First and foremost, let me quickly comment on this ridiculous direct shipping bill introduced to Congress last week.  A lot has been said about the so-called HR 5034 “CARE” bill (good overview/analysis here), but this bill, if passed, will effectively cripple the wine industry, destroying virtually every small winery that relies heavily on its direct-to-consumer business.  Throw in the fact that the wine industry is already an extremely difficult business to operate in and we are looking at potentially thousands of wineries closing up shop for good.  Not to mention it would eliminate consumer wine choices, stunt economic growth and provides further proof of something the American public largely already knows; that with enough money, power and influence, anything is possible.  Conspiracy theorists would quickly agree and bring up the JFK assassination and the second shooter (or spitter), the “Frozen Envelope” rigging the Knicks’ selection of Patrick Ewing in the 1985 NBA draft, etc.  But I digress.  I truly believe this bill will decimate the wine industry (particularly California) and is the second most laughable idea currently being discussed politically (I’ll leave this up to your imagination). 

Moving on, I had the opportunity to attend the Napa Valley Grapegrowers “Ahead of the Curve” seminar at Solage in Calistoga, CA.  I won’t reiterate everything discussed there as it was one of the more gloomy seminars I’ve been to, but I want to highlight some of the takeaways regarding key success factors for the future of the US wine industry, California specifically.  I have listed them below. 

• Wineries need to brand themselves better.  In an increasingly competitive and global marketplace, the use of the internet and social media to market and better disseminate key information to potential customers is critical.
  • Napa Valley in particular needs better brand recognition outside of the U.S.  Most Americans equate Napa Valley to great wine, but internationally, Napa is just one of many great wine regions.  Bordeaux has done this quite successfully – better than any other wine region in the world.
• US wineries need to be more cognizant of the increased globalization of the wine industry and the overall impact on its constituents.  Wineries may want to consider spending more time focusing on exporting wine (or at leat planning for it), particularly to countries like China that are showing increased interest in making and consuming wine.  Currently, China only consumes rougly .7 liters of wine annually per adult, as opposed to the US where we consume approximately 10 liters per adult, or 3 liters per person (#3 globally behind France and Italy).
  • Additionally, the current exchange rate works out favorably in terms of international demand as the Euro represents approximately 30% more purchasing power when buying American products like wine. 
• More winery owners need to run their wineries as professional businesses, as opposed to hobbies.  I mentioned this in a previous post and it still amazes me that many wineries do not operate with maximum economic returns as one of their primary goals.  Of course, I’m a finance guy first and wine guy second, so that probably explains my ignorance here.
  • The wine industry is uber-competitive (there are over 7,000 wineries in North America alone).  If that is something winery owners or grape growers do not want to do or cannot do, then achieving success is probably going to be quite difficult. 
  • In order to effectively compete, especially on an international scale, there needs to be a certain amount of cooperation with fellow competitors to successfully penetrate new markets (See:  Silicon Valley, Bordeaux, the music industry).  It will be interesting to see if the wine industry ever comes around to this fact. 
• Keep investing in R&D and innovation.  Innovation breeds success.  Things like solar panels, sustainable farming practices, oak alternatives and winery CRM software have all benefitted the industry.  This kind of forward-thinking approach to continually improving quality and overall processes can consequently lead to lower costs and carbon footprints as well.
• Last, and probably the most important point: wineries need to not lose sight of what they do best.  That is, keep making great wine and focusing on quality.  These days, if you do not have a quality product, you will not even get invited to the party, let alone have a seat at the table.

These ideas are by no means all-inclusive or the end all be all, but other winery owners I have spoken with recently seem to more or less agree.  Now, if we can just get them to agree on who makes the best wine!

First and foremost, let me start by saying that I love wine.  I love everything about it:  the vibrant colors, the tantalizing aromas, and the “it opened a whole new world to me” impact of trying a previously undiscovered wine.  I love how there are so many different varietals to enjoy with each offering something special to anyone with a few minutes and an open mind.  And then there’s the food…pairing an Alsatian Riesling with fresh crab, a zesty Zin with some BBQ or a vintage Port with some hazelnut gelato?!  It is all good.  Most importantly though, I love how wine continues to evolve – in the barrel, in the bottle, in your mouth.  It never ceases to amaze me how different the same wine can be depending on when, where and how you drink it.  To me, that experience is what the wine industry is all about.  We need to remember that change is a good thing and if we are not moving forward, we are moving backward.

I mention the concept of change and evolution because it is one aspect of the wine industry that will define its future success.  This belief has recently become more important than ever with different winemaking and grape growing methods and the emergence of both social media and technology (Wine Library TV).  So I wonder why the capital structures of wineries can’t ride that wave of change in the 21^st century and beyond.  How come almost all wineries continue to be owned by a small group of family members and a few key executives, but they rely on so many more to ensure the company succeeds?  It would seem to me that motivation breeds success and there is no greater motivation than potential financial gain in the form of annual cash flows or the eventual sale to the next “generation” of owners.  For proof, look up capitalism and the rise of the United States or listen to Gordon Gekko’s speech in Wall Street. 

Let me step back for a second and add a disclaimer that may help you understand where I’m coming from.  I was trained as an investment banker out of college and currently focus most of my time on fundamentally valuing companies, several of which are technology companies located in Silicon Valley.  I constantly work with companies backed by venture capitalists that often have complex capital structures involving preferred shares, warrants and stock options.  And honestly, this approach seems to work out pretty well for the technology industry in terms of creating a desire to succeed and continually innovate.  I do not see why a simpler version of that structure could not work in the wine industry.

Let’s take a hypothetical situation where a seasoned executive or well-trained professional in another industry is considering taking a new position at a winery and has two separate job offers.  Both wineries are successful family-run businesses with a long history in the industry.  Let’s say the only difference between the two is that one offers a stock option, employee ownership or profit sharing plan where current and prospective employees are granted or otherwise given the opportunity to purchase a small piece of ownership of the winery.  If the wineries are virtually identical, the candidate would likely take the offer from the winery with the option/ownership plan nine times out of ten, even if it included a salary lower than the competing offer.  With this assumption in mind, the option plan then becomes a key differentiator in terms of recruitment at only a marginal cost to the winery itself (depending on how many shares offered versus how many shares are outstanding).  With a structure like this in place, a winery essentially increases its chances of hiring the best and brightest among the candidates available.  Furthermore, it incents the new employees to work harder by giving them an ownership stake.  It is true that employees would likely only realize an eventual return upon a specific liquidity event, but I’m sure if you asked people whether they’d love to own a piece of a business that could be worth some money one day (in return for work they are already doing or going to do), the answer almost unanimously would be yes.  Finally, it is a fact that many wineries are actually created as a result of winemakers not having any upside or financial interest in the success of a previous winery where they worked.  As a result, they start their own winery and often compete directly with their former employer.  I know for a fact that several of these enterprising winemakers would have stayed with their former wineries had they been offered stock or profit ownership.

Now, let’s dig a little deeper into this concept of recruiting and differentiation.  It seems pretty apparent to me that one of the things that separate the wine industry from most other industries is that it largely continues to be operated and embraced here in the US as a family-run, cottage industry despite its overall size and vast number of competitors.  While Northern California is home to some of the best wineries in the world, the majority are purchased as lifestyle choices, third or fourth careers or inherited or purchased from a prior generation.  They are operated professionally with dedicated winemaking and operational staff but in most cases run as a small business.  While most businesses are created and designed to maximize profits, the “return” to an owner (or family members) are salaries and annual distributions.  If profitable, capital is not usually “retained” and is reinvested in the business.

If wineries want to grow and build a financial (or family) legacy they will need to realize that there comes a point of inflection where they need to open up the opportunity of growth and share the success with their investors and employees.  Equity ownership and stock option plans facilitate this end game and as mentioned earlier, you only have to drive around Silicon Valley to see that the model works.

In light of today’s global recession, now, more than ever, it is important for every business (wineries especially) to begin thinking of new ways to spur growth, creativity and continue paving the way for future success.  As Ralph Waldo Emerson once said, “Do not go where the path may lead, go instead where there is no path and leave a trail.”