Rules of the Road for Social Media Advertising, Influencers and Wine Brand Owners

By: Louis J. Terminello, Esq. and Brad Berkman, Esq.

The COVID-19 pandemic has had a profound impact on the world of beverage alcohol. As the reader knows, e-commerce sales of all alcoholic beverages, and especially wine, have grown exponentially. The reliance by the consumer on their computer is resulting in a war of attrition against the three-tier system, the legal doctrine of Tied-House and trade practice concerns.

  One significant and deeply affected business sphere is how marketers are using technology to create brand awareness. Clearly, the beverage alcohol advertising landscape is in a state of flux and change. The internet and social media, in particular, have had a profound impact on virtually all consumer goods but it seems that the boundaries of acceptable alcohol advertising are being expanded outward. More significantly, the impact of the ‘influencer’ in the alcohol sphere has become an important marketing tool for raising brand awareness and driving case sales. A simple search on YouTube will quickly reveal innumerable posts and videos on the effective use of social media and the influencer to promote wine brand awareness.

  In the world of wine, there is room for influencers at all levels. Although in different forms, past practice supports this contention. There is little difference to the wine marketer between wine writers of the past and the videographer of the present. Whether it be number of points given by Parker, or the number of followers of an influencer, the goal is to raise brand awareness and ultimately move boxes. Obviously, certain categories of influencers will be used to advertise and market high-priced single varietals or a unique Meritage. Lower priced, broad market and perhaps younger focused labels require a different type of influencer.  However, the use of an influencer and the commensurate social media campaign, if not properly designed and executed, could be perilous for the brand owner.

  The purpose of this article is to provide the wine marketer who may be considering the use of influencers with the basic guidance for the effective use of the “influencer” and social media in order to withstand the scrutiny of alcohol regulatory authorities.

TTB and the FTC

  The Alcohol and Tobacco Tax and Trade Bureau (“TTB”) promulgates rules for compliant labeling, advertising, and related trade practice matters. State(s) alcohol control boards possess the authority to promulgate and enforce their own similar rules within their borders.  The regulatory agencies are certainly known to the reader. There is another federal agency, less known to those in the industry, called the Federal Trade Commission (“FTC”), which the wine marketer should be aware of.

  The FTC is an independent agency within the federal government that is tasked with, in its own words, “…protecting consumers and competition by preventing anticompetitive, deceptive, and unfair business practices through law enforcement, advocacy, and education without unduly burdening legitimate business activity.” The FTC has stated publicly that it has the authority and ability to enforce alcohol advertising rules on various media including the social media and the use of influencers.

Trade Associations

  Historically, alcohol beverage producers self-regulated their advertising initiatives by adhering to the guidelines of three (3) influential producer associations. Those associations are: 1) The Beer Institute; 2) The Wine Institute and: 3) Distilled Spirts Council of the United States or DISCUS.

All three associations have published guidelines for brand owners of each commodity to follow as minimal industry standards.

  The FTC has adopted these rules and advises that alcohol advertisers should comply with these standards. The FTC has openly stated it can file enforcement actions against brand owners that disregard the adopted standards. It is important to note that to date, the FTC has not often enforced these rules through administrative action. Given the changing nature of advertising and the “pushing of the envelope” by young influencers of acceptable standards it is wise to be familiar with them and work to be sure they are complied with.

  The main concern of the FTC is advertising that is intentionally or inadvertently directed to underage consumers and where the content of the advertisement may be of particular appeal to the underage drinker. Since this is a wine focused publication, we direct the reader to the short list below taken from the Wine Institute, which outlines best and responsible practices. Note that this is not a complete list, but highlights the most significant factors to bear in mind when constructing advertising content and in particular, overseeing the content of influencers broadcast on social media platforms.

Responsible Content

  Wine advertising shall not depict or describe in its advertising:

•    The consumption of wine for the effects the alcohol may produce.

•    Direct or indirect reference to alcohol content or extra strength.

•    Excessive drinking or persons who appear to be intoxicated or to be inappropriately uninhibited.

•    Any suggestion that excessive drinking or loss of control is amusing or a proper subject for amusement.

•    Any persons engaged in activities not normally associated with the moderate and responsible use of wine and a responsible lifestyle. Association of wine use in conjunction with feats of daring or activities requiring high degree of skill is specifically prohibited.

•    Wine in quantities inappropriate to the situation or inappropriate for moderate and responsible use.

•    Wine advertising should not depict or encourage illegal activity of any kind.

•    Wine shall not be presented as being essential to personal performance, social attainment, achievement, success, or wealth.

•    The use of wine shall not be directly associated with social, physical, or personal problem solving.

•    Wine shall not be presented as vital to social acceptability and popularity.

•    It shall not be suggested that wine is crucial for successful entertaining.

•    Wine advertisers should not Show models and personalities as wine consumers in advertisements who are or appear to be under the legal drinking age. Such models shall be 25 years of age or older.

•    Use music, language, gestures, cartoon characters, or depictions, images, figures, or objects that are popular predominantly with children or otherwise specifically associated with or directed toward those below the legal drinking age, including the use of Santa Claus or the Easter Bunny.

•    Be presented as being related to the attainment of adulthood or associated with “rites of passage” to adulthood.

•    Wine advertising shall in no way suggest that wine be used in connection with operating motorized vehicles such as automobiles, motorcycles, boats, snowmobiles, or airplanes or any activities that require a high degree of alertness or physical coordination.

•    Comparative advertising claims shall be truthful and appropriately substantiated and shall not be disparaging of a competitor’s product.

•    Wine advertising shall not degrade, demean, or objectify the human form, image or status of women, men, or of any ethnic, minority, religious or other group or sexual orientation. Advertising shall not exploit the human form, or feature sexually provocative images.

  It is important to point out that the three essential elements of brand advertising incorporated into the Wine Institute, Beer Institute and DISCUS rules, which are designed to ensure that a particular brand does not appeal to underage consumers, are:

•    No more than 28.4% of an audience for an advertisement is to consist of people under 21 years of age.

•    Content of the advertisement should appeal to individuals over 21 years of age-conversely; content should not appeal to individuals under 21 years of age.

•    Models and Actors employed should be older than 25 years of age and reasonably appear to be over 21 years of age.

  When deciding on whether to partner with an influencer, wine marketers should scrutinize the past content of the influencer as well as thoroughly analyzing the demographics of the influencers target audience.

  Although the Wine Institute is silent on this issue, the DISCUS rules state that the 25 year old threshold for models and actors does not apply to athletes, celebrities, spokespersons and influencers of legal drinking purchase age that are generally recognizable to their intended audience (see Code of Responsible Practices Distilled Spirits Council of the United Sates). The influencer does not necessarily have to be older than 25 years of age.

  Beverage alcohol manufacturing, production, taxation, Tied-House, and related regulatory matters are complex. Trade practice and advertising rules, standing alone are also detailed and complex. As this article suggests, the internet, social media, and the influencer are acting as disrupters of an orthodox system of doing business. Of course, the new media and the new media stars offer tremendous opportunities to raise brand awareness that translates to more sales. The best advice here is be aware of acceptable and self-imposed industry standards and make them part of an effective social and influencer media driven campaign. The FTC is poised to enforce these regulations and likely will do so the more and more influencers test the acceptable limits of alcohol beverage advertising. As wine brand marketers, strive for compliance to stay off the radar of the regulatory authorities. To do otherwise, could be costly.

Preparing for the Exit: Why Winery Owners Need to Develop a Harvest Strategy

By: Edward Webb, Partner, BPM & Kemp Moyer, Partner, BPM

Successfully running a business means overcoming numerous challenges. Owners need to scale the business, find competent employees, deal with regulatory issues like taxes and licenses, and create processes and systems — all while developing a robust customer base and go-to market strategy. For agribusinesses, owners have all these challenges plus whatever Mother Nature decides to throw at them. For California’s wine industry, this includes increasingly unpredictable variables such as drought, flooding, landslide, excessive heat, cold snaps, pests, and the growing risk of wildfires and damage from smoke taint.

  Despite these challenges, several successful business models predominate in California’s wine sector. There are fully integrated vintners that grow their own grapes, ferment them into wine, bottle them, and sell and market the finished product. Some winemakers do not own vineyards and, instead, purchase grapes from various growers before bottling and going to market. Finally, there are virtual wineries that buy completed wine and sell it under a brand name. Each models bring its own unique challenges and opportunities.

  While a few large producers dominate the state’s wine sector, most businesses are family-owned and operated. This can lead to a new and significant challenge: What happens when the owner wants to retire and either hand over or sell the business? When you include a force like a once-in-a-century pandemic, you can understand why many baby boomers — about 10,000 of whom turn 65 every single day — might be looking at an exit strategy right now. But, as you might imagine, exits can be more complicated than just a simple sale when a family is involved.

Planning is Essential

  First and foremost, an owner should start planning a “harvest strategy” well before they are ready to pull the trigger. To paraphrase Benjamin Franklin, failing to prepare is preparing to fail. A harvest strategy is a much more detailed plan than a “kitchen table” document.  It goes into great detail on the owner’s goals when they will exit the businesses. It tells the financial and operating story that the next owners need to know. It does not hurt that after more than a decade of quantitative easing, historically low-interest rates and a multi-trillion dollar government spending plan, there is plenty of cash in the system fueling record M&A activity.

  There are various factors that need to be considered in a well-constructed harvest strategy, and it is essential that these succession plans are communicated to all stakeholders, both in the family and with the company’s vital employees or managers. Talking things through will illuminate potential pitfalls, such as the owner’s children not wanting to continue with the business or being unprepared to take on potentially substantial operational challenges. Key employees might want to purchase the operation or refuse to continue working with a new owner. Understanding these dynamics will help when it is time to put the plan in motion and limit any unpleasant surprises. Planning ahead may also allow time to employ tax mitigation strategies.

  The harvest strategy provides detailed instructions on how the business is managed, including all the different procedures and systems used in the business. This document becomes increasingly vital as owners age because of life’s unpredictable nature. An owner could become incapacitated or worse, and the company might not survive without their critical knowledge. Owners should revisit the harvest strategy frequently for updates. Plans made today could be vastly different in five or ten years.

Understanding Value

  Regardless of what an owner chooses — either handing over the business to their children or selling it to someone else — any transaction requires the company to have a fair market valuation. Federal and state tax authorities will demand it, so selling the business to family for a dollar will not work. This valuation will look at all aspects of the company to determine its worth, including its financial performance, assets, inventory, real estate holdings and even the brand’s value. Qualified appraisers are the professionals that will undertake this task and will use different techniques and methods for the equity and/or underlying assets. Sellers should note that having a valuation supported by a third party can help minimize pitfalls during deals, like overvaluing an asset, which can cause potential buyers to walk away or not engage in negotiations.

  Appraisers can use a few different methods to calculate the value of the company’s real estate holdings. However, putting a price on a business is more nuanced than selling a single-family home. A typical technique would be to look at comparable sales of similar properties in that area and base the valuation on the transaction price. This method would take things like the size of the property into account, but not necessarily the cash flow potential of operations, including the production of grapevines.

  The value of the land and the grapevines depend on several factors, ranging from the variety of the plant, age of the vineyard, plant density, production per acre, and the presence of pests like vine mealybugs (VMB) and Virginia Creeper Leafhoppers or diseases like Grapevine Leaf Roll. Other improvements to the land will affect its price, including trellis systems, irrigation and frost protection systems. An appraiser might estimate the fair market value for this asset by calculating how much revenue the land generates based on projected demand, grape price trends, and the yield the land produces. A discounted cash-flow analysis could also be used to factor in variables like projected cash flows, industry cycles and general economic trends. Of course, an appraiser could use a combination of all these methods to determine the asset’s value.

Brand Awareness

  One asset that could be harder to put a value on is the company’s brand. It is an intangible that could be worth more than all of the physical property and inventory of the company. There are three methods to determine a brand’s value, and they are sometimes used together.

•    The first is to calculate the replacement cost of the brand. Basically, this involves formulating how much time and money it would take to re-create the brand from scratch, which are divided into three subsections:

      Brand Identity: Covers all items used to create and develop the brand’s identity, including the name, designing the logo, novel bottle designs, trademark and legal fees, websites and choosing a color palette.

      Brand Awareness: The cost of advertising, promotion and publicity campaigns for the brand to achieve its current level of market awareness.

      Market Position: This is the cost of retaining the business’s current clientele and includes advertising, discounting with distributors, and building relationships with retailers.

•    The second is comparable pricing. This method requires researching the sale of similar brands and using that as the foundation for a valuation. This can be a challenge if there are little or no sales of similar assets.

•    The third and final method is an income-based approach, also known as an “in-use” approach. This involves calculating the future earnings that can be directly tied to the brand to determine its value. The formula looks at everything from income to cash flow to cost savings generated from the brand.

Sell High

  If a winery owner’s family is not interested in maintaining the business, selling is the other option. The sale could be to an industry peer, a current employee, a high-net-worth individual or even a private equity fund. However, certain factors go into the sale and the final price beyond the valuation process discussed earlier.

  Any potential buyer is looking for the ability to generate future cash flow. Operating a winery takes leadership with specialized education and experience. This knowledge includes how to grow and harvest grapes, the manufacturing process, as well as storage of the wine. If the sale is to anyone but an industry peer or employee, this can hobble a deal or result in a lower sales price. As mentioned earlier, having a detailed manual on how to operate the business can help reduce transition issues that may impact price, but locking down an expert to assist with a sale can be essential to getting the maximum return in a sale.

Distressed Resolutions

  All the information above is based on the orderly sale or transfer of the business at a fair market value. That means there is a willing seller and a willing buyer. However, the price could be much lower in a scenario where the owner is forced to sell or liquidate, either through bankruptcy, the sudden death of key people, or litigation. In these situations, engaging an experienced restructuring professional is essential.  Navigating a distressed situation is difficult, doubly so when the business is yours.

  There are multiple variables for owners to consider and plan for as they create their harvest strategy. Being prepared for this transition will help them avoid costly mistakes or address issues early enough in the process to make them non-factors. This planning is essential to maximizing the value of their business. Owners contemplating making this transition would be wise to start the process and create their harvest strategy today.

Edward Webb has over 35 years of experience in consulting and financial management, including specific experience in business restructuring and leadership advisory services. Edward has a Doctorate in Business Administration and currently leads the Corporate Finance Consulting group at BPM, one of the 50 largest public accounting and advisory firms in the country, where he sits on the firm’s Management Committee.

With more than 15 years of experience in complex financial advisory, and a primary focus on valuation services, Kemp Moyer has led hundreds of business and asset valuations in his career with substantial industry experience in technology, life science, professional services, food and beverage, digital assets, manufacturing, and consumer business, among others. A partner in BPM’s Advisory practice and head of the firm’s Valuation team, Kemp’s valuation experience includes M&A and IPO preparation and support, fairness and solvency opinions, and litigation support and dispute resolution, among other high impact analyses.

Non-Fungible Tokens The Continued Evolution of Blockchain Use

A non-fungible token (NFT) is an original, autochthonous asset of value that cannot be replaced with an identical asset. An NFT has a unique, traceable print that has the capability to take on disparate forms and fluctuating values based on market or other forces for trade in a monetary or financial transaction.

NFT’s are specific units of data stored in a digitized blockchain, usually for the purpose of covert exchange between parties. Because an NFT has a unique digitized signature, it is nigh impossible to replicate but easy to assign value as agreed upon between parties (buyer and seller) using a “smart contract” as the agreement vehicle.

For example, an artist may digitally create an image authenticating it using blockchain. However, when purchase of an NFT does not necessarily convey the bundle of legal rights generally associated with ownership of a physical or digital item – it instead conveys ownership of a unique token identifier associated with that NFT. The token identifier is unique but traceable and stored in a public database that serves as a ledger. Anyone can verify data regarding the image: who created it and when, ownership, tracing ownership, etc. This is a secure transaction because the authentication marker as part of the blockchain cannot be copied. It is digitally secure and digitally traceable to the source.

Digital art, a cartoon, a memory collage-like tokenized collectibles, a pair of gym shoes, an important tweet can be sold as NFT’s through the blockchain. The ability to use NFT’s as a method of payment and smart contracts as a contracting vehicle allows anyone who understands the technology or at least understands this digital process to buy and sell worldwide in a secure, traceable environment. The first NTF transaction happened in 2014 with a tradable blockchain marker affixed to the digital artwork.  In the first quarter of 2021, over 200M was spent on NFT’s using online platforms.

Smart contracts, blockchain technology, and NFT’s are the trading blocks to be used in place of traditional contractual vehicles and hard currency. Understanding how this technology works will help clients avoid being taken advantage of by an unscrupulous contracting partner or running afoul of tax, ethics, and other regulatory compliance requirements. Blockchain and NFT’s are here to stay.

Dan has practiced law in Silicon Valley since 1977. The Firm’s practice is limited to regulatory law, government contract law, and international trade law matters. Dan has received the prestigious “Silicon Valley Service Provider of the Year” award as voted by influential attorneys in Silicon Valley.

He has represented many very large global companies and he has worked on the massive US Government SETI (Search for Extra Terrestrial Intelligence) project as well as FOEKE (worldwide nuclear plant design certification), the Olympic Games, the first Obama town hall worldwide webinar, among other leading worldwide projects.

Dan has lectured to the World Trade Association, has taught law for UCLA, Santa Clara University Law School and their MBA program, lectured to the NPMA at Stanford University, and for the University of Texas School of Law.

Dan has lectured to various National and regional attorney associations about Government contract and international trade law matters. He has provided input to the US Government regarding the structure of regulations relating to encryption (cybersecurity). He has been interviewed about international law by the Washington Post, Reuters and other newspapers.

He is the author of four books unrelated to law, one of which was a best seller for the publisher, and of dozens of legal articles published in periodicals, technical and university journals distributed throughout the world. He serves as an expert witness in United States Federal Court regarding his area of expertise.  

MINUTILLO’s e-newsletter and all of its content is provided for information and very general purposes only. It is not intended to provide or offer any specific or general legal advice, or to create an attorney-client relationship. Before acting or relying on any information provided in this e-newsletter, consult an attorney who is an expert in the appropriate field of law. 

Don’t “Blow Off” Cybersecurity

By: Mark Sangster, Vice President and Industry Security Strategist, eSentire

Martin Luther, the famous German theologian and religious reformer, is credited with saying “Beer is made by men, wine by God.” Had he lived another 475 years, he likely would have added that “Cybercrime is made by the Devil.”  And, he wouldn’t have been too far off.

  Cybercrime is insidious: It knows no borders and as we’ve seen, knows no bounds. In fact, a report from Cybersecurity Ventures predicted that the global cost of cybercrime will reach $6 trillion USD this year. According to the 2019 Cost of Cybercrime study by Accenture and the Ponemon Institute, the average cost of cybercrime to a U.S. organization was $13 million — a significant sum. And, a report from my own company eSentire found that cybercriminals netted more than $45 million in the first four months of 2021 alone. But before you start thinking that means cybercriminals only go after the big guys, consider the fact that it’s small and medium-sized businesses (SMB) that are the primary targets for data breaches (Data Breach Investigation Report, Verizon 2020).

  To be sure, there are threat actors that are out to make trouble, whether it’s disrupting critical fuel pipelines or, like the modern-day equivalent of sleeper agents, quietly accessing classified systems to gather top-secret information or cripple it at a later date. However, what most companies encounter comes as the result of unadulterated greed from a run-of-the-mill cyber crook. Just like your average street criminal, these people attack businesses because that’s where the money is. And like it or not, SMBs, such as family-run wineries and vineyards, make for low-hanging fruit. Cyber attacks on the wine, spirits and beer industry have ramped up in the past year including hits on Brown-Forman, E & J Gallo Winery, Molson Coors, and the Campari Group.

The Earth Is Mine. (What About Your Network?)

  On the one hand, it’s a brave new world for the farming and production aspects of winemaking, thanks to automation advances. But on the other hand, a great deal of manual labor is involved, and despite advances, the wine industry is still considered very much old-school, lagging behind other industries when it comes to the use of technology.

  When you consider the production process from grape to glass, some of the greatest risk of cyber exposure lies on the farming side. Growing the perfect grape comes with a lot of moving parts, and like other production businesses, enterprise resource planning (ERP) systems are in place to track a variety of processes, from what pesticide was applied on which date,  to the costs involved, etc. Whereas how these things are tracked will vary from vineyard to vineyard, the common denominator is that in most cases the people interacting with these systems are predominantly field workers who might not be the most tech-savvy. Add to this the fact that many front-line remote systems are loosely managed and run on personal field laptops or mobile devices, and you have an ideal attack vector.

  Regardless of whether you are operating a small, family-run vineyard or have a large-scale wine operation, you face an even greater risk each time you sit down at your desk. The vast majority of cyberattacks begin with malware, typically embedded in an attachment sent with a seemingly innocuous email. Maybe it’s an invoice from a distributor you work with, maybe it’s your bookkeeper asking you to review a document, or maybe it’s a complete stranger, hoping you’ll slip up, open his attachment, and launch a malware script that will encrypt your data until you give in to his demands.

  While unsecured computer systems and mobile devices are common attack vectors, it’s safe to assume that as your operation grows, so too does your attack surface. Now wine operations have barcoded, inventory-tracking devices that are used on a remote workflow in the field. That information is fed into a central ERP system that’s tied to another automation system, and so on throughout the production process, as tank temperatures and acidity levels are monitored. Then, too, consider the controls that regulate humidity levels inside a facility or the transfer of wine from tank to tank. Any and all of these systems can be tampered with and if they are, it can negatively affect the end product and your business.

Data, Decanted

  Outside the confines of your vineyard or winery lie even further risks. Supply chains are attractive targets not just for the information they hold but the damage they can inflict if disrupted. Distributors, especially smaller ones, often track depletions manually and share updates via email. Consider the example of a small warehouse in Kansas City that might have 20 pallets of your wine and little to no security solutions in place and then consider how quickly a threat vector could spread via a spreadsheet attachment.

  On the retail side of wine operations, both on- and off-premise operations, offer up other strike zones. Each of these channels has its own supply and inventory management systems that track activity all the way out to individual shops, bars, and restaurants, which again, may or may not have the strongest security posture.

  Nor can you overlook the direct-to-consumer aspect. Customer relationship management(CRM) systems that are used to manage your wine club or market tasting events hold a wealth of personal information, not to mention credit card numbers. They’re gold mines for those looking to sell that information on the Dark Web for a tidy profit and scarily enough, you might never know you’ve been compromised.

Just Enough Rain to Stress the Vine: A walk in the cloud(s)

  In the face of myriad risk and attack vectors, it’s tempting to take the path of least resistance, and send up a prayer that you’ll be among the lucky ones to not suffer a cyber breach. But in today’s climate, that’s risking a lot more than bottle shock. Companies today, regardless of their size or industry, need to assume that it’s not a matter of if they will be targeted by cyber crime, but when. Depending on your size and budget, running a full-scale Security Operations Center might not be in the cards, but there are steps you should be taking to protect your business today and in the future:

●    Suspicious emails should trigger the same reaction as a wine that’s corked. Avoid it at all costs. Phishing emails are a popular attack vector, and unless you know what to look for (and how), you are putting yourself and your company at risk each and every day. Educate your staff on what to look for and make sure that whatever training they receive is specific to the vineyard/wine industry. People like to think they won’t fall for the “Congratulations! You’re a winner” emails, but are they prepared to investigate those emails from your attorney or best vendor? Additionally, you should ensure that your department systems are segmented, preferably using the principles of Zero Trust. That way, if one person accidentally opens a malicious email, they won’t be granting a hacker access to the whole system.

●    Maintain Security Hygiene: Network systems need to be maintained and cared for just as you would oak barrels. Security  hygiene is a critical component of cybersecurity and at the very least should include:

1.   Regularly patch and update your software You’d be surprised at the number of breaches that could have been avoided simply by keeping software systems patched and up-to-date. It’s estimated that a third of all data breaches come as a result of unpatched vulnerabilities when patches were available. (Looking at you, Equifax).

2.   Two-Factor Authentication Is a MUST . Make sure to implement two-factor authentication around all of your company’s key software applications and systems, providing an additional layer of security. Never, ever reuse passwords across accounts or devices, and if your budget allows, implement solutions that employ a Software Defined Perimeter (SDP) approach. Be aware, however, that while these solutions offer advanced security, because they are more complex they are costlier; plus, there are the added costs associated with hiring staff who have the proper expertise to manage them.

3.   Operate on a need-to-know-basis. In general, it’s a good idea to limit the amount of network access your employees have — compromised accounts can be used to create shadow employee accounts which in turn can be used to move around a network. It’s especially important that top-level executives and owners aren’t given the full set of keys to the kingdom just because they’re the boss. Senior-level employees and owners are prime targets for cybercriminals looking for ways to infiltrate a system and move around with impunity. Someone might ask why your front-desk staff is nosing around a payroll system, but no one will question the boss.

4.   Virtual private networks (VPN) are more than a good idea. They provide secure and encrypted connections between systems (files shares, email servers, etc.) and ensure that your communications can’t be intercepted.

5.   Lock down your operational technology (OT) systems and ensure that they are not left internet-facing.

●   Automation technology is complicated and protecting it, even more so. You can’t assume that everyone further down the supply chain is taking a serious approach to cybersecurity or even knows where to start. It’s incumbent on you to protect your business, so talk to the experts. Be sure to talk with your insurance providers, legal team and other key vendors to ensure you have a plan in place for when the inevitable happens.

Something to Think About

  Too often, companies fail to adequately protect themselves against cybercrime, because they are laboring under a trifecta of misconceptions:

●   “We’re not a bank or even a household brand name so we aren’t a target.” This is a prime example of absolutist thinking and the harm it can cause. To the thief, even the poorest person has something worth stealing.

●   “We could never defend ourselves against massive ransomware gangs and state-sponsored actors so why even try?” When it comes to the average cybercriminal, Thomas Crowne they are not. That said, there’s no reason to stand up when the bullets are flying. By carrying out basic cyber protections you can reduce your risk by up to 80 percent.

●   “We never saw it coming.” In the world of cybersecurity, by the time you see the red flag, it’s too late. Heed the little signs. They won’t all pan out to be cyber attacks, but when things go bump in the cybernight, it usually means there’s a monster there. It just hasn’t struck yet.

  The wine industry has a long and storied history and holds an important place in culture and daily life. From small vineyards to wine conglomerates, there are financial gains to be made for the hacker looking to grow his ill-gotten gains. By following some basic steps, you can ensure that cyber criminals are the only ones claiming sour grapes.

About the Author

  Mark Sangster is vice president and industry security strategist at eSentire. He is the author of No Safe Harbor: The Inside Truth About Cybercrime and How to Protect Your Business. Mark is an award-winning speaker at international conferences and prestigious stages including the Harvard Law School and RSAConference. He has appeared on CNN News Hour to provide expert opinion on international cybercrime issues, and is a go-to subject matter expert for leading publications and media outlets including the Wall Street Journal and Forbes when covering major data breach events.

The Pandemic’s Impact on the Wine & Spirits Industry

By: Quinton Jay

The year 2020 was a complicated one for the wine and spirits industry. According to information published in Beverage Industry, the sale of wine at retail and convenience stores grew by some 11.4% in multi-outlet stores throughout the 52 weeks between December 1st, 2019, and November 29th, 2020, and champagne, as well as other sparking wines, saw year-over-year growth by nearly 29%, topping sales at roughly $1.6 billion.

  This boost to wine sales, however, could not fully offset the losses incurred by many other businesses throughout the wine and spirits (WS) industry.

  Fortunately, the U.S. seems to have since turned a corner in the pandemic struggle, and most restaurants and other WS businesses like wineries, distilleries, and breweries (WDBs) that were able to survive the brunt of the COVID-19 pandemic’s impact are now back open and able to serve customers indoors, or at least in some form of hybrid indoor-outdoor seating arrangement. While this return to normalcy should help the WS industry experience an upswing capable of putting business back on track, some industry experts are still analyzing the true depth of impact the pandemic has had on the industry and the businesses in it, regardless of whether those businesses survived the pandemic’s fallout or not.

  One such expert is Quinton Jay, a WS industry expert, Japanese whisky otaku, and industry consultant with more than 20 years of experience in owning, building, operating, and investing in businesses–specifically those in the wine and beverage industry. We recently sat down with Quinton to learn more about the trends he saw arise within the WS industry throughout the events of last year’s pandemic, how those trends impacted the WS industry as a whole, and where he sees the industry heading over the next few years as a result.

WS Trends Resulting From COVID-19

  According to Jay, one of the most widespread trends that impacted the WS industry as a result of the pandemic was the increase in the amount of WS businesses – including WDBs – that began offering e-commerce and Omnichannel retail marketing. By offering these channels, businesses across the entire WS industry were able to continue selling products directly to consumers (D2C), saving many businesses from having to shut their doors to customers – both online and offline – for good.

  “Methods like Omnichannel retail allowed businesses in the industry to continue selling products D2C,” Jay tells us. “For many businesses, especially WDBs, this was the difference between surviving the pandemic or not.”

  Along with the growing trend of Omnichannel retail marketing, many business owners in the WS industry have experienced what Jay refers to as “business fatigue.” This feeling of fatigue is one that many business owners who experienced the pandemic can sympathize with, but for the WS industry specifically, it could mean more owners of WDBs, restaurants, eateries, or other businesses preparing for financial exits from their ventures.

  “Business fatigue is a real thing,” Jay tells us, “and rather than simply close up shop and call it a day, the better option for business owners is to sell their company to someone willing to acquire, rebrand, and revitalize it.” This trend of business fatigue, according to Jay, could hint at other ways as to how the pandemic left a lasting impact on the industry.

The Lasting Impact of COVID-19 on the WS Industry

  In describing the ways that Omnichannel retail marketing has affected the WS industry in recent years, Jay also mentions the historical lack of innovation – particularly technological innovation – within the industry. In mentioning this, it begs the question as to just how innovation, both during the pandemic and immediately following it, will evolve both for businesses and consumers.

  “Many WDBs and other businesses in this industry aren’t necessarily at the forefront of innovation, especially when it comes to growing their market share,” Jay says. However, as Jay continues to explain it, the writing is literally on the wall for the continued growth of Omnichannel retail, given the industry’s historical customer demographics, current and emerging technologies, as well as the ever-evolving nature and growing competitiveness of the WS industry’s supply chains.

  “The U.S. has been lagging behind much of the world in Omnichannel retail offerings, obtaining less than 10% of all global e-commerce sales for the WS industry compared to China’s roughly 25% share,” says Jay.

  In these matters, Jay’s predictions may not be far off from aggregated industry data. For instance, according to McKinsey’s 2021 Consumer Report, e-commerce sales in the U.S. were projected in 2019 to reach 24% of all retail sales by 2024. This projection later increased to 33% by June of 2020 after the onset of the COVID-19 pandemic, seeing larger growth in e-commerce retail across the U.S. in six months than it had over the past 10 years.

  “As we continue to emerge from the pandemic,” Jay continues, “I expect many more businesses in the WS industry – especially WDBs – will begin offering or broaden their offerings regarding Omnichannel retail as more American consumers opt for D2C retail channels.”

What’s Next for the WS Industry

  As a result of the COVID-19 pandemic, every global industry was forced to evolve virtually overnight. The WS industry was no different. Along with broader implementations of Omnichannel and D2C retail methods and deeper technological innovations, Jay tells us that he also expects many businesses in the industry to rethink the way they operate internally and interact with customers on all levels.

  “Overall, I think the pandemic has left many business owners in this industry feeling defeated,” Jay says. “As a result, we can expect to see an increasing number of companies in this industry become more creative in the ways they can target, reach, and sell their products to consumers, as well as become more innovative in the ways that they handle and react to crisis situations.”

  Indeed, the revitalization of crisis management detail is one vital aspect that every business that survived the pandemic will inevitably have to revisit. For the WS industry in particular, this could mean the addition or inclusion of additional D2C sales channels (similar to the inclusion of Omnichannel retail), but also the way that many establishments in the industry hire and retain talented employees.

  “The U.S. has been experiencing a hiring crisis over the last few months,” Jay adds, “and tons of restaurants, eateries, WDBs, and other businesses that survived the pandemic initially are now struggling to keep up with increased consumer demand as the threat of COVID-19 wanes. By implementing policies that promote employee safety and wellness, offering more competitive wages, and remaining adaptable enough to stay ahead of society’s ever-changing curve, the industry as a whole can prevent the detrimental effects that came as a result of last year’s pandemic from having such a deep and lasting impact in the future.”

How to Succeed in WS Post-Covid

  As Jay mentions, there are a number of precautionary methods and strategies that business owners and managers, and other industry professionals in WS can use to better protect their businesses from suffering in ways similar to how they may have during the onset of the COVID-19 pandemic.

  “The first step every business in the WS industry should take is to implement more actionable mea

sures in planning their business strategy,” Jay says. “Start by taking a look at what types and quantities of grapes you have coming in, what bulk wine you have in the tank, your total count of bottled finished goods, and become intimately familiar with your sales run rate: if you know those 4 things, you can plan out your business very well and forecast what your business should be focusing on acquiring in order to avoid jamming up your supply chain.”

  For example, if your winery business finds that its sale run rate has slowed down, perhaps the winery needs to look at selling its bulk wine (wine in barrel or tank), or perhaps can temporarily focus on committing fewer grapes for an upcoming vintage. However, once any particular wine has been bottled, that’s it, which is why Jay says to avoid bottling your inventory until you know what your sales run rate is and how it directly impacts your business. While selling out of a certain inventory item can sometimes be a boon for your business, not selling enough can cause inventories to back up, alerting you that your business will need to discount other items and sell that portion of your inventory faster in order to get back into balance.

  A second method WS businesses should consider, according to Jay, is to revisit and revitalize their plan regarding capital management, or the funding of their business initiatives as they pertain to the needs of a business’s financing or cash flow.

  “Most business owners and professionals in the industry want their business to grow,” Jay adds, “but don’t realize how much money they need, especially regarding the lead time required for fine wines and of many products in the industry as a whole, especially aged beverage products.”

  Indeed, as Jay explains, it can often take one year for most white wines and Pinots to be made and bottled, as well as 2-3 years on average for wines like high-end cabernets. Most red wines can take anywhere between 12-30 months to properly process in-barrel and add to their in-bottle age time from Grape to Bottle. This, of course, takes cash, which is why planning your capital budget is just as important as your sales plan.

  By carefully considering these crucial factors to any business in the industry, Jay explains that they can be better positioned to survive in the face of the next inevitable threat the industry will face in the years to come.

The Supply Chain Executive Order and Review

The Executive Order and Review

Following the guidance Executive Order 14017, signed by President Biden on February 24, 2021, many federal agencies have begun the process of reviewing their supply chain. The guiding purpose of the Executive Order is to make America’s supply chains less vulnerable to disruptions such as pandemics, cyber-attacks, and economic competition and less reliant on foreign supplies, workforces, or stockpiles instead of domestic industry and businesses.

The Executive Order directs numerous federal agencies, in coordination with the Assistant to the President for National Security affairs (APNSA) and the Assistant to the President for Economic Policy (APEP) to identify vulnerabilities in important US supply chains and subsequently develop policy recommendations and plans to ensure the security and resilience of those supply chains going forward.

The Executive Order mandated review of two categories of supply chain vulnerabilities. First, a 100-day review of four sectors: semiconductor manufacturing and advanced packaging; high-capacity batteries; critical minerals and strategic materials, and pharmaceuticals and active pharmaceutical ingredients.

Second, a one-year review of supply chains for six “industrial bases”: defense; public health and biological preparedness; information and communications technology; energy; transportation, and agricultural commodities and food products.

Following these reviews, the APNSA, APEP, and the relevant agencies will submit reports to the President detailing their findings and actions taken in advancement of the Executive Order as well as recommendations to further strengthen the supply chain.

What Next?

At present, no firm rules or regulations have been set forth, but the expectation is that there could be a mixed bag of additional compliance “burdens” (e.g., trade restrictions) in some instances and “incentives” (e.g., tax credits, federal procurements) in others. While the Executive Order and subsequent regulatory changes likely will not have the power to directly modify the supply chains of private companies, possible regulatory changes could, as a practical matter, necessitate modification. Such regulations might include imposition of additional tariffs to push companies away from certain suppliers, additional import requirements on certain goods from certain countries, inclusion of certain foreign companies to the Entity List, or modification of federal procurement regulations to favor domestic goods (as already seems to be happening with the expansion of Buy American domestic content thresholds).

Federal agencies have begun issuing public notices and requesting public comments to assist in the evaluation of relevant supply chains. For example, the Department of Commerce requested comments (submission deadline of November 4, 2021) regarding the information and communications technology supply chain. Other agencies, including the Department of Transportation, Department of Energy, Department of Agriculture, and Department of Defense have also issue requests for public comment.

Companies participating in any of the supply chains identified by the Executive Order should consider participating in these requests for public comments as these supply chain review will more than likely lead to policy, regulatory, and compliance changes. Additionally, companies will want to keep an eye on the regulations that develop from these reviews in order to adequately prepare for additional compliance standards and capitalize on possible new business opportunities.

 

Dan has practiced law in Silicon Valley since 1977. The Firm’s practice is limited to regulatory law, government contract law, and international trade law matters. Dan has received the prestigious “Silicon Valley Service Provider of the Year” award as voted by influential attorneys in Silicon Valley.

He has represented many very large global companies and he has worked on the massive US Government SETI (Search for Extra Terrestrial Intelligence) project as well as FOEKE (worldwide nuclear plant design certification), the Olympic Games, the first Obama town hall worldwide webinar, among other leading worldwide projects.

Dan has lectured to the World Trade Association, has taught law for UCLA, Santa Clara University Law School and their MBA program, lectured to the NPMA at Stanford University, and for the University of Texas School of Law.

Dan has lectured to various National and regional attorney associations about Government contract and international trade law matters. He has provided input to the US Government regarding the structure of regulations relating to encryption (cybersecurity). He has been interviewed about international law by the Washington Post, Reuters and other newspapers.

He is the author of four books unrelated to law, one of which was a best seller for the publisher, and of dozens of legal articles published in periodicals, technical and university journals distributed throughout the world. He serves as an expert witness in United States Federal Court regarding his area of expertise.

Changes to Gift Tax Exemption Laws Could Affect Winery Estate Planning

By: Kemp Moyer and Sachi Danish, BPM LLP 

For owner-operators of wineries and other closely held businesses, now may be an opportune time to maximize estate planning through the utilization of gifts of ownership interests. The Tax Cuts and Jobs Act (TCJA) of 2017 has been broadly seen as favorable to businesses, high-net-worth individuals and estates, including the temporary doubling of the lifetime federal exemption for gift, estate and generation-skipping taxes, which stands at $11.7 million in 2021.  

  However, the combination of a new administration, as well as increasing federal deficits in the wake of the COVID-19 pandemic fallout and federal response, means the higher lifetime exemption may be in jeopardy. Many in the tax policy and preparation communities are expecting the recently elected Congress and administration to accelerate the rollback of the exemption increase. Sweeping changes have been proposed by the Biden administration and now it is widely considered just a matter of when and how much. Among the potential early targets is the larger estate tax exemption, which will sunset back to pre-TCJA baselines at the end of 2025 without further action from Congress.  

Estate and Gift Tax Law 

  As noted previously, the current gift, estate and generating skipping tax (GST) exemption amount is approximately $11.7 million per individual. This exemption amount is currently required under the law to be cut by 50% in 2026, to about $6 million per person, depending on adjustments made for inflation. This reduction is built into current law, and it has created a use-it or lose-it opportunity for high-net-worth individuals. However, the following Biden proposals are even more dramatic: 

• Reduce the estate and GST exemption to $3.5 million and only permit $1 million in tax-free lifetime gifts. 

• Increase the estate tax rate significantly from 40% up to a 65% top rate. 

• Eliminate the stepped-up basis rules at death. This would be a significant change as a carryover basis may create an income tax at death (“death tax”) or upon later sale on all appreciated property.  

• Limit valuation discounts between family members. 

• Include grantor trusts in the grantor’s estate and eliminate use of short-term grantor retained annuity trusts (GRATs) and sales to intentionally defective grantor trusts (IDGTs). 

• Limit duration of GST trusts. 

  The above proposals make it urgent to address your estate tax planning now, rather than waiting for what the future may bring, although planners must also consider the possibility of retroactive law changes. 

  Some estate and gift opportunities to consider under current law include: 

• Use your annual exclusion gifts of up to $15,000 per person ($30,000 if both parents make gifts to that individual). Over time, these gifts can accumulate into significant amounts. These amounts could be on top of direct payments to a provider for medical services or educational tuition for anyone, related or not, which are not considered gifts.  

• Make large gifts of assets with potentially depressed values and subject to discounts. Leverage the current $11.7 million unified credit amount with gifts of fractional interests in real property or ownership interests in a family or closely held business that qualify for valuation discounts. To protect against retroactive changes to the $11.7 million gift exemption amount planners should also consider use of disclaimers, formula gifts, and lifetime qualified terminal interest property (QTIP) trust elections as part of the planning with trusts. 

• Make low-interest loans to children. Loans for homes or business opportunities are often very attractive, with August 2021’s Applicable Federal Rates (AFRs) at .19% for loans three years or less, 1.00% for loans more than three years and not more than nine years, and 1.87% for loans more than nine years. 

• Gifts and sales to intentionally defective grantor trusts (IDGTs) can be used to transfer cash, securities, business interests, real property and other investment assets to descendants in a tax-beneficial manner. The sale or gift of assets from the parents or grantors to an IDGT is not subject to income tax, because the grantors are treated as having sold the assets to themselves. Only gift tax is due on the transfer. Assets transferred to the IDGT remain in the trust and grow outside the grantor’s estate, allowing them to appreciate tax-free. 

  Owner-operators of successful businesses likely already have some familiarity with the estate tax. This tax works in conjunction with the federal gift tax, which applies to transfers of property during one’s lifetime. In theory, both estate transfers and gifts made during one’s lifetime are currently taxed at a maximum marginal rate of 40%. 

  The gift tax annual exclusion allows individuals to gift up to $15,000 per recipient per year tax-free. The lifetime gift tax exemption currently stands at $11.7 million, and this maximum amount represents the sum of all taxable gift, estate, and generation-skipping giving allowed before taxes are due. The temporary nature of the current higher lifetime exemption has created a level of urgency in many estate strategies. 

  There are proposals in Congress to reduce the estate and GST tax exemption to $3.5 million and the gift tax exemption to $1 million, limit valuation discounts for family businesses, and trigger income tax when gifts and transfers of appreciated property exceed $1 million.  Political analysts expect these proposals to be among the Democrats’ top priorities, not to just increase taxes but to redistribute wealth in our country. This puts some pressure on larger estates that may be affected, including many winery owners. To utilize the higher lifetime exemption before it expires, many high-net-worth individuals are acting urgently to accelerate their estate planning strategies to avoid a much greater potential estate tax burden. 

Winery Ownership Estate Planning 

  Even in an increasingly corporatized wine space, many wineries continue to be family-owned businesses. Many owners of closely held wineries, desiring to keep their legacy in the family, already intend to pass down the business upon their death to their children or other inheritors. The increasing likelihood of a rollback on the lifetime exemption means winery owners may want to consider transferring at least some portion of their business in the near future via gifts, or sales to IDGTs rather than waiting until death. Gifts and sales of appreciated assets may trigger immediate to grantor trusts are  

  While certain wine industry segments have recovered to or even exceeded their pre-COVID sales, many closely held wineries are experiencing challenges such as reduced tasting room visits and lower sales to restaurant customers due to COVID-19, which often contributes to a lower business valuation. A lower valuation means a smaller gift in the eyes of the IRS, and less estate taxes or even avoiding them altogether. 

  The benefits of any reduction in business value due to the pandemic and the availability of the favorable tax rules related to grantor trusts may not be here for long. This is a unique opportunity for winery owners to take care of what they were already planning to do down the line, while taking advantage of historically favorable tax conditions. Estate planning is a process, not a one-time trust agreement, and as you become more educated in the process through your trusted advisors including your attorney, accountant, wealth and insurance advisors, your ability to make the key decisions in the process will become easier. 

  Kemp Moyer is Certified Valuation Analyst and a Director in the Advisory practice leading the Firm’s Valuations and Appraisals team at BPM LLP.  

  Sachi Danish is a Director in Tax Private Client Services and leads the Estate & Trust practice for BPM. 

Post-Pandemic: How Small Wineries & Vintners Can Get Back to Business, Better!

By: Rod Hughes

Wildfires, faulty tanks, flooding, a pandemic, lockdowns, water shortages, tornados, tropical storms – the past two years have been, in a word, biblical in terms of challenges faced by vintners and winemakers.

  However, like the rest of the U.S. economy, there are signs of positivity on the horizon. Pandemic restrictions are loosening, and Americans seem eager to travel and resume their former leisure activities. This includes touring wineries as well as resuming their search for those great bottles to share with friends.

  This reality presents both opportunities and challenges to those in the winemaking industry.

  The challenges are not inconsequential: Northern California wineries faced savage wildfires in 2017, 2019 and 2020, leaving many around the country with the impression California wineries were irreparably harmed. In parts of Maryland, some wineries are still trying to put the pieces back together after Tropical Storm Isaias last summer. And let’s not forget the pandemic shutdowns, limited capacity re-openings and economic pain felt universally across all wineries. 

  However, the opportunities for those that made it through may be just as powerful.

EAST COAST SOLUTION

  One example is Old York Cellars Winery in Ringoes, New Jersey. Shutdown in March 2020 like much of the country due to COVID-19, owner David Wolin — a former attorney — gathered his staff and brainstormed.  (Photo: David is 3rd on the left)

  “We knew what we couldn’t do, and it was a lot,” Wolin explained. “The question was what could we do in this new environment?”

  Wolin and his team quickly turned to one of the major challenges for independent wineries: direct shipping to consumers.

  Winery direct-to-consumer shipping is legal in 47 U.S. states, each of which regulates its own system. Regulations, taxes and various packaging requirements can vary. However, Wolin and his team had time on their hands (they would reopen, albeit under strict New Jersey Department of Health restrictions, with limited capacity in June 2020). So Wolin put his legal training to work and secured approval to ship his Old York Cellar wines to 15 other states as well as Washington, D.C.

  In short order, he found a niche market and started shipping wine as far as California and Oregon. Much of the direct shipment was coupled with virtual wine tastings as customers reached out from all over the U.S. looking for creative ways to stay connected with friends and family through virtual activities. By the end of 2020, Old York Cellars experienced a 545 percent increase in online sales and swung from an early 2020 revenue loss of more than 70 percent to end the year up by 13 percent overall.

  For this New Jersey winery, its pandemic recovery began when it took on one of an independent winery’s biggest sales obstacles and found a way to turn it into a success.

WEST COAST SOLUTION

  Another example of finding opportunity amid challenge is Healdsburg’s Longboard Vineyards in California’s famous Sonoma wine region. Like Wolin in New Jersey, Longboard’s Head of Hospitality Heidi Dittloff and Oded Shakked, the owner and winemaker, had to reinvent the business following the March 2020 shutdowns.

  “We were at a stand-still, like a lot of businesses at that point, trying to figure out how to stop hemorrhaging cash while also looking for new revenue sources,” explained Dittloff. Like many pre-pandemic wineries, Longboard’s online sales were only between 1 and 3 percent of its annual revenue.

  “Of course, looking back, ecommerce seems like the default route. Just take your sales online. Simple, right? Um, no,” said Dittloff.

  Like many small wineries, outdated software and robust websites tailored for ecommerce sales had not been a priority. Before COVID-19, it could take shoppers up to 10 clicks to purchase a bottle of wine on a typical small winery’s website. In the age of Amazon’s One-Click mindset, that’s nine clicks too many.

  Dittloff’s solution was to re-examine the sales funnels for Longboard.

  The majority (more than 70 percent) of sales for most wineries before the pandemic came from three areas: tasting rooms, wine clubs and wholesale. The shutdowns and later limited capacity requirements of 2020 effectively took in-person sales off the table, as wholesale transactions dipped temporarily. Pivoting to touchless curbside pick-up and leveraging their wine clubs helped, but the key to surviving was replacing the lost tasting room sales funnel. Longboard accomplished this through what Dittloff called “data hygiene.”

  This meant closely examining all consumer data available, understanding new buyers versus pre-COVID buyers, and designing offers that matched buyers’ needs. To do this well, Longboard also had to reinvent its website as well as completely overhaul its shopping cart to create a more user-friendly environment that limited clicks, provided buyers with their order history and created stunning visuals. This also meant updating the winery’s Point-of-Purchase system.

  “None of this was cheap,” Shakked noted. “But it was either invest or vanish because no one knew back then how long the pandemic shutdowns would last.”

  With improved customer reach and systems tied to aggressive outreach on social media to bloggers and area businesses, Longboard grew its online sales from 1 to 30 percent of its revenue, replacing nearly all of its lost tasting room sales. The key to growth in 2021 and beyond, said Dittloff, is to maintain those online sales as restrictions ease and the tasting room business returns.

  “There’s a lot of opportunity for wineries like ours to come out of this pandemic stronger than when it began,” said Shakked. “Pursuing those new sales funnels and making better, smarter use of data will be critical to that future growth.”

ONGOING SOLUTIONS

  For many independent wineries and vintners, undertaking the paperwork headaches, sales tax collection and reporting, as well as the logistics of shipping wine to dozens of other states, is too heavy of a lift. For some, so is a complete overhaul of its web, ecommerce and POS systems.

  This is where a solid communications strategy can play an integral role in helping independent wineries rebound from both the pandemic and all that came before it.

REINVENTION

  One early and likely ongoing solution that will continue to be needed is the reinvention of outdoor spaces. Despite re-openings, some customers aren’t going to be completely comfortable going back indoors. This means, especially for the purposes of enticing wine club and other regional customers, developing seasonal or quarterly “makeovers” of outdoor spaces. While the upfront costs and sweat equity can be considerable, they can be recouped through a thoughtful email and social media campaign promoting the spaces. Done well, these reinvented spaces can present customers with something new or different to see several times per year while also purchasing your wines.

  Old York Cellars has done this successfully, creating a Winter Wine Village on its 28-acre property in late 2020 and early 2021, complete with decorative cabanas, high-end fire pits and posh outdoor furniture. A tented “Spring Wine Village” offers a similar vibe at Old York Cellars with a focus on new views, a dining menu and a return of outdoor entertainment, as well. Cana Vineyards & Winery in Middleburg, Virginia took a similar approach, creating 10 cozy fire pit areas on the lawn overlooking its 43-acre property and nearby mountains. Patio heaters on the winery’s outdoor decks and front porch created warm winter spaces along with ceiling heaters and an outdoor pavilion with stunning stone fireplace. S’more kits were also available for purchase.

  By mixing up the outdoor experience for customers, small wineries can offer something fresh and new for regional customers, road-trippers and wine club members to bring them back. These outdoor makeovers also present opportunities for email marketing and public relations to introduce customers to a remodeled venue as well as special offers.

A COLLECTIVE VOICE

  Additionally, small wineries should closely examine working with their local grower’s associations and/or chambers of commerce to come together with a single voice on their industry. Consumers are likely to remain unsure of what is and isn’t possible with travel and tourism businesses for some time. Using a collective voice to let travelers know that area wineries are open for business is key.

  Partnering with other business or marketing associations can also reveal additional opportunities for wineries to grow their way out of the pandemic and its economic challenges. A great example of this type of partnership is the collaboration of the Napa and Sonoma wineries working with LuxeSF, a B2B partner network comprised of sales and marketing professionals focused on luxury marketing in the Bay Area. As recently as April 2021, LuxeSF hosted a panel of small wine producers to talk about what happened in their industry in 2020 and offer tips and best marketing practices going forward for independent vintners.

MAINTAINING THE PULSE

  Surveys, of course, are an ideal way to stay connected to winery customers. They have the added value of not being seen as an overt sales tactic. Not only can these surveys help to keep small wineries top-of-mind, but they can also be great tools for gauging customer sentiment and crowdsourcing ideas as the country reopens. For instance, a survey about how customers might feel about a “garden party event” this summer or fall is a great way to gauge how to best address the potential use of masks as well as possible turn-out.

  Surveys about continued virtual tastings, satisfaction with prior wine shipments and ecommerce experiences can also provide vital insights into the continued strength and likelihood of these pandemic-induced sales channels.

BECOMING PUBLISHERS

  Finally, and this is a recommendation that should not be dismissed out of hand, wineries need to become content publishers.

  The world has changed, and we’re now in the experience economy. A consumer’s personal experience with a brand, service or winery can drive sales. And in a world where smartphones are ubiquitous and even grandparents are mostly on one form of social media or another, wineries need to feed consumers’ insatiable appetite for content.

  If wineries produce no other form of content (and they should produce a variety, just like their wines), it must be video. Video content should run the gamut, including tours of the vineyards, the first crush of the season, 3 to 5-minute video winemaker interviews on topics for aficionados, as well as casual tasting room tourists, 30-second event update videos and more. These videos should be shared across all the winery’s social platforms and promoted via email marketing and the website. Consumers are 37 times more likely to engage with a piece of video content than a newsletter, blog or long-form article.

  But that video needs to be brief and packed with good, non-sales information. They also need not be slickly produced. In fact, millennials and Gen Z consumers find simple smartphone videos to be “more authentic.”

  The pandemic is just the latest in a string of challenges to wineries, but it’s also likely to have one of the most profound and lasting effects on the industry. The good news is all wineries will have ample opportunities to rebound from this latest challenge, but it won’t be a return to normal or even a “new normal.” Rather, what comes next must be a new approach to how the business of wineries and vineyards are conducted and how they engage with their customers.

ABOUT THE AUTHOR  Rod Hughes is vice president and principal with Kimball Hughes Public Relations. A former journalist and frequent public speaker, he can be reached via email at rhughes@kimballpr.com or by phone at (610) 559-758

Simplified Risk Management for Your Winery

By: Michael Harding, Senior Risk Solution Specialist, Markel Specialty

Take a look around. You must be so proud of where your winery is today! You’ve worked very hard to develop, finesse, and grow your winery to what you see in front of you. Countless hours and limited staffing have created a place of pride!

  You took a lot of risks to get your winery to where you are today. In fact, your winery probably wouldn’t exist if you hadn’t taken some of those risks. But now that it is more established, the risks are more significant – there is just so much more to lose! A serious calamity could be detrimental to all that you’ve built. And, unfortunately in today’s “mid-COVID” economic environment, limited staffing may present many challenges to your winery and it may be difficult to allot sufficient time to think about the many ways your winery might be impacted by previously unthought-of risks. Risks can be managed, however. Whether your winery is small or large, you have the responsibility to your employees, your clients, and yourself to invest in risk management planning.

  A lot of winery businesses only think about buying insurance when they think about risk management. However, many wineries don’t give much thought to other ways that they can protect their winery from the numerous risks that they face. Some risks are random and unpredictable (like weather and acts of nature). Others are more predictable and can be planned for – such as costs of supplies, overhead, new hires, and equipment replacement. There are also the other kinds of events that can – and do – happen almost anytime; they can disrupt your operations, take a chunk out of your reserves, kill your bank account, and cripple or destroy your winery.

  Trying to get your arms around all potential risks and attempting to completely eliminate them is unrealistic. On the other hand, not paying enough attention to relevant risk management issue can leave you unprotected. To that end, it makes sense to be cautious. The biggest challenge in risk management is to find the proper balance between peace of mind and running your winery.       

  Simply stated, risk management is a discipline for dealing with uncertainty. It provides you with an approach to recognize and confront the threats you face. Risk can be very complicated, but it doesn’t have to be. Every winery can start with a simple, easy-to-follow plan that can manage and lessen risk. If needed, you can expand from there.

Getting Started

  Risk management goes beyond just identifying risk; it is about learning to weigh your risks and making decisions about which risks deserve immediate attention.

  There are many ways to undertake risk identification; the key is using a system that allows you to identify major risks facing your winery. It is important to make a list and examine every risk, no matter how small; they could develop into something more serious over time. To begin, a risk assessment might  start by examining some of the different aspects of running your winery. You could look at your:

1.  Management practices

2.  Hiring and volunteer policies

3.  Training

4.  Staff, guest, and visitor safety

5.  Growing, harvesting, and production methods

6.  Insurance coverage

7.  Property and facilities

8.  Warehousing

9.  Workers compensation

10. Crisis and emergency planning

11. Auto and mobile equipment exposures

12. Social media

  Although this might, at first glance, appear to be complicated and involved, a simple way to start your own self-assessment that may be useful is to gather a few members of your staff representing various functions of your winery, and conduct a brainstorming session by asking a few questions:

1. What can go wrong?

2. What are you concerned about?

3. What will we do to prevent harm from occurring?

4. What will you do to lessen the worry?

5. How will you finance?

  Your answers to each will provide you with a direction for necessary action.

  From this session, you’ll undoubtedly have a sizable list with many concerns. And, just making a list of all possible risks is not enough. It is easy to quickly become overwhelmed, so you’ll need a way to take the risks you’re facing and put them into perspective. Not all risks are created equal. Risk management is not just about identifying risk; it is about learning to weigh various risks and making decisions about which risks deserve immediate attention. In doing this you will often find that your winery’s vulnerability to a risk is often a function of financial impact. What are the odds that a particular risk will materialize, and  how much is it likely to cost? How much does your winery stand to lose as a result? This helps quantify which risks are worth worrying about and which are not.

Using a Risk Matrix in Your Risk Assessment

  A risk matrix is a valuable tool you can use to help determine both the likelihood and the consequences of any particular risk. It helps you focus your attention on those issues that have higher consequences. In such a matrix, the likelihood is rated from probable to improbable and the consequences are rated from acceptable to intolerable. A risk that is almost certain to occur but has few serious consequences needs little attention. This enables you to identify and mitigate risks that may be less certain but have greater consequences.

Prioritize Your List

  Once you’ve assessed your risks, you can begin to take steps to control them – giving priority to those with the greatest likelihood of occurrence and/or biggest potential impact.

  Select appropriate risk management strategies and implement your plan. Here are four basic risk management techniques that can be used individually or in combination to address virtually most every risk you face:

1.    Avoid it: Whenever you can’t do something with a high degree of safety, you should choose avoidance as a risk management technique. Don’t engage in an activity or provide a service that pose too great a risk. In some cases, avoidance is the best technique because many wineries don’t have the financial resources required to fund the training, supervision, or other safety measures. Always ask, “Is there something we could do to provide this safely?” If the answer is “yes”, risk modification (#2 – next) may be more practical.

2.    Change it or modification: Modification is simply changing an activity or service to make it safer. Policies and procedures are examples of risk modification. For example, if a winery is concerned about the risk of using unsafe drivers make deliveries, they might add Department of Motor Vehicle (DMV) record checks to its screening process.

3.    Take it on yourself/retention: A winery may decide that other available techniques above aren’t suitable and it will retain the risk of harm or loss. For example, when a winery purchases liability insurance and elects a $1,000 deductible, it’s retaining risk. Where organizations get into trouble is when risk is retained unintentionally, such as within the exclusions of their insurance policy.

4.    Share it: Risk sharing involves sharing risk with another through a contract. (Insurance is an example that shares the financial impact of risks.)

  Monitor and update the risk management program. Your winery is a dynamic one that constantly faces new challenges and opportunities. Risk management techniques and plans should be reviewed periodically to make certain that they remain the most appropriate strategy for your needs and circumstances.

Conclusion

  The ultimate goal for your winery regarding risk is to create a culture where risk is routinely examined and managed, simply as part of your organization’s overall business process. Risk management starts with the management of a winery. By operating in a transparent and ethical manner, a lot of risks are mitigated by promoting a sense of accountability.

We can’t know what lies ahead, but we do want to be prepared to respond to future events effectively and gracefully. Make a conscious effort to identify and manage your exposures. Ask:

•    Can you avoid or eliminate the risk?

•    If not, can you control or mitigate the risk?

•    Can you transfer the responsibility of finance?

  Reckless leaders take reckless risks; prudent leaders take calculated risks. Risk management is the “calculator”.  Kayode Omosebi

YOUR RISK MANAGEMENT PROGRAM

  The next step is to involve others in your efforts. Remember that an effective risk management program can never be the responsibility of one individual. If you’ve already engaged a group, task force, or committee in identifying risks and strategies, you’re well on your way to implementing a risk management program.

  Keep in mind that many effective strategies for managing risk in a winery may not require any additional expenses. Time, attention, and resolve may be all that’s needed to increase the safety of vital assets. Give your team a deadline—a  date by which you plan to have made significant progress in achieving your risk management goals. Review your progress frequently and set new goals as you achieve the existing ones.

  As we have discussed, risk management need not be a complex and bewildering array of technical terms, actuarial tables, or probability statistics. On the contrary, risk management is, in large part, the application of healthy doses of common sense and sound planning.

  Remember that the simpler the risk management strategy is, the more likely it is that it will be applied. Yes, there may be items that are not considered in the first iteration of the plan, but at the outset, it is more important that your program be comprehensible rather than comprehensive. As you continue to develop and refine your plan, what now seems new and strange will become second nature.

  As time passes, your plan should become more inclusive as you address more risks in order of their priority. As stated at the beginning of this article, risk management is a process not a task, therefore it is important to constantly review what you are doing, celebrate your triumphs, and analyze the reasons behind any setbacks.

Demystifying Wholesale Wine Distribution

By: Becky Garrison

  At the virtual Oregon Wine Symposium held February 16-19, 2020, Jeff Lewis, Director of Education & National Sales, Revana Portfolio, and Colin Eddy, National Sales Manager, NW Wine Company, presented a seminar titled “Demystifying Wine Distribution: A Winery Toolkit to Help Build and Navigate Wholesale Distribution Across the United States.” They designed the seminar for winemakers looking to enter the wholesale channel for the first time, and those with existing distribution looking to expand their markets.

  Lewis and Eddy opened their conversation with a brief history of the 21st Amendment ratified on December 5, 1933, which repealed the 18th Amendment that launched prohibition. The 21st Amendment left it up to the states to govern the production and sale of alcohol. While every state has its own specific regulations, most stuck to the 3-Tier System separating producer, distributor and retailer.

  According to Lewis and Eddy, this 3-Tier System has multiple benefits. From a regulatory and educational point of view, this system ensures the safe handling of alcohol so that the final prod-ucts are safe for consumers. From an economic angle, this creates billions of dollars of local, state and federal tax revenue. The commercial benefits prevent a given winery from dominating the marketplace.

  Eddy said a key advantage of expanding into wholesale distribution is a daily representation of your brand. “You’ve got salespeople out there telling the story of your brand and letting custom-ers sample your wares. No one can be everywhere.”

  Distribution also ensures the ability to deliver products to licensed accounts in designated territo-ries and collect payment in accordance with state and federal laws so that both the manufacturer and producer get paid on agreed-upon terms.

  Another development that began in 2020 was a rise of online wine sales, with consumers pur-chasing bottles directly from a winery, a website like wine.com or an online service such as Drizly. Large wholesalers rolled out online purchasing websites that allowed retail shops, bars and restaurants to purchase wines online without the presence of sales representatives. “The les-son here is that people are comfortable having wine delivered to their home, and online platforms are getting future customers easier and safer access. That is something that’s going to continue,” Eddy said.

Achieving Success in the Wholesale Distribution Market

  Winemakers interested in expanding their sales should first ask themselves why they are inter-ested in wholesale distribution. “It’s important to remember you’re creating a whole new sales channel, and with that comes a whole set of variables,” said Lewis.

  Among those variables include how existing sales channels will interact with this new wholesale channel and how a wholesale distribution channel will impact the sales of wine clubs or winery-only wines. Is there enough wine in production to execute this plan?

  Lewis and Eddy broke down their approach into a toolkit designed to help winemakers achieve success in the wholesale distribution market. Their first recommendation is to review the current distribution landscape. Currently, there are 1,126 unique wine distributors across the U.S. In breaking down these numbers, 37% of these distributors reside in four states, with 141 distribu-tors in California alone. Also, the list of distributors continues to shrink and consolidate market share. Presently, the top ten distributors as follows: 

Southern Glazers Wine & Spirits

https://www.southernglazers.com

• 45 States

• 119 offices

• 1100+ wineries represented

•225 Oregon Wineries Represented (total U.S. market share 32%)

Republic National Distributing (RNDC)

https://www.rndc-usa.com

• 23 States

• 94 offices

• 1000+ wineries represented

• Major recent acquisitions in Young’s Market (2020) and Opici FL (2021) (total U.S. market share 19%)

Johnson Brothers

https://www.johnsonbrothers.com/suppliers

• 23 States

• 36 offices

• 430+ wineries represented California only

• 70+ Wineries represented (total U.S. market share 10%)

Breakthru Beverage Group

https://www.breakthrubev.com

• 16 States

• 40 offices

• 660+ wineries represented

Empire Distributors, Inc.

https://empiredist.com

• 4 States

• GA, NC, TN, CO 580+

• wineries represented

WineBow

https://www.winebow.com

• 22 States

•. 600+ wineries represented

• National Wholesaler R. Importer

Heidelberg Distributing Company

https://heidelbergdistributing.com

• 2 states OH/KY, 90+ wineries represented

• Services 26,000 retailers

Wine Warehouse

http://winewarehouse.com

• California ONLY

• 70+ wineries represented

Horizon Beverage

https://www.horizonbeverage.com

• 5 States

• Northeast Based

• 260+ wineries represented

Empire Merchants

https://www.empiremerchants.com

• New York only

  At present, there are 11,000 wineries, with 80% producing less than 5,000 cases a year. Another 16% of wineries are classified as small, producing 5,000 to 49,999 cases, 2% are medium pro-ducing 50,000 to 4,999,999 cases, and 1% are large wineries that generate 500,000 cases or more.

  Next, they said to explore what markets to target. An analysis of the desired markets will help determine which distributors would work best for those particular products you’re looking to sell. Where are people consuming wines, and which wines are they drinking?

  Along those lines, look at regulations in these particular states to assess if this is a market where it makes sense to enter at this junction.

  Presently, 13 states are one-price states. In these states, there’s no different pricing for restaurants or retail outlets and no quantity discounts.

•    Kansas,

•    Missouri

•    Oklahoma

•    Oregon

•    Virginia

•    New Hampshire

•    Utah

•    Idaho

•    Montana

•    New Jersey

•    Mississippi

•    Pennsylvania

•    Ohio. Also,

  Channel pricing is prohibited in 16 states. In these states, you cannot separate on- and off-premise pricing.

•    Kansas

•    Oklahoma

•    Virginia

•    New Hampshire

•    Utah

•    New York

•    Arizona

•    Washington

•    Idaho

•    Oregon

•    Montana

•    New Jersey

•    Mississippi

•    North Carolina

•    Ohio

•    Pennsylvania

  In addition, quantity discounts are restricted in Connecticut, Idaho, Kansas, Louisiana, Maine, Missouri, Minnesota, North Carolina, Ohio and Oklahoma.

  Next, Lewis and Eddy addressed state-controlled and franchise markets. Unless one has particu-larly strong relationships in an individual state, these markets do not represent an ideal place to start, and it can become difficult to change distributors should the need arise.

  The state-controlled markets are in Pennsylvania, Mississippi, Utah, Wyoming, New Hampshire and Maryland (Montgomery County), where the wholesaler acts as a broker to the state, or you sell directly to the state as the manufacturer, creating another “tier” to sell through.

  The franchise market is loosely defined as a market or defined territory in which one has a con-tractually binding agreement of representation with a wholesaler. Generally speaking, franchise markets protect the wholesaler or distributor from losing revenue and brands they’ve worked to build over time. Before entering into one of these markets, research the franchise law agreements for that particular state and define the parameters around potential future releases. If possible, sign a contract with these parameters. Thirteen states are currently under a franchise market.

•   Connecticut

•   Georgia

•   Idaho

•   Maine

•   Massachusetts

•   Michigan

•   Montana

•   New Mexico

•   North Carolina

•   Ohio

•   Tennessee

•   Vermont

•   Virginia

  The final market type they addressed was price posting. In certain markets, the winery and dis-tributor must post their wholesale pricing in advance with the state. The five states that require monthly price postings are Connecticut, Delaware, Missouri, New Jersey and New York. Also, they touched briefly on special situations like SS packs, Cuvée cases, and other “work-around methods” in pricing wines for different premise-types.

Choosing a Wholesale Distributor

  Lewis and Eddy advocate asking your pre-existing relationships which distributors they would recommend. Also, define the distribution partner’s territory and assess if their market focus is in sync with those markets you’re looking to target. Then look at those distributors and determine where your positioning might be within their portfolio.

  Examine the number of their active accounts with a particular focus on those deemed their key accounts. Will a new brand get buried because they represent other similar varietals that will re-ceive greater attention from this distributor, or can they market a new brand effectively? Does the pricing for your wine fit in with this distributor’s portfolio? Where are their most active sales channels? For example, if a distributor primarily targets bars and restaurants for sales, they will not be the best fit for a winery looking to enter the retail market.

  Lewis added that another huge part of this equation is the sales team and territory. “You might end up splitting a state up because these mid-level and smaller distributors aren’t big enough to cover an entire state.”

  Be sure to explore the distributor’s overall operation. What is the size of their staff, and is this staff commissioned? Who are the key decision-makers, and what is their overall reputation with-in the wine industry? Is there an ownership change or other management issues? Are they look-ing to consolidate or expand? What is their timeline for paying their wineries, and do they pay them on time? Does their warehouse and inventory practices work for your particular needs?

  They recommend the SevenFifty website https://go.sevenfifty.com/ as a valuable source in identifying brand competitors and researching distributors, as well as price positioning and mar-ket positioning. The website also allows you to look at which producers wholesale distributors have in their book.

Launching a Wholesale Distribution Program

  Before releasing a particular wine, be sure your sales reps and brand managers have adequate resources so they can tell the story behind this vintage. Be clear where you want your wine sold, as well as the pricing for placements. Along those lines, register your labels when applicable, and allow for ample time for this registration process to be completed. Determine if you need addi-tional staff to manage both this new sales channel and inventory.

  When planning a market visit to a distributor, timing is everything. Many distributors hold their general sales meetings on Mondays and Fridays, with most of their sales staff in attendance. Hence, these meetings represent an opportunity to tell the brand’s story and have the staff taste these wines.

  When going on a distributor ride-along, be mindful that most ride-alongs occur Tuesday through Thursday from 10:00 a.m. to 5:00 p.m. The typical visit is six accounts, though it could be any-where from five to nine with a break for lunch. (You will be expected to pay for lunch). Ask to see a list of accounts you will be visiting in advance. In particular, you need to know if you are visiting on- or off-premise accounts, as that will impact your attire and the sales materials you need to bring. Know your pricing and be prepared with collateral. During these visits, be flexi-ble. The distributor arranged an entire day of appointments around your wines, so be mindful when they need to do tasks such as putting in an order. Also, expect the occasional cancellation.

  A few things Eddy suggested to keep in mind once you have a distributor in place include monthly tracking to check your inventory and update your distributor on progress versus goals. He said wineries should know when it’s time to change pricing and be aware of chain presenta-tion schedules. “You need to be clear with your distributor regarding where you want your wines sold.”

  Finally, nothing is more important than having a plan. “Have a plan going in. Check up on it, and follow up,” said Eddy.