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July 1, 2024

Venturing into Vintages: The Economics of Starting a Winery in Pennsylvania

Entering the winery business in Pennsylvania is a venture that combines agriculture, manufacturing, and luxury goods marketing.

Venturing into Vintages: The Economics of Starting a Winery in Pennsylvania

As an experienced business leader with a firm grasp of finance, sales, and profit and loss management, stepping into the winery business might seem like treading new terroir. However, the fundamentals of starting a business remain the same—understand your market, manage your costs, ensure you can sell your product at a profit, find the most talented leaders, and team build at every opportunity. When it comes to starting a family-owned winery, that is additionally both woman-owned and veteran just outside of the Lehigh Valley of Pennsylvania that imports grapes from premier American Viticultural Areas (AVAs) like Washington, Oregon, and California, there are unique economic considerations to navigate. One of my favorite expressions is, “There are many ways to receive an education and few of them are cheap.” Here’s a breakdown of what potential investors and business enthusiasts should know, peppered with our experiences. 

Understanding the Market

First, I believe there are three (or more) distinct businesses rolled into a winery. There is an agricultural business related to growing grapes to the highest quality, the vineyard management, managing and training teams of laborers, and determining the best time for harvest. There is an entertainment business, hosting events, creating memorable occasions, and generally promoting fun. Finally, there is the business of making great wines. While we dabble in entertainment, our core mission and key business differentiator is in making great wines. Our winehouse is seeking refined consumers that may otherwise visit Sonoma, Napa, and France, convincing the Pennsylvania Dutch Country consumer that great wines, especially red wines, are close to home has been a challenge that our team of sommeliers readily undertake every weekend.

Pennsylvania’s wine market has been growing steadily, offering a promising environment for new wineries. However, importing premium grapes from renowned AVAs, to augment locally grown grapes, introduces both opportunities and challenges. On the one hand, these regions—known for their high-quality grapes—can provide a product that might exceed local offerings in quality. On the other hand, they come with higher costs, logistical complexities, and difficulties in sourcing. Our neighboring vineyard, Galen Glen Winery, has developed outstanding examples of the German varietals that Pennsylvania cultivates so well. Galen Glen Winery has also prepared the local customer base of dry wine lovers with an appreciate for the quality that finer wine craftsmanship can offer. Although a wine slushy will never make it onto our menu, we will ensure that your wine glass is always filled with sparkling wine made in the méthode champenoise or an all-natural wine showcasing how dynamic and alive this style can be, or our other fantastic selection of wines.

The key market opportunity here is to target wine enthusiasts who appreciate premium wines but may be looking for something new or different from the local vineyards. The unique selling proposition would be offering high-quality, distinctive wines that leverage the reputation of these well-known grape-producing regions. One of the main ways that we planned to distinguish ourselves was through winning prestigious awards. In becoming an award-winning winery, we leverage the reputation of the judges and the competition to convey to future customers that our wines are of distinguished quality, and that is recognized by industry experts. Once these awards are secured, the plan is to use this newfound credibility to expand our reach and customer base.

In the Washington style of collaboration and inclusiveness, we have become closer with owners and managers of other longer established Lehigh Valley wineries in Pennsylvania like Blue Mountain Vineyards, Clover Hill Vineyards & Winery, Vynecrest Vineyards & Winery, Black River Farms, Franklin Hill Vineyards, Tolino Vineyards, and Pinnacle Ridge Winery just to name a few.

The Cellar Beast winemaking team gets the machinery ready for processing the fall harvest.

Cost Considerations

1. Sourcing Grapes

Importing grapes from states like California, Oregon, and Washington is inherently more expensive than using local Pennsylvania grapes. Ever increasing transportation costs, risk of spoilage, import duties, and interstate commerce regulations add to the overall expense. Additionally, the price per ton of grapes from these prestigious AVAs can be significantly higher than local prices due to their superior quality and demand.

Many prestigious AVAs, like Willamette Valley and Red Mountain, invest substantially in marketing efforts to elevate the reputations of their region. Individual growers in these AVAs recognize that their collective success lies in only selling grapes to winemakers that will uphold these brand standards by producing award winning wines. Our winemaking team takes an annual trip to visit growers, cultivate relationships, beg for higher quantities of premium grapes, and moreover feel a sense of community with these hardworking viticulturists. We have been able to cultivate a great relationship with many of the wineries and vineyards in Washington to include Shaw Vineyards, Col Solare, L'Ecole Winery, Frichette Winery, Fidelitas Winery, and Gramercy Cellars.

At our Andreas facility we have acres of vineyards to make all-natural wines and experiment with the Pennsylvania growing climate.

2. Licensing and Regulations

Navigating the regulatory environment is crucial. This includes obtaining the necessary permits to start a winery from the PLCB to the TTB to the USDA. Training staff members to comply with PA’s RAMP certification process and developing then upholding the internal standards set for the safety of staff and customers is a substantial undertaking. The cost and time required to comply with these regulations need to be factored into the startup budget.

3. Facility and Equipment

Starting a winery requires significant investment in facilities and equipment. Even if the primary focus is on fermentation and production costs can be substantial. Equipment needed includes destemmers, fermenters, presses, storage tanks, bottling equipment, and temperature control systems. Leasing equipment or purchasing used equipment can help manage upfront costs.

The temptation is to overinvest early, the current equipment is never adequate and harvest season involves long hours that can always be shorten slightly more with capital investment. As cash is the lifeblood of any business, developing a strategy that accounts for adequate equipment at startup and incremental investment which balances investment efficiency with cash flow management.

4. Labor

Skilled wine makers and technicians (insert link to Meet the Team Page) will be essential to ensure the grapes are processed into high-quality wine. While Pennsylvania offers a growing pool of local talent in winemaking, the specific experience with grapes from premier AVAs and developing internationally award-winning wines is limited. Finding and retaining these wine makers is absolutely critical.

5. Marketing

The marketing strategy should leverage both direct-to-consumer sales and partnerships with high-end restaurants and specialty stores, aiming to attract a niche market willing to pay premium prices. Implementing robust digital marketing campaigns and establishing a compelling online presence will be crucial. Although the costs of creating brand awareness for premium wine in Pennsylvania may be high, a well-executed marketing and sales strategy can position the winery as a distinguished player in the national wine market, ideally yielding high returns on investment.

The Cellar Beast team raises brand awareness by attending local wine festivals.

Revenue Streams and Sales Strategy

1. Direct-to-Consumer Sales (Retail Sales)

This model can offer the highest margins, but carries the complexities of attracting customers. Sales strategies might include opening a tasting room, developing a wine club, and implementing a strong online sales platform. Given the quality and uniqueness of the wine, these strategies appeal to a niche market willing to pay premium prices.

The tasting room model is the cornerstone of this business, our team of sommeliers educate consumers in a fun and approachable manner. Education is the foundation of appreciating the nuances that separate fine wines from even finer wines, which ultimately reinforces the pricing premiums that world class wines command. Our goal is always to value our customers and create the best possible experiences with the backdrop of exquisite vintages. We operate a Lehigh Valley based wine bar in Easton and host larger parties and wine pairing dinner events in our Schuylkill Valley tasting room and production facility in Andreas, just outside of Jim Thorpe, both of which are included on formal and informal wine trails and wine tours. With food trucks to augment our Andreas food offerings of light appetizers and our participation in seasonal events throughout Lehigh County, Bucks County, Carbon County, and Schuylkill County, we look forward to filling your wine glass soon!

The next phase of DTC for us will be ecommerce. As the first phase of this expansion nears completion with the launch of our new website with the help of Yocum Technology Group (www.ytg.io), we plan to continue refinement of the site and optimize search engine optimization (SEO) for online wine sales. In the world of ever-changing SEO rules and privacy enhancements, there is no substitute for partnering with a world class marketing organization that guides non-marketers through this everchanging landscape. 

2. Restaurants and Specialty Stores (Commercial Sales)

Partnering with high-end restaurants and specialty wine stores can help place the product in front of consumers who appreciate premium wines. This requires building strong B2B relationships and possibly a dedicated sales team. My wife, Kim McCullough (kim@cellarbeastwine.com), heads this portion of our business and has been extremely successful in finding establishments with refined customers who appreciate the highest quality wines in Pennsylvania.

This partnership is valuable for both parties, our commercial sales program offers the customers’ staff training from our sommeliers (Level 3 and Level 4 Sommeliers from the Wine School of Philadelphia), access to premium products at attractive prices, links to their business websites from our (which enhances their SEO metrics), and most importantly creates a symbiotic marketing arrangement where both parties benefit from increased customer awareness.

3. Wholesale Distribution

Although this channel offers lower margins, it can achieve higher volumes. A robust distribution network can help penetrate various markets outside Pennsylvania, especially in states that already recognize the quality of grapes from Washington, Oregon, and California. Courting distribution partners is challenging and time consuming, then continually balancing the long-term stability of more consistent although lower margin sales with the production volumes desired.

In finance terms, this is referred to as managing the “mix”. With fixed output capacity, in order to achieve an overall contribution margin to fully absorb our fixed costs, we need to manage the volume of wine sold through channels with low margins in a way that maximizes our ability to saturate the higher margin retail market wine. 

Financial Projections and Profitability

Crafting a detailed business plan with realistic financial projections is critical. This should include startup costs, operational expenses, revenue projections, and cash flow analysis. Profitability will depend on the ability to manage the higher costs of imported grapes while maximizing the premium price points such wines can command. One largely overlooked aspect of even an otherwise robust financial model is working capital. This aspect involves the cash outlay between accounts receivable and accounts payable and in terms of inventory, both from a cash perspective and a space planning perspective. An entire blog post could be written about space management and implications on working capital.

Testing how the next vintage of Cabernet Sauvignon is aging in barrel.

Conclusion

Entering the winery business in the Lehigh Valley of Pennsylvania is a venture that combines the complexities of agriculture, manufacturing, and luxury goods marketing. For a business leader with no prior wine industry experience but deep expertise in finance and sales, the key will be leveraging business acumen to build a brand that can justify the premium costs associated with importing high-quality grapes. With meticulous planning and strategic execution, this venture not only promises an exciting entry into the world of wine but also the potential for fruitful returns. 

About Cellar Beast:

Our team of skilled wine makers and sommeliers curates an exceptional selection of dry wines that will transform your understanding of wine flavors available in Pennsylvania, sourced from top producers. Our wine campus, located just a few miles from the Lizard Creek Inn (lizardcreekinn.com) showcases a distinctive array of wines, especially French, distinguishing us in a region predominantly known for sweeter offerings. Participating in a tasting session with our award-winning crew is akin to attending an immersive wine class; it's an experience designed to excite your taste buds, enhance your scent recognition from primary to tertiary aromas, engage in blind tastings, and truly savor the distinctive wines marked by the Cellar Beast logo. Many of our wine lovers are inspired to further their wine education at the Wine School of Philadelphia (www.vinology.com). We also provide exclusive selections, including sparkling wines, to our wine club members, setting new standards for what you expect from a bottle of wine. Cellar Beast has achieved top honors, such as Double Golds and Best in Class, at numerous wine competitions, with ratings reaching up to 97 points.

Our intention is to build a community of industry professionals, please feel free to reach out to me with questions, potential collaboration and ideas at aaron@cellarbeastwine.com

Venturing into Vintages: The Economics of Starting a Winery in Pennsylvania

Aaron McCullough is a multifaceted professional with a diverse background spanning military service, engineering, and business.