Shortage of Cash: the Wine Industry's Biggest Problem. And How to Solve it.

Wine industry margins are often too low, but even profitable businesses struggle to cover the costs of maturing wine. Especially when something goes wrong. Maybe it's time to turn to brewing?

Image: Robert Joseph / Midjourney AI

Cash: the four-letter C-word word that helps to explain why the wine industry is simultaneously so unattractive to brewers, distillers and venture capitalists, and potentially so appealing to private equity.

The topic came up at the recent Global Tech Weekend in Tbilisi at which I was a speaker (OK, I know what you’re wondering; I’ll get back to it) where potential investors had flown from the US and elsewhere to meet local and non-Georgian candidates who were pitching a bewildering range of fledgling businesses. Many, naturally, involved AI, and quite a few, equally inevitably, required an understanding of crypto.

Why not wine?

When I asked some of these men and women what was wrong with the wine business, even in California, close to many of their homes and businesses in San Francisco and Silicon Valley, they brought up the same problem I had heard from people at companies like Diageo and Pernod Ricard that have, over the years, exited from the wine sector after trying it out. The issue for all of them is the amount of capital that’s tied up at any time, both in land and, often more significantly, stock. And the poor return on investment and capital with which this is associated.

Return on capital. The brewers look weak on return-on-capital, but that's largely because AB InBev and Molson Coors carry enormous goodwill from mega-mergers (SABMiller, MillerCoors) that inflates the capital base; the underlying beer economics are far healthier than 6–7% suggests. Brown-Forman, which grew mostly organically, shows what clean drinks capital returns look like at around 17%. The wine signal is the honest one: Treasury's premium-skewed management ROCE of roughly 10% barely clears its ~8% cost of capital even before impairments, and the statutory return went negative once the commercial brands were written down.

Once one strips away all the romance associated with wine, ultimately it’s a business that has to provide sufficient return on the capital that is invested in it. And that calculation is based around a combination of margins and time.

Beer and white spirits can be produced on command and, as Adrian Bridge of port-producers Taylor Fladgate wrily told me me, aged “on the bottling line”. Beer can be on sale within weeks of being brewed (far less in the case of microbreweries) but even unoaked white wine and rosé take significantly longer, and red and sparkling wine, a veritable age.

Predictably unpredictable problems

And this is when everything is working well. Unpredictable harvest sizes, cancelled orders, tariffs, pandemics and wars simply exacerbate the problem. And, every year, regular as clockwork, those vines keep having babies that have to be processed and financed until the wine they’ve produced has been bought and paid for.

Brewers don’t make a huge margin on their ales, lagers and stouts but, as I’ve said, they don’t have to wait very long for their money. Makers of whisk(e)y, fortified wines, Champagne and other premium sparkling wines, by contrast, have to be far more patient, but are often rewarded by the high prices they can charge.