The news was a long time coming but, in the end, it didn’t surprise many people. The publicly-traded Vintage Wine Estates, with almost three dozen brands in its portfolio and a stock price that had been as high as $12.85 a share, declared Chapter 11 bankruptcy in July.
Yet another publicly-traded wine company had failed.
Yes, Vintage had its problems, not the least of which is that it was a SPAC – a company formed from a special kind of merger that was in favour several years ago and has since gone out of style because of its drawbacks. But there was more to it than that, says attorney Todd Friedman, the co-leader of the Agribusiness Industry Group at Stoel Rives in Portland, Ore.
“Wine consumption is stagnant at best,” he explains. “And if there is no growth in the market, there’s very little opportunity for growth in the short term. And that’s the key for public companies.”
The history of publicly-held wine companies is uneven at best, and includes a fair number of failures – some of them quite spectacular. Compare this to the long, and perhaps even more spectacular, record of success for privately-held companies like Gallo, Jackson Family, Trinchero and Delicato. What is it that makes it so difficult for so many publicly-held wine companies to succeed? Is it the nature of wine companies, the necessities of the wine business, or the requirements of public companies?
“Wine lends itself to not being public,” says Mike Fisher, co-founder and partner of Global Wine Partners in St. Helena, Calif., a strategic and financial consultancy. “The stock market rarely understands them because of its short-term focus on earnings, and not the appreciation of assets. And wine companies are about the latter.”
Wine consumption is stagnant at best. And if there is no growth in the market, there’s very little opportunity for growth in the short term. And that’s the key for public companies
History lesson
None of this is to say that publicly traded wine companies haven’t been successful and made money for their investors, and especially in the short term, says Fisher, and he mentions Chalone Wine group in the early 2000s.
But save for a handful of exceptions today, like Willamette Valley Wines and Crimson Wine Group, most are known for their failures, be it Coca-Cola’s attempt in the 1970s; Robert Mondavi’s rise and fall as a standalone public company at the turn of the century, which eventually saw it sold to Constellation Brands; or Treasury Wine Estate’s woes over the past couple of years. Even Constellation divested itself of most of its wine brands, despite being one of the most historic wine companies in the US, in favour of businesses where it envisioned more growth – because, said several analysts, that’s what drives its stock price. And the stock price is what matters to its managers.
“It’s 90 days versus three to five years,” says Erik McLaughlin, the CEO of METIS in Walla Walla, Wash., a financial consultancy. “I’m sure you’ve heard the same explanation from everyone, but the winery business cycle – planning, stockpiling, and production — doesn’t fit that 90-day cycle.”
There are other complications as well. When big, non-wine companies buy into the wine business, says Silicon Valley Bank’s Rob McMillan, the acquisitions are often “small parts of large public organisations, and there are no supporters within the parent company. Coke had a plan to go more broadly into wine, and that was an experiment that proved to be too small to move the needle.”
Besides, say analysts, no matter how much talk there is at the time of synergies, trimming the fat, and the like, wine companies – if only because of the legal requirements – have very little in common with non-wine consumer product goods businesses. Imagine trying to explain to Coke executives that their wine couldn’t be sold in a New York state supermarket, even though Coke was.
In addition, wine, at its core, is farming, with a new crop every year. That’s an alien concept even to other alcohol companies, which can increase or decrease production without waiting to see what the harvest will be like. If business is off, for instance, a beer producer just makes less, without worrying about what to do with the product that’s aging in tanks or still on the vine.
When big, non-wine companies buy into the wine business, says Silicon Valley Bank’s Rob McMillan, the acquisitions are often “small parts of large public organisations, and there are no supporters within the parent company.
Different responsibilities
Also key, says McLaughlin, are the demands made on wine executives in the public company environment. Presidents and CEOs, he says, no longer spend most of their time running their business. Instead, “they’re focused on the shareholders, corporate compliance, and accounting. They’re managing the markets – meeting with analysts, explaining the stock price – and running the company day to day ceases to be their full-time job. They’re explaining performance, and they don’t have any time to fix performance. Their skill in running a wine company enabled them to take it public, but now, other people are running the wine part. And no one is quite prepared for that change when it happens.”
That is one crucial difference between successful private wine companies and those that go public. There’s no pressure to produce day-to-day earnings, and no one from the Gallo or Indelicato families has to explain anything to stock analysts. The late Jess Jackson probably got more attention for his non-wine endeavours than he ever did for how he ran Jackson Family.
Wine businesses like sports teams
One significant comparison, says Friedman, are sports franchises. These are also asset-based companies, where the value comes not so much from the day-to-day performance, but from the team’s assets – primarily its athletes, its TV contract, and its real estate. Hence, the owner’s return comes not from a stock price, but when the team is sold. The NFL’s Dallas Cowboys are worth a record $10 billion, but they haven’t won a Super Bowl since 1996. Nevertheless, if and when owner Jerry Jones sells, he will have more than made back the $140 million he paid for the team in 1989.
“That’s why you don’t see many publicly-trade sports teams,” says Friedman, “because there is a mismatch between earnings and asset value. They’re run not necessarily to make money, but to win. And that’s similar to the wine business, where making great wine is sometimes more important than making money.”
And, he says, it’s probably not a coincidence that people buy sports teams for the same reasons they buy wineries – not because they want to run a business, but because they love sports or wine.
Perhaps the most telling example of how the markets favor day-to-day performance over assets is what has happened to Duckhorn Portfolio since it went public in 2021. Every analyst interviewed for this story said it was a well-run company with high-end assets and quality brands, including Duckhorn and Kosta Browne. McMillan says it’s “in pretty good shape despite the drop in stock price. … I don’t think anyone is expecting them to follow the path of Vintage. Their owners are very experienced businesspeople and now understand the business.”
“Wine lends itself to not being public. The stock market rarely understands them because of its short-term focus on earnings, and not the appreciation of assets. And wine companies are about the latter.”
Bucking the market - in the wrong way
Yet Duckhorn stock is worth just one-third of its initial price, even though the overall market has increased by 42%, as measured by the S&P 500, over the same period. And almost all of its financials are negative for the first six months of this year, despite a 1.4% rise in revenue.
As Fisher says, “This is a pretty gloomy time for the wine business.” Which is a condition that the market doesn’t like.
The irony is that the successful public wine companies, like Crimson and Willamette Valley, are closely held. That means very little stock is traded; Crimson’s daily volume is less than 1% that of Treasury. That shields the companies from much of the day-to-day pressure others are under to boost earnings at all costs.
“Their shareholders and investors aren’t looking for financial returns,” says McLaughlin. “They’re looking for other perks, the things that come with owning stock in a wine business. They are very patient stockholders.”
Which is something more publicly-held wine companies wish they had.
