Starting a Winery with $0

In the early 2000s, Ryan Carr, an ASU alum who studied graphic design and had no money and no wine experience decided he wanted to learn how to make wine and start a company. He started by working with wine makers in the Santa Barbara area and began to learn the trade well enough to begin making his own wines in his garage. He made enough to sell 10 cases to friends who immediately took to the wines and wanted more. Fueled by the success of his first go attempt, Ryan began to scale up his production, trading his time working for anther winery for the space and equipment to produce his own commercial wine. Eventually, he continued to scale to the point of owning his own wine tasting room in downtown Santa Barbara and starting his own vineyard management company.

Here’s the success: Ryan owns hundreds of barrels worth of wine all housed in his own tasting room and has received some of the highest honors and best commercial success for his pinots in the Santa Barbara area.

Here’s what makes this even more incredible: he started from nothing and still doesn’t own any vineyards.

What?! I thought you had to have a fortune to start a winery?

This summer I had the opportunity to visit Carr Winery’s tasting room in downtown Santa Barbara and learned about Ryan from his wife (who runs the tasting room). Ryan’s story fascinated me because it runs so antithetical to the oft cited story of the multi millionaire who wanted an outlet to spend all his/her money and so started a winery.

Ryan’s winery has been profitable from the start and he’s grown more or less just on the back of his compounding business success in wine making. I love this story because it’s a great example of how hard work, determination to learn, and resourcefulness enabled an entrepreneur to buck the traditional model of winemaking (buying and owning a vineyard before making wine) and found success along the way.

Maybe this could be a new case for this class?

Biodynamics and one woman

When I was in cooking school in Ireland, I attended a dinner hosted in honor of Anne-Claude Leflaive, named in 2006 as the best white wine maker in the world. Leflaive is a legend in the wine world. Her family estate is in Puligny-Montrachet, Burgundy, and her land has a Grand Cru appellation, meaning that it is some on the most coveted terroir in the world. She also pioneered biodynamic practices in Burgundy when no one else in the old guard understood its value.

In Ireland, there's a great tradition of folk music after dinner, and that's exactly what we did. We all clustered into the drawing room to hear old songs about the emerald isle, or the Irish bandit whose lover betrayed him. My brother, though American with no Irish heritage, had to play a folk song for the group - that's just the kind of guy he is. But Anne-Claude became enamored of him on the spot. Suddenly, we had plans to dine with her the next night.

When we sat down for dinner, all of us nervous to impress her, the sommelier handed the wine list to my dad. I've never seen him so panicked. I mean, how do you pick wine for the best winemaker in the world?? He settled on an Albarino.

Throughout the course of that conversation, Anne-Claude told us about the meaning of her biodynamic practices. Yes, she believed that the practices improved the quality of her wine. She believed that they concentrated the flavor of her wines. But, to focus purely on quality misses the point of her life's work. She viewed herself as a steward on the land. A temporary inhabitant of a long line of Leflaives whose responsibility it was to make her land more resilient. Her practices were driven by a respect for nature and for the environment. I feel compelled to buy biodynamic wines because I want to support that stewardship.

At the end of dinner, I asked if I could come to her vineyard for the harvest. I'll never forget her response. She said, "yes, of course, but be aware that you'll be shitting in a bucket. We'll use your waste to compost."

I never ended up going, and it's one of my biggest regrets. Anne-Claude passed away a few years ago. The world lost one of the best winemakers, and one of the few top women winemakers.

Does Hanging Deer Bladders Stuffed with Yarrow Flowers in your Vineyard Improve the Taste of your Wine?

Last class, Professor Rapp made short reference to the winemaking "witchcraft" of biodynamic agriculture. While she teased some of the bizarre practices—which include stuffing severed cow horns with "the manure of lactating bovines"—involved in biodynamic winemaking, I believe it may have undersold what is surely one of the most baffling widely-practiced agricultural techniques in the modern world.

After visiting yet another vineyard that espoused biodynamic principles on our Argentina/Chile GST focused on the New World wine industry, I became interested in learning more about the practice, which had previously been described to me as "beyond organic" or "the Cadillac of organic farming".

Suffice it to say, a few short minutes of Googling will surface enough mysticism to bring even the most pious astrologer to his knees.

In addition to the above, so-called biodynamic "preparations" include: "stuffing chamomile blossoms in to the small intestines of cattle then burying in humus-rich soil in the fall and digging up in the spring", "placing chopped oak bark inside the skull of a domesticated animal surrounded by peat and burying in the ground where rain water flows", and packing "deer bladders with yarrow flowers and then hang[ing] them amid the vines". Each preparation is to be properly "activated" by a stirring process known as "dynamization" and applied to the land with due care to the position and influence of celestial bodies.

SF Weekly writer Joe Eskenazi recalls his visit to a biodynamic vineyarrd thusly, "Luke and Sue sit beneath a tree, scooping up handfuls of ripe manure and packing it tightly into cows' horns. Nearby sit four "sausages" of chamomile wrapped in cow intestines. Both will be buried around the fall equinox and unearthed on the spring equinox after having amassed "etheric and astral forces" – for which the horn serves as an amplifier." He notes that both Luke and Sue "believe the well-being of this winery is controlled by cosmic, supernatural powers that descend from the distant heavens and percolate up from the depths of the Earth."

Biodynamic agriculture was divined by an Austrian soothsayer named Rudolf Steiner, who Eskenazi reports was "a self-professed clairvoyant and occult philosopher" that "conceived of Biodynamics during his telepathic visits to the realm of spirits he claimed existed 'behind' our material world."

Indeed, science has not been kind to Steiner's preparations.

Linda Chalker-Scott, a professor at Washington State University, notes that many today associate biodynamic agriculture with organic practices. That is, biodynamic is simply organic farming with a bit of sophistry added on top. However, Steiner himself had nothing to do with the inclusion of standard organic practices in biodynamic agriculture.

This has served to muddy the scientific waters, as some of the studies that proponents of biodynamic practices have pointed to merely compare conventional to biodynamic farming, without controlling for the scientifically verified effects of organic farming. However, Chalker-Scott concludes, "when researchers have compared biodynamic, conventional, and organic farms... by and large there are no differences between the biodynamic and the organic farms".

And, although Professor Rapp mentioned a study (perhaps this one?) showing that biodynamic wines performed better in a blind taste test, one wonders whether the control group included non-biodynamic organic vineyards. Even then, perhaps we should wonder whether this is a matter of causation or correlation. That is, does jumping through all of the biodynamic hoops simply lead one to take better care of your vineyard, even if its scientific benefits are dubious?

For those with more interest, Katherine Cole has a book called "Voodoo Vitners: Oregon's Astonishing Biodynamic Winegrowers".

Sources:
http://archive.fortune.com/magazines/fortune/fortune_archive/2004/08/23/379392/index.htm
https://drinkwhatyoulike.wordpress.com/2011/12/31/cow-horns-manure-mysticism-planetary-alignment-and-biodynamic-viticulture-in-virginia-and-other-eastern-wine-regions/
https://civileats.com/2011/05/03/voodoo-vintners-oregons-astonishing-biodynamic-winegrowers/
https://archives.sfweekly.com/sanfrancisco/voodoo-on-the-vine/Content?oid=2170162&storyPage=2

Experience or Convenience?

      Throughout this course, I have been surprised by the number of online wine players that have been shared on the screen such as WineDirect and Wine.com. Despite the growth in this space, I still find myself thinking brick & mortar for my own personal wine purchases, however maybe I am just old school. For me, wine has always been an activity of discovery when dealing with lower priced wines, but when thinking about a more expensive purchase, I exclusively rely on a few trusted people for direction. For this reason, I was not surprised to read in the "Drowning in the Wine Lake" reading that the attribute ranked second as most valuable in wine choice was good customer service. It also stated that "at the specialist shop, having a staff with good wine knowledge was rated more important than a good selection of higher priced wines, implying that even more knowledgeable consumers want a salesman that can be trusted with making wine recommendations." So where does ecommerce come into play here and why would someone chose to forego the experience of wine selection and choice to purchase online? I think one of the key differentiators is knowledge and education in this space. There is no way to know what the wine inside the bottle will taste like without expert knowledge of the region, the varietal and perhaps even simply having tasted it before. The salesperson is necessary to bridge this gap between the product and the consumer. Without this expert knowledge, people are most likely to rely on queues such as a familiar brand name, an eye catching label or perhaps a brand name that triggers a recollection. Another thing to note is the differentiation of selection that consumers can find online vs. in store. Growth of online DTC has grown over 60% in the past several years, but when looking at lower priced wines under $15, that growth is much smaller. Perhaps, online consumers are falling more into a category of wine enthusiasts that enjoy the search for a delicious wine to round out their collection or perhaps even to gift to a friend. My assumption and learning from this course is that many smaller wineries are using the DTC online channel to circumvent the three-tier system and that wine enthusiasts that want specific bottles will go to the source to attain them.

      This caused me to think a lot about the role ecommerce plays in other luxury industries such as fashion or beauty. Many of the luxury players have been slow to jump on the ecommerce bandwagon relinquishing power of controlling the experience that consumers have with the brands. Consumers enjoy the process of entering a luxury house, being cared for by the associates and then showcasing their new purchase in a luxury labeled bag as they exit the store. This experience is lost with ecommerce, but with it, consumers gain convenience and expanded distribution availability. The question remains – which is more valuable to the consumer and does this change depending on what the product is that is being purchased? As ecommerce has become more popular, we see many of these luxury houses starting to adopt ecommerce as a distribution channel because of the benefits of being able to reach a wider range of consumers. The challenge is balancing exclusivity with availability. Many of the big wine players have managed to tackle this challenge by introducing wine clubs, but I will be interested to see how these luxury players continue to weather this trend – will the store experience or the tasting experience ever decouple from the purchase of wine? Will a world ever exist where we rely solely on information available over the web and forego the luxury experience for convenience? I am not sure that it will ever be that extreme, but I am eager to see how this industry plays out as technology begins to play an ever-present role in our lives. 

Great Wall Wine

This week’s “Wine in China” case reminded me of a funny wine memory I hadn’t thought about in years. After graduating from my undergraduate university in 2012, a good friend and I moved to Shenzhen, China, for the summer. We had been asked by a tutoring company to lead workshops for Chinese high schoolers on how to apply to American universities, specifically focusing on that elusive personal statement essay. Long story short, we soon realized that Shenzhen is not a glamorous city. Its stifling temperature and lack of activities other than shopping resulted in our spending a considerable amount of time inside together. We obviously needed wine.

On our first wine shopping adventure, we discovered Great Wall Wine (images below). As recent college grads easily pleased by Charles Shaw, we thought the $4-5 bottles were fantastic. We picked up several and made our way back to our apartment, excited to dive into a wine-accompanied Netflix marathon.

Much to our dismay, the wine was awful. We’re not talking boxed wine awful, but rather undrinkable awful, to the extent that we worried what chemicals beyond grapes made have made their way into the bottles. We spent the rest of the trip purchasing our vino from the esteemed neighborhood 711. We spend about $20 per bottle on the “fancy” Yellow Tail option which, by comparison, offered more than top shelf tasting notes.

I never got around to researching Great Wall Wine, but was inspired by this case to poke around online. In line with the timeline provided in our case, the company was founded in 1983 and is China's largest wine producer. Most interestingly, in my opinion, it is a subsidiary of state-owned COFCO Group. COFCO, or “China National Cereals, Oils and Foodstuffs Corporation,” is the largest food processor, manufacturer, and trader in China. Yet the company does market is wine around the world, including USA, the UK, and even France. Needless to saw Great Wall wine isn't available in Menlo Park's K&L Wines, but it is available for purchase online.

Given last session's discussion of family-owned wine operations, I found this comparison of a state-owned winery quite interesting. Based on my tastings alone, however, I think my personal bent will be to by from the former.

Domaine de Penglai

Latest status report on the DBR partnership with the Chinese International Trust and Investment Corporation (CITIC) can be found here: http://www.thesundaily.my/news/2017/10/06/lafite-release-first-chinese-fine-wine-next-fall

Investing in Wine

I was intrigued by our class discussion of whether it makes sense for a winery to IPO. Listening to Pete Mondavi share his family's experience of grappling with multiple investors, wrestling with the public for control, and searching for ways to raise capital in order to expand the business was enough to convince me that an IPO is a often giant headache for a family-owned winery. It appears that wineries--especially in the Robert Mondavi era--were caught between a rock and a hard place, with expansion being necessary in order to survive, but capital being incredibly difficult to come by (and not without significant requirements). To summarize, going public may have been a necessary evil for the Mondavi family .

This discussion also caused me to consider how to access the wine industry as an investor. As noted in class, the public equity markets seem to be a challenging way for investors to access the wine industry. Consider that wine is a finished product with a high degree of underlying commodities volatility (i.e. grapes)--the finished product truly is at the mercy of mother nature, which would likely result in volatility in the winery's public shares. This volatility may be tricky to hedge for investors who are used to limiting this kind of commodities exposure to commodities futures and ETFs. Additionally, wine grapes are a finite resource, meaning the management at wineries cannot simply toggle production up and down with as much flexibility as other companies--that's one fewer lever to pull in terms of maximizing shareholder value.

If the public equity markets aren't investors' preferred method of accessing the wine industry, they could always buy the finished product by the case or by the bottle. This is akin to buying fine art, and it often requires significant capital for the retail investor to  purchase cases of expensive wine. Additionally, investing in physical bottles of wine--like investing in art--requires careful storage and handling to avoid compromising the product. Plus, there is the added risk of a secondary market for counterfeits and damaged goods. (U.S. News: How to Invest in Wine).

Apparently, one can also purchase wine futures--the an agreement to purchase or sell wine at a fixed price at a future date. Wine futures can allow investors inexpensive claims to particular vintages in specific regions (Wall Street Daily). I don't imagine that this is a particularly deep market, but it is an interesting way of gaining unique exposure to commodities markets.



Lastly, as discussed, perhaps the best way to invest in the wine industry is through long-term private equity investments, in which the investment in a beverage company or winery falls within a portfolio of comps (either luxury brands or food and beverage brands). I thought it was interesting that there are specific, wine-focused private equity firms (ahem, looking at you, San Francisco-based Bacchus Capital Management...nice name).

Can Napa Valley wineries be anything but a hobby?

In the summer of 2012, I visited my first winery ever: Robert Mondavi Winery. I was so impressed by the acres of vineyard, the beautiful property, and the elegant tasting room. My friends and I marveled at the beautiful structures out front and how well run the winery was; we imagined that the owners were incredibly wealthy from owning and operating this beautiful estate.

We heard about the history of the winery and how Robert Mondavi had started the winery after a fallout with his brother and his family, but we had no idea about the intricacies of the wine ownership industry or the tumultuous journey that the Robert Mondavi winery went through. Reading the Mondavi case gave me a fresh perspective on the difficulties of owning and operating a vineyard profitably, particularly in Napa Valley where land costs and competition are both high.

The sale of Robert Mondavi to beverage giant Constellation keeps me wondering – can wineries be a profitable business? Or are they meant to be an undertaking only for those who have owned land for decades or those who treat wine-making as a hobby instead of a profit-making venture?

It’s clear to me that even with the Mondavi name behind him, tremendous success as a wine ambassador of Napa Valley, and quality wines at various price points, Robert Mondavi was not able to make his winery a financial success. The public markets didn’t understand his story or the business and the stock price continued to decline after its IPO, indicating a limited appetite for an exit through public markets. Private equity buyers were hard to find, and those that do invest in wineries assume they will exit in the short-term through a sale to another private equity firm or to a larger beverage conglomerate. In both a public market and a private equity scenario, the winery owners and operators lose control to those that can provide capital and do not accumulate any value for themselves. Wineries that stay away from outside capital are constrained in their ability to grow and invest in new technologies and continue to barely realize a profit.

As I think about the Robert Mondavi story and the Napa Valley wine industry, I can’t help but think that the saying is right: The best way to make a small fortune in the wine industry is to start with a large one. 

Casablanca Valley, Chile - Pioneer in cold weather wines

As we discussed yesterday the Kingston Family Vineyards case I thought it would be interesting to learn a little bit more about the Casablanca Valley in Chile, where “the farm” is located.

The Casablanca Valley is located on the northwest of Santiago (the capital and political center of Chile) and 30 kms away, in a straight line, from the port of Valparaíso (the main Chilean port and a mandatory stop for every tourist).

Casablanca is one of the few valleys in the country that is not directly associated with a river. It has an extension of about 16 kilometers in east-west direction and within the same valley there are three large sub-sectors: high (the warmest sector, near the Cordillera de la Costa mountains), medium (around the town of Casablanca) and low (the coolest, towards the west).

The climate of the valley is semi-arid Mediterranean, with oceanic influence and depending on the location, the soils have a variety of profiles. Closer to the mountains some of the plantations are on floors of granite in advanced state of decomposition. In the flat areas closer to the coast the soils are clayey-silty-sandy. These are highly permeable soils of medium depth that together with the cold influence of the ocean and the Mediterranean climate generate the slow maturation environment. This translates into fresh wines with balanced acidity, rich aromas and delicate flavors.

Casablanca Valley is a relatively new valley to the Chilean wine industry. The realization that Casablanca had great potential to produce cold climate grapes came in the mid-1980s. Today it’s one of the most popular valleys of the central zone, thanks to the fact that it has been able to diversify its offer of wines, understanding and learning about its climate and soils. Not only white wines, but red varieties such as Pinot Noir, Cabernet Franc and Syrah take advantage of the cooler valley conditions, obtaining very good results. Casablanca is currently the largest producer of Chardonnay in the country and the third producer of Sauvignon Blanc. And as we learned, some of the best Pinot Noirs in the country come from this area. Being so close to Valparaiso and Viña del Mar, two important destinations for tourism, Casablanca has become an important tourism center as well, receiving thousands of visitors each year.

The Romance of Picking Grapes By The Night

A few of us had the pleasure of being introduced to Bertrand Trepo of the champagne house Trepo Leriguier during summer this year. He was visiting Napa and was generous enough to conduct a champagne tasting for a few of us at our Escondido Village grad apartment. In spite of him being from the old-world wine region, he came across as an eager student of new wine making ideas and was in Napa to do tasting and learn. During the tasting of his champagnes, he mentioned in passing that he picked his grapes in the middle of the night. At that juncture, I did not think much of it.

In class today, however, Peter Mondavi Jr., mentioned in a comment that they themselves picked their Sauvignon Blanc grapes in the night to maintain optimal fruit freshness. According to stories, the technique originated in Burgundy at Domaine de la Romanée-Conti and continued to spread to Bordeaux region.

This reminded me of the original conversation we had with Bertrand and I went to look a little deeper. It turns out that he has taken this night grape picking technique and turned it into a marketing tool by which he invites plenty of friends, family and media to join him in the activity of night grape picking. The champagne region usually does not pick their grapes at night as the climate is cool enough during harvest season. Bertrand, however, took the night picking and made it a tradition associated with his brand. He is apparently the first champagne house to pick grapes at night. It’s a bit of a tradition and his customers are enticed to enjoy returning back to the soil by handpicking the grapes. It gives his consumers a chance to be part of the process of wine making. He furthers his brand value by associating it with a tradition and a makes a big event out of it. It celebrates the harvest season and I am pretty sure generates revenues and attaches an experience to his champagnes (beyond that of tradition tasting rooms).