The Wine Industry's Dirty Little Secret

Average selling prices may not be increasing, as some claim.
Author:
Publish date:

Every business has its way of measuring success. In the insurance industry, everybody wants to know how many policies were sold in the last three months. On the Web, it's the number of unique visitors a website draws. And in the wine business, its the average wholesale selling price. And yet it's beginning to appear that in the wine business at least, a sale may not always be a sale; and a price may not always represent what the stuff actually goes for.

I found this out recently after receiving an email from a top executive with one of the 10 largest national distributors in the U.S. He had read last month's

Drinks & Diversions on

Beringer

(BERW)

, and thought his nose was detecting the aroma of some financial stovetop stuffing wafting through the vineyard. At issue was D&D's quote from Beringer's

SEC

filings that boasted of increased average wholesale case selling prices -- to $54.30 in the first three months of 1999 from $52.52 in the first three months of 1998.

Beringer has been touting these statistics as vindication for the company's strategy of moving into higher-priced premium wines. But they also represent significant ammunition for those winery executives and beverage analysts who are desperately trying to tell the investment community that steadily rising prices prove that there is no coming wine glut.

But it turns out that industry marketing practices make these selling prices -- called FOB and meaning price at the winery loading dock -- more than a little suspect, as the distributor executive explained. "Wineries like

Robert Mondavi

(MOND)

never take FOB decreases when competitive pressures force prices down," the exec's email began. "Instead, they give a 'promotional allowance,' which is used in entirely for price reduction, instead of a decrease in FOB."

Our exec -- let's call him Deep Palate -- sent along detailed documentation to support his case. In Beringer's case, the winery offers rebates of $2 per case and more for its largest-selling White Zinfandel. But they also sweeten the deal with free merchandise, charging its $45 wholesale case price for a 15-bottle case as opposed to the standard 12 bottles.

Many wineries offer per-case price subsidies depending upon the size of the order: Beringer provides subsidies on its highly touted Meridian Chardonnay ranging from $5 for an order of three cases, to $15 for a ten-case purchase. And Mondavi provides per-case price supports for their Coastal brand of $3 to $10 per case, depending on the size of the order.

The problem is, these promotional allowances skew the income statements for wineries. That's because standard practice in the industry calls for booking the FOB price as revenue. The costs of these rebates or subsidies, on the other hand, are merely lumped together under Sales, General and Administrative expenses. Thus, the calculation of average wholesale case price is hopelessly skewed by the treatment, a fact not well known outside of the cabal of vineyards and their distributors.

To confuse matters even more, these price subsidies vary from quarter to quarter, and even from geographical market to geographical market. Deep Palate told us that Mondavi's Woodbridge brand, which accounts for 70% of sales, has not been supported recently, but will be in the next few days. "They haven't talked price yet, but they are pushing us to increase orders before their fiscal year ends June 30. Right now they're trying to get us to commit for more than twice what our actual needs are."

In polling a variety of observers, D&D found that the system's most loyal proponents agree the practice is confusing and does obscure some of a company's precise financial position. But even its greatest detractors grudgingly admit that it is not illegal and does not violate any accounting standards.

Steve McCarthy, CFO of the Robert Mondavi Winery, argued that promotional allowances rightly belong further down in the category of operating expenses. "I think that looking at operating income is the most important measure of financial performance," McCarthy said, "and that isn't changed by where the allowance is booked." He stressed that if the company changed its FOB prices from quarter to quarter, "then we'd have to explain the opposite question -- of why things were going up and down."

Top industry CPA Mike Fisher of

Motto, Kryla & Fisher

agreed: "As auditors we aren't concerned since it doesn't change the bottom line."

Beringer spokeswoman Mora Cronin told D&D that "the overall trade discount expenditure as a percentage of net income has not changed appreciably over the past three years, which means that the growth we have seen is real growth." She said the details regarding subsidies and the actual average case price with discounts included was too proprietary to release.

Because there are so many ways of granting discounts and variations for accounting for them, it's clear that trying to compare one winery's average wholesale case price with another -- as D&D has previously done -- is not really valid. It's equally clear that the practice does obscure the ability to spot possible trends in pricing, including any that might be related to the gathering glut. And in an industry that has been notoriously slack about promoting its product, the practice fails to differentiate between passive price-cutting and a more proactive and longer-lasting marketing effort like advertising.

Finally, the practice also unfairly penalizes wineries like

Ravenswood

(RVWD)

that don't offer promotional or depletion allowances and have financials that reflect face value numbers.

Sums up our distributor source with a heavy sigh: "It seems that it is very difficult to find out what the actual financial position of a publicly traded wine company really is."

Next:

Canandaigua Brands

(CBRNA)

gets promo allowance sticker shock in its acquisition of

Simi Winery

.

Lewis Perdue is editor and publisher of

Wine Investment News. While Perdue does not hold any positions in any securities mentioned in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at

lperdue@ideaworx.com.