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Default NYT: Small Wineries Being Acquired by Big Names

The New York Times
December 29, 2004
MARKET PLACE

Small Wineries Being Acquired by Big Names
By FRANK PRIAL


Photo:
http://tinyurl.com/59s2l
Caption:
George Nitikin/Associated Press
Wayne Miller, left, and his son David, shareholders in the Robert Mondavi
Winery, took part in the decision to sell to Constellation Brands.


First, the new giant on the block, Constellation Brands Inc., snapped up the
troubled Robert Mondavi Winery for $1.3 billion. Then, last week, Diageo,
the world's biggest spirits supplier, agreed to buy the Chalone Group, a
group of small high-end wineries, for about $260 million.

Both deals were unexpected. But, in fact, the wine business has been in a
state of quiet turmoil for a long time. Almost unnoticed, even by the most
dedicated wine fans, bigger wineries and liquor companies have for years
been picking off smaller wineries.

Independents in the wine business operate on minuscule margins, and any one
of the evils that can befall an agricultural enterprise can throw a small
operator into bankruptcy or the arms of a big operator.

Constellation and Diageo are both big. By dint of many acquisitions,
Constellation, which used to be known as Canandaigua Brands, has edged past
E.& J. Gallo Winery to be the biggest wine company in the world, although
Gallo remains first in this country in sales by the case. According to
industry estimates, Constellation sold about 66 million cases of wine in
2003 under a proliferation of names; Gallo sold 75 million cases under its
own dizzying array of labels (about 45 at last count).

Diageo dominates the spirits business with products like Johnnie Walker, J&B
and Captain Morgan, but it also owns Sterling Vineyards and Beaulieu
Vineyard in the Napa Valley; the French wine company Barton & Guestier; and
34 percent of the Champagne producer Moët Hennessy. It is also a major
importer of premium French wines through its Chateau & Estates subsidiary.

The Chalone purchase, which is expected to be approved by shareholders and
regulatory agencies, will add 13 wine properties to the Diageo portfolio.

Besides Chalone Vineyard, in Monterey County, they include Acacia,
Provenance, Hewitt and Jade Mountain, all Napa County wineries; Moon
Mountain, Dynamite Vineyards and Oregeny, all in Sonoma County; Sagelands
and Canoe Ridge in Washington State; Echelon Vineyards in San Miguel in San
Luis Obispo County; a joint interest in the Edna Valley vineyard in San Luis
Obispo; and 24 percent of Chteau Duhart-Milon in Bordeaux, France.

In the Franciscan group alone, Constellation owns Franciscan Oakville
Estate, Estancia, Mount Veeder, Ravenswood, Simi, Quintessa and Veramonte in
Chile. It owns Dunnewood, also in California; Columbia Winery and Covey Run
in Washington State; and Canandaigua in New York.

But the big action for a company of this size comes from wineries no one has
ever heard of. Constellation's Mission Bell winery in California, for
instance, turns out about 15 million cases of low-cost wines a year under
names like Almaden, Cribari, Inglenook, Taylor and Paul Masson. All were
once individual wineries; now they are just brands.

"Constellation," said Wine Business Monthly, a trade publication,
"represents a high-volume business where supermarket sales are important and
the name of the game is category and brand management."

In snaring Robert Mondavi, Constellation acquired not only the most
prestigious name in American wine but picked up one of the best known
low-cost wines, Woodbridge. Woodbridge accounts for almost 90 percent of
Mondavi production (9.7 million cases in 1993) and 80 percent of its income.

Mondavi owns two other wineries, Byron and Arrowood in California, along
with a half interest in Opus One, a luxury Napa winery, in partnership with
Chteau Mouton Rothschild in Bordeaux. It also has interests in Italy and
South America. Mondavi is expected to sell most or all of these subsidiary
businesses before the Constellation takeover is completed.

The list of California wineries owned by larger, and often foreign,
companies is long. Here are a few prominent examples: Allied Domecq, a
British company, owns Clos du Bois, Buena Vista and Haywood Estate in Sonoma
County and William Hill, Atlas Peak and Mumm Napa in Napa County, through
Allied Domecq USA. Vincor International, based in Canada, owns R. H. Philips
in California and Hogue Cellars in Washington State; together, the two
wineries produce about 1.2 million cases a year.

Stimson Lane Vineyards, owned by U.S. Tobacco, owns Chteau Ste. Michelle,
Columbia Crest, Snoqualmie, Red Diamond and North Star in Washington State,
and Villa Mt. Eden and Conn Creek in California. Brown-Forman, of
Louisville, Ky., best known for its Jack Daniel's whiskeys, owns Fetzer
Vineyards in Mendocino and Sonoma-Cutrer in Sonoma County.

Even Gallo, which in the past bought land but never wineries, has purchased
several wineries in recent years. Late in 2002, it bought the Louis M.
Martini winery in Napa. Earlier this year, it picked up the venerable
Mirassou Vineyards in San Jose. How much of the Martini style will survive
the arrival of the Gallo winemakers is a question. Mirassou, Gallo
executives freely admit, was purchased for its name and its Monterey
vineyards. The first line of Mirassou wines released under the new owners
was all from Gallo cellars.

Gallo's emergence over the last decade as a fine winemaker has resulted in a
variety of labels like Rancho Zabaco and Frei Brothers, all of them with
different styles and price ranges but all made in the same huge Gallo winery
in Sonoma.

Fred Franzia takes yet another approach. Mr. Franzia is president of the
Bronco Wine Company in Ceres, Calif., and is best known for his $1.99
Charles Shaw wines - the Two-Buck Chucks. Charles Shaw was a Napa Valley
winery that went out of business over a decade ago. Mr. Franzia bought the
name and filed it away. When the industry was faced with a huge glut of wine
in 2002, Mr. Franzia dusted off the Shaw label and used it to sell some of
his excess inventory.

Over the years, Mr. Franzia has used a variety of names of wineries that no
longer exist. It works for him; Bronco sells about 10 million cases a year
under its various labels plus the equivalent of another 10 million cases in
bulk to other wine companies that also have winery names but not necessarily
any wineries.

Most of the wineries that have been bought up started as independents. Some
were victims of mismanagement, some had owners who tired of the business and
others succumbed to the relentless increase in costs.

In his book "New California Wine" (Running Press), Matt Kramer estimates
that undeveloped vineyard land in prime regions that once cost $5,000 an
acre now sells for closer to $150,000. Planting that acre can cost from
$25,000 to $40,000, depending on the density of the vines, and maintaining
it, after factoring in taxes, interest, insurance and office expenses can,
Mr. Kramer writes, cost up to $20,000 a year.

California has some 900 wineries, and clearly most are not looking for
corporate buyouts. Still, few emulate owners like Warren Winiarski, whose
outstanding winery, Stag's Leap Wine Cellars, in Napa, is entirely the
product of his own hard work.

Many wineries are blessed with owners who made fortunes elsewhere and are
capable of withstanding hungry insects, market vagaries and fierce
competition from aggressive Australians. But the old wine country adage was
never truer, that the way to make a little money in the wine business is to
start with a lot.


http://www.nytimes.com/2004/12/29/business/29place.html


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