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Amazing Grapes: “The Profit” Identifies Sour Inventory

profit-sour-inventory-banner “The Profit” starring Good Sam & Camping World CEO, Marcus Lemonis, continues to provide compelling, real-world, business lessons week after week.  For this week’s episode (4/8/14), Lemonis traveled to California to save a struggling wine store and bar called Amazing Grapes. A number of serious issues resulted in the business losing money despite generating over $3.5 million dollars annually in sales.
  •   Too much inventory
  •   Absentee ownership/management
  •   Mounting debt
  •   Inefficient use of space
At Wasp Barcode Technologies, we understand that effective inventory management is a challenge for businesses of any size.  This episode illustrated how poorly managed inventory can wreak havoc on profitability.
  • Inventory & the Wine Market
The owners of Amazing Grapes did not seem to understand either the current wine market or their customer base and, as a result, carried way too much inventory.  They offered over 1800 different choices in a retail environment – meaning all that wine sat on shelves waiting for just the right customer to walk in the door.  The negative effect:  carrying costs.  It costs money – sometimes significant amounts – to keep inventory on shelves, and, in this case, the owners spent $14,000 per month on rent to essentially warehouse dead stock.  Most business owners know they need to move product in order to make money; however, it seems as though the owners of Amazing Grapes felt that concept didn’t apply to them.  By continuing to stock slow moving products, wine that didn’t turnover within 30-60 days, Amazing Grapes not only sat on the money invested in that inventory – they spent even more money to store it.
“We are going to put a process in place to buy inventory the right way, so that we measure turn, so we are not sitting on hundreds of thousands of dollars in inventory.” ~Marcus Lemonis
The following wine statistics may seem to contradict the dire financial position of Amazing Grapes:
  •   The US is the world’s largest wine market in terms of revenue, with consumers buying more than 360 million cases of wine in 2012, up 2% from 2011.
  •   In 2012 total wine sales in the US reached $34.6 billion, a 6% increase from 2011.
  •   Online wine sales are finally coming into their own, with 74% of consumers purchasing wine from winery websites and 68% from Wine.com.  Wine e-commerce has grown 15% overall since 2011.
However, what the owners of Amazing Grapes should have acknowledged – the following statistics – was exactly why they were not seeing a profit.
  •   Growth in on premise wine sales is flat, but retail wine numbers are strong at $13.3 billion in 2012 (Nielson).
  •   More wine is being sold in drug stores and other chains such as Walgreens and Dollar General.
  •   The sweet spot for wine pricing is $10 – $14.99.
profit-sour-inventoryAmazing Grapes carried an excessive inventory catering to a market of customers that no longer existed.  They also did not evaluate where they made money: wholesale internet sales and the bar and restaurant.  They charged walk-in, retail customers the same price as wholesale, internet customers; never offsetting inventory carrying costs.  In fact, 65% of the wine actually sold by Amazing Grapes was transacted via email or the internet and, yet, most of their retail store was devoted to stock instead of the space really making money – the bar and restaurant.
  • The Offer
Lemonis proposed a deal unique to the series by offering the employees a stake in the business.  Ultimately, the deal made between Lemonis and the owners of Amazing Grapes was an exchange of $300k (to decrease distributor debts) for Lemonis owning 51% and the newly appointed management team owning 25% of Amazing Grapes.
  • The Result
The layout of the store was overhauled to enlarge the restaurant and bar space, and the majority of inventory was liquidated for reinvestment in product more appropriate for today’s wine consumer.  Amazing Grapes partnered with a local, private label to provide a house wine, with higher margins, as bar selections. Amazing Grapes’ unfortunate financial position was due to ineffectively managing inventory.  An inventory management solution would have given the owners the ability to track important inventory data: what was selling, what wasn’t selling, and what was aging outside of an appropriate turnover. Visit Wasp to see what an inventory management solution can do for your business.