The use of oak barrels to improve the quality of wine and to aid in the maturation process has a long history (Garde-Cerdán and Ancín-Azpilicueta, 2006), and has become a core part of the expertise of wine makers globally. Wine barrels are expensive, and constitute a considerable share in the cost of making a fine wine – this is why it is estimated that only 4% of wineries world-wide use them (Anson, 2013). Yet there is not much in the literature on the financing models available to wine makers, or on how they decide on the optimal financing strategy, although some authors do address the issue tangentially (e.g. Carter, 2012; Monday and Wood-Harper, 2010; Blake et al., 1998). This is arguably because there are really only two financial models in use around the world: buy the barrels with own funds, or borrow directly or indirectly from a bank using a conventional loan instrument with collateral. This neglect exists despite the more recent emphasis on value chain financing in the literature (e.g. Miller and Jones, 2010). Elsewhere in the world wine makers have the option of a) buying barrels with their own funds; b) of borrowing in the form of a collateralised loan or a lease from the traditional banking sector or from a wine industry-specific bank; or c) of taking out a lease in the form of barrel-specific lending. The second of these options represents a conventional financial model. The lease option works much like vehicle finance. The owner of the equipment (in this case wine barrels), also called the lessor, gives a client the opportunity to rent the equipment over a fixed time period against an agreed rental payment. The lessee has the option to return the equipment after the expiry of the agreed term, or to take over ownership in the event that there was a buyout option (Kirkham, 2011). The lessor typically gains a tax advantage in writing down the value of the capital asset. The lessee frees their capital for other uses, especially after the harvest when wine making incurs a host of other costs. In a lease the equipment itself is the collateral for the loan, unlike a regular loan, where additional collateral may be required. The third option, barrel-specific lending, is found in different variations in France and in South Africa. The purpose of this paper is to describe the origins of the rental model in use in these two countries, and to describe the business model that has been put in place to gain access to the market. The attention then shifts to the identification of those characteristics of the market in wine barrels that make the South African version of the model suited to the needs of the local market. The paper ends with some information on international trade in wine barrels as an indication of market size and some reflections on how to grow the business.
This article was written by Karl Storchmann