Wineries a Good Bet for Investors, Survey Finds
The California wine industry is a solid bet for investors, but only if they do careful homework to find premium brands with potential for expansion.
That was the conclusion of a survey of the wine industry done by the accounting firm Touche Ross and Co. and presented Friday at an all-day symposium on the wine industry staged by Hambrecht & Quist, the San Francisco investment banking firm that initially made its biggest headlines as a sugar daddy to the high-tech industry.
The survey showed that the only winery segment that clearly was healthy was that specializing in premium brands of varietal wines selling for $3 or more per 750-milliliter bottle.
“Wineries over 50,000 cases that are heavily oriented toward varietal in the premium, super-premium ($7 to $14 per bottle) and ultra-premium (above $14) price segments tend to be the most profitable,” the survey said. It also noted that profit margins for jug wines are declining.
The survey, sent last year to more than 700 wineries in California, Oregon and Washington, failed to answer some of the questions often asked by investors such as whether a winery should own vineyards or buy grapes on the open market. The survey did generate a lot of raw data that will be combined with data from future surveys to answer such questions, said Gary Brayton, a partner in Touche Ross who coordinated the survey.
Brayton said that the price of a wine isn’t as much a factor in profitability for wineries as is “how well they turn over their assets.” That means, for instance, that investors may find more attractive those wineries that sell their wines quickly, he said.
The tone of the conference was more finance-oriented than wine-oriented. For wine makers more accustomed to talk of bottles and barrels, endless details about “return on equity” and “financial leverage” was occasionally jarring. One major reason for the symposium was to bring together investment bankers and wineries needing financing, organizers said, and it wasn’t long before investors and winery owners were trading business cards.
There was also a prediction that all this activity will soon lead to a spate of public stock offerings in the California wine business.
Earl Hamlin of Hambrecht & Quist predicted that within the next year or two, there would be about a half dozen wineries issuing stock to the public, “which is a tidal wave compared to what we have had.”
One hundred wineries returned the questionnaire, and 36 produced figures showing that they were unprofitable, Brayton said. One winery that did not respond was privately held E. & J. Gallo in Modesto, the world’s largest, even though all participants were promised anonymity.
The carrot to induce wineries to fill out the questionnaire was the promise of supplying participants with a complete statistical analysis by Touche Ross. Only survey participants were invited to attend a special briefing at the conference.
Wineries among the 340 registrants to the conference included Sonoma Cutrer, Grand Cru, Kenwood, J. Lohr, William Hill, Keenan, De Loach and about 40 others. Also in attendance were representatives of Saintsbury and Belvedere, two wineries in which Hambrecht & Quist partner William Hambrecht has investments.
John Fisher, head of a consumer group recently formed within Hambrecht & Quist to specialize in beverage investments, said this was the second such conference the company has staged, but it came 16 years after the first one.
“In 1972, we were waiting for the high-tech boom to take off, and it wasn’t happening,” said Hambrecht & Quist’s Hamlin. “We had 42 employees and we began to investigate wine.”
He said that first conference came months before a slump in statewide wine sales and the investment firm abandoned its interest in wine. Soon after, high-tech became Hambrecht & Quist’s No. 1 goal. In the years since, the firm has also specialized in the health-care field and applied technology.
Eight years ago, Hambrecht & Quist took Chalone Inc. public, and in the last two years, Hambrecht & Quist (which now employs about 275) has become strongly involved in other winery acquisitions. Recently the firm invested in Boston Beer Co.
“There are a large number of wineries here that we know are in the market for financing, and we expect that there are many others in the same position,” said Fisher.
One of 18 speakers was Brice Jones, president of Sonoma Cutrer in Sonoma County, who candidly said that his attempts to raise funds for his winery had met with failure recently because the U.S. banking community views the wine industry as a poor investment.
“Everyone wants a return on investment on a quarterly basis,” Jones said, adding that bankers simply don’t understand the economics of the wine business.
Walt Dreyer, owner of Grand Cru Vineyards of Glen Ellen in Sonoma County, said: “I was impressed with Brice’s candor. Maybe this (conference) will expose to the financial community the inner workings of the wine industry.”
Almost every speaker said wine was a good investment. The speakers included Ian Wilson-Smith, a vice president in Hiram Walker; Sam Bronfman, president of the Seagram Classics Wine Co.; Marvin Shanken, publisher of a series of alcoholic beverage industry trade publications, and Hambrecht.
Hambrecht, who also privately owns other vineyard and winery properties, said there are many reasons wine is a profit producer:
“The fundamentals are good. As tastes shift upward, there are new world markets to enter.”
Salaries within the industry are generally low. “It’s a good deal, and perhaps it’s too good a deal.”
Most investment goes into capital equipment that can be sold readily.
Entry costs are low, no more than $250,000 to become an owner of a wine brand.
