. You can find out how wineries benefit from full cost accounting in the modular system in the next article.