Fruits of their labor: co-op winegrowing takes root in North Carolina

Rural Cooperatives, Jan-Feb, 2006 by Bruce Pleasant

Before Prohibition in the 1920s, North Carolina was the nation's leading wine-producing state, with Muscadine and Scuppernong wines dominating its industry. But that all changed with Prohibition, which lasted longer in the South than in most other parts of the nation. Combined with low prices for table grapes, most vines were ripped out or left to die, says Margo Knight, executive director of the North Carolina Wine and Grape Council.

While California's wine crown is in no danger of being lost, winegrowing is steadily making a comeback in North Carolina, which currently ranks 12th among the states for wine production. Interest in wine grapes has been fueled in part by declines in the state's textile, tobacco and furniture industries, which once dominated the region's economy.

Data compiled in 2003 indicates that 1,000 jobs and $84 million are directly related to wine production in North Carolina. While the ultimate economic impact wine has on the state's economy has not been determined, Knight believes that it is significantly higher than the $84 million estimate. A new study has been commissioned to measure the economic impact with certainty, which should be completed this April.

Old North State Winegrowers Cooperative Association (ONSW) in Mt. Airy, N.C., was incorporated in 2001, and is currently the only co-op among the state's 52 wineries. When ONSW started, there were only 22 wineries, which provides some idea of the burgeoning wine industry in North Carolina.

Cooperative members have pooled resources to take advantage of economies of scale and marketing opportunities not available to small independent growers. ONSW has members from nine counties, so the impact of the winery reaches at least as far as their member vineyards.

Look for the co-op label

When ONSW bottled its first wine, the label chosen by the co-op was "Carolina Harvest," reflecting the pride the members had in North Carolina-grown wine. After a year of marketing the brand, the co-op made a bold move by changing its brand to "38 Vines" for its 38 charter members.

The label change was suggested by a team of MBA students at Wake Forest Babcock School of Management to make the wine appealing to out-of-state markets. Each bottle now tells the story of the cooperative and explains the significance of the brand name.

The Wake Forest MBA students were the winning team responsible for developing a new marketing plan for the cooperative winery.

"It was the best thing that happened, and it was the worst thing that happened to us," says Gray Draughn, president and general manager of the cooperative. After a year of marketing, they had to start from scratch to gain brand recognition. However, as they have expanded, the co-op's new brand has gained recognition. This year, the co-op's Chardonnay took a double gold medal in the state fair wine competition.

Capitalization and growing pains

Managing growth can be a welcome problem to have, but it has also caused some pitfalls for the ONSW cooperative. One of the biggest challenges the cooperative has faced has been raising capital.

Most members are small producers who must make substantial up-front investment in their vineyards, with a 2- to 3-year waiting period before generating any income from a harvest, says Doug Thomas, treasurer of the Winegrowers Association. "As a result, the membership is limited as to how much additional capital it has to invest into the cooperative."

The cooperative structure has been both an impediment and an avenue for financing their facility and operations. Cooperative members have one vote regardless of vineyard size. To meet the need for more capital, the members voted to assess themselves each $7,500. In addition, each member pays a fee of $1 per vine, with a 250-vine minimum. The vineyards range in size from 250 to 6,500 vines, which represents from about 1/3 to 10 acres. There are about 54,000 vines planted by cooperative members.

The cooperative did not have a sales staff that could service a wide geographic area, so it contracted with a wine distributor to expand its market. Expanding the markets and distribution of the "38 Vines" brand into new geographic markets is essential, given the number of wineries in the Yadkin Valley region, according to Thomas.

However, their first attempt to obtain a distributor failed after one backed out on a deal. At this point, the co-op was left with excess product that could not be moved quickly enough to free capacity. This past year, the cooperative dedicated more capacity to custom crushing for other wineries and for its members who wanted to bottle wine under their own labels.

Growth has outstripped the capacity to process wine. The inability to take equity when they leave the cooperative has hindered member investment. This has prompted the board to consider converting from a cooperative status to a stockholder corporation that would allow producers to recover their equity in the entity. However, the board tabled any proposed entity change, but will revisit it again in 2006.