Business Interruption Clause

After the catastrophic events this month in Northern California Wine Country, the clean up and recovery are now beginning. As the smoke clears, and the dust settles, many small DTC wineries are left to pick up the pieces and rebuild. Some experienced devastating losses and have started the insurance claim process. Even those who may not have experienced physical damage still have been greatly impacted. The good news is that there may be ways to recoup some of that loss, if you have Business Interruption Clause through your property insurance company. Even if you don’t have this clause, you may be able to obtain other resources to help with the loss. Either way, understanding the loss of income impact to your business is essential. It is important to note that providing accurate data, clear assumptions and your corresponding budget for the periods of closure and low traffic will aid in the intense scrutiny of the discerning third parties, ie, your insurer and its representatives.

In general, DTC-focused wineries should review three key areas in calculating the lost revenue impact. Besides the projected tasting room revenue, it is also crucial to think about lost future business of wine club sign ups and ecommerce impact of not collecting guest data for future marketing.

Let’s start with lost Tasting Room Revenue. One way to calculate lost revenue is to look at historic metrics and anticipated guest counts. Specifically, knowing the Average Order Value and how many guests convert to purchase are key.  Multiply AOV by number of orders anticipated, and the result should be in the ball park of what revenue would have been generated.

For example:

  • Winery A expects to see 500 guests per week, and 75% convert to purchase, or they anticipate 375 orders per week.
  • Average order value this time of year tends to be $275. (Remember we are in peak season – ensure you are looking at AOV that reflects that.)
  • 375 orders x $275 = $103,125 per week
  • $103,125 x two weeks  = $206,250

Next, we will focus on the impact to wine clubs. Based on the projected visitor count, how many wine club members would you have signed up during your business closure or reduced traffic periods? Using your Life Time Revenue calculations, what is the present value of that future business? Let’s walk through an example using industry standards and a few assumptions.

For example:

  • Winery A expects to see 500 guests per week, and has historic metrics that shows 10% conversion to wine club members. 500 x 10% = 50 new members of “lost business”.
  • Average tenure of Winery A’s database is 24 months, and the annual cost of a membership is $1,000.
  • 50 new members per week times $1,000/year = $50,000 per year in lost revenue, times two years is $100,000. (So for two weeks, $200,000 in lost future wine club revenue.)
  • Don’t forget about spend outside of shipments!

Finally, let’s not forget about future ecommerce business, especially since we are in the 4th quarter! Start by calculating the data capture rate of all guests and your email marketing conversion rates. This one is tricky, but if you have solid metrics, you can factor pretty close.

Keeping track of metrics helps not only during budgeting but also in times of crisis. If WISE can assist in any way, we are here to help. This is our strength, and we are here to help our industry rebound.

For more on how to claim loss of business or proof of business interruption, see these articles:

http://smallbusiness.chron.com/claim-loss-business-income-insurance-14436.html

https://www.irmi.com/articles/expert-commentary/burden-of-proof-in-business-interruption-claims/ 

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