Are We Hiring into a Industry-Wide Downturn?

February 7, 2019

This month’s issue of Wine Business Monthly has a lot of useful information in it.  A lot of talk of headwinds up ahead for the wine industry, along with some justifiable “yes, but stay calm”-type of advice.  For regular readers of this blog, you know that I've been worried for a long time that 2019 would signal a cyclical downturn for grape growers and that, more recently, I've come to believe we're headed into a recession and an industry-wide slump.  Which is why I was also interested in the metrics on page 30 showing a couple of years of very strong growth in hiring for the wine industry.

 

This is concerning to me.  I worry that we, in this business, tend to respond to market conditions after they’ve become reality (and may soon be shifting), instead of anticipating them.  I’ll touch on that in a bit, but let’s go over the numbers first. 

 

According to WBM’s job posting numbers, hiring for all winery jobs is up 6 percent over last year.  DTC, TR and retail (hospitality) are up 11 percent from 2017 and 14 percent from 2016.  Winemaking hiring saw an increase of 10 percent since 2017 and 28 percent since 2016! 

 

Sales and marketing hiring, curiously, is down since last year and statistically flat since 2016.  Even more odd: retail hiring has plummeted 21 percent from 2017 and 32 percent from 2016.  I wanted to understand if S&M hiring was down due to heavy hiring in previous years.  But going back a few years, I saw that hiring has been pretty flat for the several years for which data is available.

 

So, what are my worries?  If you know me or read my blog, you know I’m worried – it’s kind of my job.  You also probably know that before I go any further, I’ve got some caveats.

 

Keep in mind during this discussion that I’m not drawing actual conclusions, just voicing concerns.  The reason for this is that I’m looking at a one-dimensional measurement.  It’s a single metric that measures “how much” and it’s a proxy measurement.  It’s not a direct measurement of hiring, just a measurement of job postings.  It doesn’t capture, for instance, hiring that occurs organically through professional networks, which may make up a great deal of hiring during the early part of increased hiring or in a specific category of jobs. 

 

In addition, this metric doesn’t tell us the why, who, what or how of the hiring.  It doesn’t tell us how much slack there was in companies’ workflow that could be taken up by extant employees.  It doesn’t tell us why these folks are being hired.  Etc., etc.

 

Now that we’re past that on to the worries!

 

 

We’re Hiring Just in Time to Not Afford or Need It

 

Since 2012 or so, I’ve been predicting that 2019 would be a year in which we see the first signs of a period of difficulty.  Recently, I’ve been talking about that even more.  And it’s not just me – you can read plenty about it in this month’s WBM or from some of our industry’s luminaries, like Rob McMillan

 

Scaling up your labor costs just prior to a drop in sales is a great way to see your margins compressed or eliminated.  The average winery probably has a profit margin of somewhere around 8%.  If you lose, say, 5% of revenue that’s down to 3%.  A rise in labor costs could easily eat up all of that 3%.

 

In the meantime, reduced sales also often mean reduced workload.  If you’re selling less, you may start producing less.  But idle hands still need to be paid.

 

 

And Labor Costs are Sticky

 

Let me just insert an excerpt from my previous blog, The Three Horsemen of the Grapepocalypse, Part 3: The Rising and Sticky Cost of Labor:

 

 

"As you can see, wage increases have been steady and reasonable.  They are possibly just now growing in response to a tightening market.  One thing I want to point out is that, even in the depths of the recession, when wineries were seeing revenue streams dry up, they continued to increase salaries at a rate that outpaced CPI growth.

 

my main worry is the general stickiness of salary costs, [that] …  we will not be able to ratchet down when revenues stagnate or fall.  For most humans, the least comfortable ways to reduce costs are to fire people who rely on that job to make a living; cut pay to people who have come to rely on that level of pay to get by; or reduce benefits to people who have come to rely on those benefits.  And in fact, as I pointed out, wage increases outpaced cost of living increases even during the Great Recession." 

 

 

We May Also be Getting Diminishing Returns on New Hires

 

By now, the labor market is tight.  Check out the chart below, using Bureau of Labor Statistics numbers.

 

                         Unemployment Rate, Selected Counties, Bureau of Labor Statistics

 

If you’re hiring in Sonoma County right now, you’re hiring into a labor market with very little available labor.  That means you have fewer candidates who need to be paid more than ever.  You can pay a lot and poach someone or maybe you can hire a candidate who isn’t ideal.  Either way, you’re getting less of a return on wages paid than before.

 

While not every area is subject to this dynamic, I worry that in many of our core wine producing regions, we are hiring in a market that is producing diminishing returns on each hire.

 

 

Retailer Hiring is Down

 

I can’t draw solid conclusions here without more data, but this is a worrying data point. Our hiring is strongest near the top of the supply chain: winemaking.  But it’s down for the folks at the bottom of the supply chain, in the trenches, facing the customers.  This could indicate a precarious disconnect.  If retailers are hiring less, because they are selling less or foresee selling less, then why are we scaling up hiring for production?  This could indicate - as I think it does, based on other indicators – a coming mismatch in supply and demand that’s going to cause some level of pain.

 

 

Why Don’t We Hire for Sales & Marketing?

 

I’m not a sales and marketing guy.  Sure, if you pour me some wine I’ll tell you about how we should have Juneteenth wine events, push Wine Wednesday as an opportunity for selling wine as a moderate and healthful drink and then rant about how Paul Mabray needs to get everyone to hashtag #WineWithMillenials or something like that.  But, with the exception of data work, I don’t even really know what our S&M people do all day.

 

What I do know is that they are, unsurprisingly, the people who sell and market wine.  You know… the thing that pays all of our salaries.  Again, I can’t take this one indicator as the Answer to Life, the Universe and Everything, but we’ve had a long run of increasing sales in the wine industry – why haven’t we been hiring more sales and marketing people?  When the market is great, maybe we don’t need them as much.  But now that the market might turn, it would be a good thing if we had used the revenue we’ve been generating to prepare by hiring the right people.  Or, at least that’s one theory.  It could also be 42:

 

 

 

If You’re On Time You’re Late

 

I spent three years of high school in a military academy.  That means I heard this adage a lot: “If you’re on time, then you’re late.”  I wish our industry took that adage to heart.  Not with showing up at meetings, but with strategic and operational decisions. 

 

When I ran vineyards, I remember one of my customers was a very, very large winery.  It was 2011 and I was growing Bordeaux reds in Lake County.  The customer weaseled out of their contract, thinking there was oversupply.  Several months later I ran into one of their grower reps at a vineyard supply shop.  He wanted to buy my grapes!  I told him I was contracted up and he asked what price I would need to break my contract.

 

Now two things here are unimaginable to me.  First, his disdain for contracts.  But that’s beside my point.  How can a company full of well-paid, experienced people get into a situation where they are trying to weasel out of contracts and only 6 months later or so, realize they’re short!  No surprise that the same company felt the need to destroy many millions of dollars of wine two years later, fire their CEO a year after that and then have to pay out $49M to shareholders for related matters four years after that.

 

While this is an extreme case, I believe that late reactions are too common in our industry and proactive anticipation of shifts in the market are too rare.  We can do a reasonable job of forecasting demand, supply, grape prices, expenses, land prices and much more.  And we can prepare for uncertainty.  All too often, we don’t and it costs us, sometimes dearly.  And I worry that this hiring trend is another example of that.

 

I’m sure that many of our companies have done a great job managing their workforces.  But I worry that too many missed their chance to hire early.  To hire good people at reasonable wages.   To make sure those people were at work when the market was great, producing revenue, building relationships and developing skills that could be used to weather the coming storm.

 

Of course, hiring in anticipation of shifts in the market is risky.  But the upside is that you can right-size your business and make sure your labor force is prepared for challenges.  And, in all honesty, I’m not advocating so much that we hire in anticipation of an improving market.  Instead, think of my advice more as (a) hire early in a continued growth period, in order to power the growth process and (b) pull back on hiring when you’ve got a tough sales environment up ahead.

 

One final note: I really don’t want this to be misconstrued as a push to wantonly reduce our labor force.  One thing I really hate is how many business owners think that an accountant’s job is to tell you to cut expenses.  Even worse are the accountants who think that’s their job.  Instead, financial personnel should help you figure out which spending does or will produce a positive ROI and which spending won’t.  This is something we all can and should do and something I push on my clients.  Ideally, we would go even further, with a formal financial planning and analysis process where financial realities inform operations and operational realities inform financial decisions.

 

 

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So, my life is busy with AVA valuations up until the LLC tax filing deadline.  After that, I hope to do another public grape price forecast and, depending on the political environment, update the Grape Data Tool.  But my passion is trying to convert as many folks as possible in the wine industry to believing in the benefits of data, analysis and forecasting for decision-making processes and not just for sales.  If you like some of my articles and would like me to address a topic in front of your wine industry organization, please reach out.  In particular, I’d like to be talking about the coming “Grapepocalypse” and do presentations tailored to different groups to help their members prepare for the uncertain and challenging period ahead.

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