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.
V, this question of profitability is highly relevant for Napa winemakers, both current and aspiring. We've discussed in class how the price of plantable land in wine-growing regions has increased dramatically. In 2015, the price of prime real estate in Napa Valley grew almost 15 percent. The price of sourcing grapes from growers has also risen. According to the Napa Valley Register, the average price per ton for Napa County grapes rose nearly 8 percent from 2015 to 2016. Unequivocally, the financial feasibility of starting a new wine venture - by purchasing a vineyard or making wine through a virtual brand - has come under pressure.
ReplyDeleteHowever, a host of other factors have compressed and will continue to compress the profitability of existing winemakers, even as their land appreciates in value. First, labor shortages in agriculture California are becoming problematic. Related to labor, the cost of living in neighboring areas has made working in the industry less palatable for low-skill worker, and lack of transportation infrastructure has made commutes for workers unbearable during peak season. Second, the impact of climate change and increasing frequency of extreme weather events will impact yields and wine quality. This summer, Napa had over 20 days of 100+ degree temperatures. As Elin McCoy of Bloomberg writes, "Welcome to wine’s new normal: extreme weather events. They influenced this year’s harvest everywhere from Germany and France to Italy and Chile last spring and, at the last minute, Napa and Sonoma." For high-end producers, fewer grapes will meet quality standards for premier wines, meaning they will need to produce a higher case volume of lower-price, second-selection wines or sell wine into the bulk market. Finally, forthcoming regulations will make planting new vineyard area extremely difficult (albeit with good reason, as biodiversity decreases and formerly forested areas continue getting carved up).
In sum, the quandary you raise seems to be getting more difficult over time, not easier! I would be curious to know what labor markets look like in other dominant wine regions, but per the articles below, it seems as though newer regions such as Chile and Oregon are facing some of the same issues.
1. http://e360.yale.edu/features/in-napa-valley-vineyards-take-a-bigger-bite-out-of-forests-and-biodiversity
2. https://www.bloomberg.com/news/articles/2017-09-20/the-2017-wine-report-frost-fire-heat-affect-quality-quantity