Introduction to Loss of Wine Production
Loss of Wine Production is a difficult problem for a winery. A wine producer may have many loyal customers. Normally, the producer sells all wine produced. Suddenly only a reduced volume of wine can be sold. This could be catastrophic weather destroying much of their grape crop, for example.
In Argentina, hail is a particular threat to winemakers:
In, fact loss of wine production causes $10bn of losses to winemakers every year. If wineries seek to maximise revenue and minimise losing loyal customers, what are some of the tactics they might apply?
It would generally be prudent to store some wine for two reasons. Firstly, the winery could handle production outages such as the above-mentioned circumstances. If any wine can benefit from ageing, then some should be stored in any case. That is because storage will maximise value, though potentially at the cost of some temporary cash-flow issues.
If however, the producer sells all the wine, the problem is more difficult. If the producer sells all the wine every year, then there will be no reserves available.
Using Loyalty as a Metric
“Loyal” customers may receive all the wine. If so, then there is no way of providing the desired amounts of wine to all customers who are loyal. If on the other hand any customers are casual, they should be the first to lose their allocation.
This suggests an approach whereby the winery should rank its customers by loyalty. Loyalty means that a customer has bought a large quantity of wine for many years.
A loyalty figure of merit is calculated by multiplying the number of cases bought and years for which they are purchased. However, the simplest way might be to find the total of cases each customer has bought in the last yen years.
We should also adjust this figure for recency. It would be a mistake to give the same loyalty score to one buyer who took 10,000 cases ten years ago and nothing since and to a second buyer who took 10,000 cases last year and says they will do the same in future. It is easy to do this. Divide the number of cases by the number of years since they were bought.
This algorithm produces a rank order of loyalty which can now feed in to allocation decisions.
Process for handling Loss of Wine Production
The first task is to contact all customers and explain the position in terms of lost production. The initial aim here is to find out if any customers have alternative supplies of a reasonably similar product
The winery should seek to proactively identify alternative suppliers. These could be located in any major global wine location. Those suppliers could have product/excess product available. If so, a deal is available.
The winery could open discussions with this other producer about supplying existing customers. However, a major risk here is that customers remain with the alternative supplier in future years. Therefore the winery should consider actually purchasing alternative supplies and thus retaining client contact.
Such an operation need funding. Banks may lend, but if the winery has crop insurance, this is a good application of such receipts. If it does not have crop insurance, it should acquire some unless it is in sufficient funds to self-insure against this risk.
The secondary aim is to “take the temperature” of clients. They may be unhappy about the problem. Or they may be philosophical about it. Agricultural production can not be guaranteed.
Loyal, understanding clients may defer their allocation for this year. This could be on the basis that they will receive bonus allocations next year if they so wish.
Alternative production methods
A specific shock could impair the grape harvest. Hail in the exact vineyards owned/operated by the winery might be the problem. If so, there may still be other grapes available in the region from other producers or specialist growers. Bought in grapes would allow the reinstatement of production. If the adverse conditions affected the entire region, this will not be a solution.
If the adverse factors are different, there are likely to be ways of addressing them, which will cost money. A temporary bottling line can replace a damaged one.
Loss of staff could be the issue. Alternative staff are available from different locations. The vineyard may be suitable for mechanised harvest.
If for example a global pandemic makes it impossible for workers to travel from traditional locations in CEE, then it might be possible to employ workers furloughed from other businesses. Hospitality is one obvious source.
The revenue maximisation question is secondary because revenue is to some extent already maximised. The winery sells all of the wine available.
Some clients may pay more in order to receive an increased allocation. This is risky since it could appear to be price gouging. Clients need transparency here. This should emphasis that the winery has certain fixed costs. It also has a much reduced production this year, so it needs to charge more per bottle in order to survive.
Clients amenable to this could receive discounts or guaranteed priority in future years.
The winery could enter into long term supply contracts with top clients. The clients are guaranteed what production there is in a particular year.