It is nearly impossible to pick up a newspaper or watch the evening news without the alleged misbehavior of Goldman Sachs being pushed into our faces. They, it seems, were able to play the market and make money on the sale of real estate tranches without regard if the market value increased or the market value decreased. Sweet.
Absent from all reporting which I have read has been any mention of how challenging that proposition truly is. Most investment bankers take positions on one side and hedge the other: it appears that Goldman was "all in" on both the puts and the calls.
The wine industry operates in a challenging patchwork of state and federal rules, regulations and laws. The three-tiered marketing channels (distributor, wholesaler & retailer) act as a filter to limit broad market access by smaller vintners as economies of scale are required at the distributor level. Without sufficient inventory to spread over the distributors territory they won't give you a second look. Small wineries suffer most under this marketing schema.
Investment bankers such as Goldman Sachs don't always own the product which they are selling: that is one way to hedge risk. Wineries, on the other hand, almost always own the product that they sell: all risk is carried on the shoulders of the vintner and his/her family. A good year can be wildly profitable while a bad year can be disastrous.
How than can small wineries in Iowa replicate the financial success of Goldman Sachs - and avoid jail time for that matter?
Think of scale. Small wineries have to find a way to look and act big. Think of the aggregation which Goldman Sachs performed with the real estate which they bundled and sold. The took lots and lots of small mortgages and packaged them into something large which appeared to have low risk and high profitability.
What then is the wine analogy? Aggregate and self-representation.
If I were an Iowa vintner I would create the wine equivalent of the real estate tranche:
- I would create a corporation to bundle and represent Iowa wines to distributors. This would be the corporate entity which could, by aggregation, create the volume of wines which are interesting to the distributors.
- I would select a handful of wineries careful to choose a focused array of varietals and regions within the state. Iowa still hasn't identified it's trademark wine. The selections in the wine tranche needs to be wide enough to cover the state, yet narrow enough to maintain quality.
- I would also direct-market the product in a similar fashion to the California Wine Club. Establish a two-bottle monthly distribution to those who have visited tasting rooms of the wineries in the aggregation.
Bottom line: As long as small wineries think small they will remain small. Growth will require innovative marketing practices acting in parallel with the development of high quality products.