I’d Like To Speak With The Owner

(Originally published June 2009)

As the economy continues to “sputter” (to put it mildly), Hanes wants to comment on something rarely considered by retail wine shoppers. Of course, this is a phenomenon which occurs with any small to medium sized retailing operation of any type. But it is perhaps more acute with wine retailing where a strong personal relationship often develops between the customer and the proprietor.

To wit. Very few wine store “owners” actually own their stores. John or Sarah’s business card may say owner, proprietor, partner or the like. But in the basic terms of equity ownership most of these people own squat. Which is interesting for a variety of reasons, particularly during a down cycle in the economy. (“Cycle” bandied about loosely here.)

Most owners of boutique wine stores spent many years in the trade honing their skills and knowledge. It takes a long time to not only become a master of the world of wine but also develop the interpersonal skills required for successful retailing (the latter may remain a work in progress in many cases). It is also a well known fact that working in wine retail pays jack. All this time you are acquiring wine knowledge and selling skills, you sure as hell are not acquiring the kind of capital needed to open a new wine store. But the day does indeed come when the senior salesperson says, damn it, it’s time for me to do this the right way and go out on my own. This is usually combined with similar exhortations from friends and family. You go, girl!

Between build out costs, legal, accounting and regulatory fees, insurance, website, and – most importantly – the initial stocking of the store, it is easily high six figures to open a store, sometimes seven figures depending on location and how whiz-bang you want the operation to be. How does one save $750,000 on $12/hour? You don’t. But new wine stores open all the time, right?

Well, unless, the salesperson in question is also independently wealthy (a possibility), you look for capital. With virtually no savings and no real unique business plan, a bank isn’t going to loan anyone half a mil. No, selling Müller-Thurgau instead of Chardonnay is not a unique business plan. So, after the bank lends you $50K, how do you come up with the next few hundred thou? The vast majority of the time it’s the ever-popular “silent partner,” the “money guy” who loves wine and believes in you. Man. Whether it comes from banking, advertising, the movies or professional sports, it don’t matter none. He’s got the cash, you need the cash. You run the show, he comes in once in awhile to show some friends around and pick up his case of Lafite. Same deal as with soooo many high end restaurants. It isn’t the chef’s money. And, as long as things are going good, err, things are going good. The investor(s) make a little return on investment, gets to feel good about funding the sales of good wine, and gets his trophies at cost. The “owner” gets to make the decisions, defend the rights of Zweigelt to exist, and make a better salary than he would working the sales floor for someone else.

That’s how it usually goes when times are good. When times are bad, it’s a whole other kettle of fish. Woe unto the day when the money guy actually needs that $500,000 he invested in the wine store. Then the silent partner starts to get real vocal like. Which is trouble because (a) the money guy probably doesn’t know anything substantial about wine retailing and (b) probably doesn’t have a firm grasp on general retailing principles either. Which, in turn, leads to the main crux of the problem when things go bad in the economy.

Most small wine store owners aren’t really good business people. Shock, horrors, but it’s true. They get into it with a very open-ended expectation that they’ve arrived and this is what they will be doing until 65 or older. At the outset, there’s no thoughtful consideration of what the best “exit strategy” from the business will be for them. And there’s rarely any explicit plan to “pay off” the money guy and increase their equity in the company while decreasing his. So, maybe it’s then an issue of how one defines “ownership” – if you work 15-20 years for a company but never acquire controlling equity, are you an owner or a “favored long-term employee”?

Which kind of cascades into a similar set of questions. Most successful boutique wine shops operate along the “cult of personality” lines. The owner and/or a top salesperson or two are the people every customer wants to see and have them help with their wine selections. Over time, the store’s persona more or less translates into this person. Extract the person from the equation and what value is left in the business? Probably not a whole lot as the customer loyalty is arguably more with the person than the actual brick and mortar establishment. Which is doubly weird because finding the true value of the business becomes hard to pin down.

Is the true value in the actual person who is the “front man” owner? If so, then the money guy can’t necessarily “fire” the owner or risk injuring his financial investment in the business. However, the front man (whom everybody loves) remains unlikely to be able to translate his personal value into true equity and remains in essence an employee working for someone else, the money guy.

Is the true value in the money guy? Well, he probably can’t sell wine on the sales floor effectively or coordinate delivery of orders or run a retail website. But he does have lots of money, very much needed money or it’s all a non-starter. On the other hand, the money guy needs a quality front man or the store won’t come close to maximizing revenue and return on investment. This is not to say that money guys do not sometimes churn through front men, they certainly do. Especially during tough times when, as previously noted, they need liquidity from their investment in the store and egos or visions of the business may clash. Anyway, there is a basic symbiosis in play.

Is the true value in the store itself, the wine stock, the location, the lease, the fixtures, the customer list, etc.? One might be tempted to say so but this rarely turns out to be the case. The stock could only be sold to a third party at a serious discount. The store’s general reputation may be high and salable but, again, how much of this is attributable to the cult figure front man? Moreover, if both the money guy is extracting nice yearly dividends or other forms of ROI payments and the front man is getting a hefty salary as “owner,” how much money is left over to reinvest in the business to attract a future buyer? Probably not a lot.

Which is the small business conundrum, be it selling wine or other stuff: what have you got when retirement day comes along? The front man “owner” has his yearly salary from the past 15 years, hopefully he got medical benefits along the way, and maybe some 401(k) money (but it’s doubtful the business did any matching funding). The money guy got some basic financial payments out of the business on a regular basis – but maybe not as much as an investment in other financial instruments or opportunities. He also got wine at cost and the jazz of being an owner of a swank wine store. But neither is likely to see any great payday when the business is sold. You’ll get cost of inventory, value of lease, value of customer list/relationships, value of staff (as if), and a small percentage on top for having successfully run the joint for 15 years. But it’s not like building a company that makes some new computer memory chip and then you sell it for a bazillion times what you financially put in.

And that’s why venture capital never touches small businesses. And why banks become increasingly leery of funding startups or extending sizeable lines of credit. The endgame value numbers don’t make sense. With a chain or franchise like Bottle King, Total Wine, or Majestic in the UK, there’s a scale that produces a much steadier revenue stream and more of a corporate structure which makes stability and return on investment clearer to any potential funding party. There’s no great dependency on a few people to sell wine and keep the business afloat and likely no one money guy to deal with, more of a corporate hierarchy (even if comprised of same family members and such). If the funding party needs to seize assets and sell them, there’s a lot better chance of getting a solid return via the sale with a chain operation than with Bob’s Emporium of Unique and Rare Wines.

So, the way things are now economically, be careful who you consider to be the owner of the boutique stores you frequent. They are not quite as indispensable as you might think. Or they might start stocking stuff you never thought they would, all in the name of making a buck (for the money guy). Hanes would love it if the people we think are the owners actually had a plan to gain majority equity. But that’s very rarely the case. And if you find a small retail store with the day-to-day operators having fully vested equity in the business, chances are the owners know jack about wine, they made their money elsewhere and just thought it would be “cool” to own a wine store…