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).

Superstitions of Vintners

SUPERSTITIONS OF VINTNERS

Superstition rituals are powerful routines that give us solace in stressful times and allow us to have the positive thought and faith that otherwise in a stressful situation is hard to come by. Since time immemorial, people have had to deal with the randomness of nature and have had the fear of the unknown. since the wine Industry is so held captive and ransom to the tantrums of the weather and its effects, its but Natural that the vintners, want to connect and repeat the psychologically comfortable circumstances manifested as rituals to remain positive. Some of the superstitions that have been practiced and acknowledged by the vintners are as follows: -

Hair:

The superstition in this winery in Oregon is that there is no shaving once the first fruit is picked until the last cluster runs through the sorting line. The pickers are allowed to shave their neck, because that’s just gross. The first shave is typically something weird or different. This works out good since it is usually around Halloween and one can get away with looking like an idiot. It is believed that failure to follow these rules would result in poor fermentations, and thus most people follow this ritual. Once harvest starts lot of winemakers in the state of Washington don't shave again until their last grapes are in (especially when harvest is off to a great start). One of the winemakers grew so tired of the routine to grow and cut the Hair that he instead came up with the idea of dyeing his hair purple or red just before harvest.  However, Anne Vawter of the Red Mare wines always chops her hair right before harvest. She proudly says-Out with the old and in with the new.

Clothing:

Rachel Stinson Vrooman says that her biggest harvest superstition is a little grungy in that the harvest sweatshirt/vest must not be washed from the beginning of harvest until the last press run. Other than that, water hoses must be left perfectly coiled at the end of the day, lugs stacked in stacks of 20, and no checking of grape ripeness the day after a rain. Neeta Mittal of LXV Wine, Paso Robles wears her Cal Berkeley Sweatshirt on the first pick of every harvest. Paul Steinauer of Flora Springs, St. Helena wears shorts from the first day of harvest until the last tank of red is pressed out. Even though the last pressing might continue till last November and it gets cold.

 Toasting:

MJ Tsay at Realm Cellars, St. Helena says that since she is a female winemaker, she cannot participate in the harvest ritual of shaving, and thus she has taken the elegant route of toasting the first grapes received, with a bottle of Champagne. She always gathers her entire team (sales/marketing included) at the ungodly hour of 5 or 6 a.m. to gather around their first bin of grapes and a taste of Champagn- remembering to always give a pour for Bacchus over the grapes.

Paul Steinauer of Flora Springs, St. Helena follows the ritual to saber a bottle of bubbly and christen the grapes to celebrate the vintage and then the team toasts to a great harvest season. 

Odd Stuff:

Matt Crafton in Chateau Montelena, Napa Valley, ever since his first harvest, has always carried a plain-white envelope with the word ‘push’ written on it to keep him motivated during the crazy, stressful days of harvest.

Garrit Stoltz of Stoltz Winery, Hood River, Oregon on the other hand has a deep distrust of pumping wine. They instead fork the grapes by hand into destemmer, and then feed down into what was the cadaver laboratory (their winery facility was once a funeral home) for fermenting and pressing. Once quiet it is moved with gravity and gas displacement into the mortuary’s old cold chamber. The wine is bottled by hand back in the lab without ever seeing the inside of a pump.

Stuart Spoto of Spoto Wines, Oakville has a simple ritual wherein he sits down with his cup of coffee, pets the winery dog and let him lick his face for luck. This is how he starts his days during crush and to top it all the winery dog’s name is Napa.

Brooke Langelius of St. Supéry Estate Vineyards & Winery in Napa dreads the Full moons because as per him they bring nothing bad luck for bottling. The equipment on their bottling line breaks down with no explanation what seems like every single time they bottle on a full moon.

Laura Barrett of Casey Flat Ranch in Capay Valley follows just one superstition – she never, never washes her car during harvest. With multiple trips, up and down Casey Flat Ranch the dust gets into every nook and cranny of her car, inside and out but she believes that It's against all winemaker rules to wash until the last grapes are in. If you hit the carwash, it will rain.