These five accounting leaders in the North Bay wine industry answer our questions about regulations, challenges and the future of their business.
Answers have been edited for space and clarity.
What has changed most in your industry in the past two years?
Timothy Allen: We still see consolidation creating a challenge for our wine clients and wine distribution. It continues to become harder to get attention from the wine trade or the consumer. When the wine industry is challenged, the wine accounting industry is challenged.
Wine sales are down this year and last, both distribution and direct to consumer. Tourism to Napa / Sonoma has decreased, which some attribute to the state of of San Francisco, the hub of travel to our region. Younger consumers are drinking less alcohol, replaced by cannabis or simply choices they deem to be more healthy. Now, more than ever, it is critically important that every winery understands its cost accounting, sales margins and cash flow forecast.
Guy Carl: Many wineries are experiencing challenges in maintaining sales volume in the post-pandemic marketplace. On-site winery visitation traffic has declined, so they are needing to find new and creative ways of connecting with their DTC customers. The wholesale channel has been inconsistent but there are opportunities to be found.
In the Napa Valley in particular, the past two years involved navigating the smoke-tainted perception of the 2020 vintage. Many brands skipped that vintage entirely, creating cash flow concerns. The subsequent vintages have been touted as very excellent quality, which has helped with the recovery.
Jon P. Dal Poggetto: The past two years have seen the same cyclical decline in winery profitability that seems to occur roughly every 10 to 13 years in the wine industry. The current expectation is that conditions will improve in 2025 and into 2026.
Dave Dillwood: The effect of the worldwide reduction in demand for table wine has had widespread impacts on the industry, from the publicly owned winery businesses to the smallest wineries. Inflation has had a significant impact on costs, while the soft demand has made it difficult to keep up with the rising costs of doing business.
It has become very difficult for smaller wineries to find buyers if they want to retire and do not have a successor. The strongest players in the industry will be able to survive the current shake out, but it is going to be difficult for highly leveraged wine businesses to continue operations without significant investments of capital.
James Elliott: DTC sales growth is facing headwinds as customers have full cellars and seem to be more reticent to buy in the same quantities they did during the pandemic.
Are there any new tax laws, regulations or decisions that make it more challenging this year?
Timothy Allen: There are a handful of tax laws that are wine industry specific which may benefit the winery taxpayer, including the $25M cash basis ceiling, the pass-through entity deduction, and AVA intangible asset amortization. While we see new tax laws frequently, many of those do not have a large impact on winery tax.
Guy Carl: By far the most challenging income tax law change has been the requirement beginning in 2022 for wineries to capitalize all research & development costs, which had always been allowed as an immediate deduction in the past.
Congress has admitted that it never intended for this requirement to go into effect, and they have been promising for three years that they would rescind or delay the requirement. However, no agreement ever came to pass so wineries have been stuck with unexpected income tax liabilities. As an example, a winery with annual revenues of $10M could expect to owe an additional $1.5M in income tax during the initial years of this requirement. The current tax law regime is set to expire at the end of 2025, so we are expecting this to sunset.
Dave Dillwood: There is concern that the upcoming rules requiring “subscription services” to make it easier to terminate their subscriptions could have a significant detrimental impact on Wine Club memberships and the resulting sales.
The rules, while not directly targeting Wine Clubs in particular, could result in more cancellations. Wine Club sales have remained as a strong point in the sales function, especially for small to mid-sized wineries. There will also be costs associated with altering websites and communications to conform to the new rules, unless changes are made before the new rules become effective.
James Elliott: Clients are very interested in taking advantage of the provisions in the Inflation Reduction Act for renewable energy. On the other hand, the upcoming sunsetting of the 2017 Tax Cuts and Jobs Act has many of our clients in a holding pattern regarding long term investments.
Where do you see the industry trying the most to trim costs? What trade-offs are involved?
Timothy Allen: With wine industry sales declining, it’s more important than ever for a winery to be mindful of expenses. AWG relies on overseas labor for some of the more basic accounting transactions, which provides a tremendous cost / benefit. Additionally, AWG and other accounting firms are always looking for ways to improve technology and automate services to help with efficiencies and costs.
Guy Carl: There is a lot of pressure right now on packaging materials, both from the cost perspective as well as the environmental impact. Many are trending toward materials that are less expensive and lower in shipping weight. The jury is still out on how consumers will feel about this change, whether it will affect their perception of the wine’s quality, and whether this feeling might be mitigated by the improved carbon score.
Jon P. Dal Poggetto: While cost control is important, the industry is mostly trying to achieve better margins through price increases to offset the increases in production costs that are not controllable in the short term. This is leading to reduced sales in 2023 and 2024 compared to earlier years.
James Elliott: Clients are looking to right size inventories to current market demand as well as looking to evaluate the ROI on most spending categories. The concern is if they over reduce their inventory for the current 2024 harvest they may end up not having sufficient product if the market rebounds faster than anticipated.
Copyright for syndicated content belongs to the linked Source link
