Wine clubs should have two budget reports, because clubs (generally) don’t pay as many operating costs as the tasting room.
By Craig Root
First of all, I am a huge fan of wine clubs.
In addition to my role as a consultant and analyst for existing tasting rooms, I also help create them. I review designs with the architect, help create the business plan and pro forma, train staff — and, yes, create the wine club. I’ve helped create more than 90 tasting rooms, primarily in the United States but also China, France and Canada. All in all, I’ve created more than 150 clubs.
In every case, I’ve insisted (as much as a consultant can insist) that a wine club has to be ready to go on the tasting room’s first day of operation. I remember two owners who didn’t like clubs — thought they were pushy and fought me tooth-and-nail to not have a club. I eventually convinced them and, after 2 years, they were extremely grateful for my insistence. After 5 years, they were thrilled with the money the club was making. As I often say to clients, “Wine clubs: that’s where the money is in the tasting room business.”
Wine club benefits
Wine clubs promote brand loyalty and encourage visitation, and club members are opinion shapers for your brand among their friends, relatives, neighbors and other close affiliations. There are also plenty of other positive attributes with wine clubs.
Don’t forget the lifetime value of clubs. Most people stay in clubs longer than two years but let’s be conservative. What is the average shipment cost times two years? Generally, lifetime value is around $1,000 to $2,000 (a very conservative estimate) depending on your bottle costs and location.
Suppose you host an event for the general public. After you pay all your expenses you make a net profit of $5,000. But you also had a special visible area that was separate and featured some special treats. Consider this scenario:
Visitor: “What’s going on over there?”
Staff member: “That’s our wine club area. They are tasting artisan cheeses with their wine or older vintages. You can join them if you wish to join the club.”
As a result, you sign 10 people into the club with a lifetime value of $1,000 each (again, that’s very conservative). Now, instead of a net profit of $5,000 you have a potential profit of $15,000. Yes I know that is over the course of 2 years — and it’s gross not net — but you can’t deny the club’s worth.
So why do I say clubs net figures are overblown? Quite simply, because clubs (generally) don’t pay as many operating costs as the tasting room.
Budget disparities
The vast majority of wine club sign-ups in a tasting room are not created by the club manager, they are created by the tasting room staff. But does the wine club pay any of the labor costs (besides the club manager’s salary)? In my experience, the answer is no. Imagine you had a business and you got free labor: do you think that would improve your net? Absolutely.
How about the tasting room facility itself? What if you got free rent, utilities, maintenance and other costly line items at no charge. Again, you would be overjoyed. How about promotions and advertising to drive quality attendance: think those are free?
They aren’t to the tasting room manager’s budget, but they sure are for the wine club budget.
When I see industry folks talking about margins of 40, 50 or even 60% for clubs, I think those numbers are not accurate. I even use nets of 30 to 40% because the vast majority of clubs I work with don’t pay for all the items they receive.
Their fair share
So what is the point? I think clubs should have two budget reports. One report is without the club paying for all the services they receive for free and the second would show what their net is when costs are included. Conversely, the tasting room should have two budgets. Again, one would show what the tasting room net would be if the club paid for the services it receives for free.
But what formula do you use to divvy up the revenue? My formula is this: if the club is 40% of the gross for the entire tasting room, then the club’s master budget should pay 40% of tasting room expenses that are relevant to the club operation (such as the few I’ve just enumerated).
Clearly, this is something your finance people need to deliberate. I haven’t had much occasion to use the formula because only a very small handful of wineries I work with have been willing to look at their business this way.
All I’m saying is, this fiscal anomaly deserves more scrutiny.
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Craig Root
Craig Root has more than 30 years experience working with tasting rooms. For over 13 years he was first staff and then a successful manager. For the last 20 years he has consulted with over 150 tasting rooms including over 90 start ups mostly in the U.S. but also in China, Canada, and France. He is the only person who lectures on tasting room design and management at UC Davis in its continuing and professional development division.
