The wisdom of an investment can often come from the investor’s prospective making it necessary to deﬁne what a “wise investment” is. Since the “wine industry” reaches many disciplines, only businesses that “touch” the production of wine will be entertained. Wine enterprises that are specialized in a specific sector of the wine industry have been successful and can illustrate the worthiness of the industry as an investment. Examples of successful wine companies will support that under the right circumstances – which as any other business venture involves being at the right place, at the right time with the right plan – the wine industry can indeed be a wise investment.
Each investor has different levels of appetite for asset ownership, time horizon or rate of returns. Despite the fact that there are no two identical investors, it is fair to say that they would deﬁne a wise investment as a venture providing a fair return given a certain ﬁnancial risk. Unwise investments made by wine wannabes that rely on exuberant tax haven to offset their eye popping income will not be discussed – only for-proﬁt ventures with signiﬁcant business motivations rather than emotional ones will be of interest to demonstrate the wisdom of a wine investment. It is fair to add that the wine industry has been growing well in the New World over the past 30 years while it has been under many challenges in the Old World. This is why ﬁnancial wine success stories tend to be concentrated in the New World.
The breadth of the wine industry from suppliers (equipment, packaging, public relations to name a few) to grape growers to winemakers to sales and marketing companies is too large to be discussed all at once. Only businesses that are involved in the production of wine will be covered for the purpose of this conversation. Three segments of the wine industry will be discussed: The grape growing business, the winemaking business, and the sales and marketing business. Finally we will have a look at fully integrated models from grapes to sales.
The grape business can provide tremendous return over the long run as it not only generates cash ﬂow from selling the crop but it is also a real estate investment. This business is long term oriented and slower pace than any other segment in the wine sector. Large farmers have been known to enter the business as a diversiﬁcation strategy for their estate; this has been the case for many Washington State growers for example. The land investment alone can be sufﬁcient to validate a project – consider the case of the Mariani family that bought 7,100 acres of land in Montalcino in the 1970’s when this region was undiscovered; ﬂash forward 45 years later and now this region is one of the most prestigious in Italy with skyrocketing land prices – a very wise investment indeed.
The winemaking business is a medium term business and often requires technical people and a great deal of business acumen – the critical skills here are to turn grapes into wine at the right cost and produce the desired quality. In its simplest incarnation, one can think of a custom crush facility such as Courtyard Cellars in Paso Robles (that sold at a good premium to Gallo two years ago) or perhaps a large European Cooperative. The Cave Cooperative du Luberon is a great example of a very successful winemaking operation using its winemaking expertise to attract growers. This allowed it to expand its control to 80% of the appellation and is now seen as one of the largest players in the south of France for Rosé wines.
The sales and marketing business is the fastest pace business by far. It requires little capital, just wits and a knack to spot trends ahead – or sometimes to create them. In the United States, a company like Cameron Hughes does this well. They successfully sell wines in lot series by quickly adapting to the marketplace and taking advantage of excellent wine lots unsalable by other wineries – Consider this 10-year-old modern negoçiant sells about 3 million bottles. Of course this idea has been used for many years by Burgundy negoçiants and other wine brokers (Bordeaux for example) whom add value by understanding the market well and connecting buyers with the right wines.
Vertically integrated businesses are the toughest enterprises to run as a viable venture. Those businesses grow grapes, they transform them into wine, and they package and sell the resulting wine. It is a difﬁcult business model requiring simultaneous long and short term thinking. The difﬁculty is exacerbated for small wineries as they usually lack expertise in one area of the wine sector. Consider the Clos Saint Vincent in the Bellet AOC near Nice in France. Sergio, the owner, produces 20,000 bottles a year and his enterprise is made of him, his spouse and one part time vineyard worker. Sergio, like all small business owners, has to wear many hats – he is the viticulturist, the winemaker and the sales and marketing director – Sergio cannot be good at every role. But luckily he is in a region where local wines are consumed avidly allowing him to be a successful one man band. Put this in contrast with the giant Chilean Concha y Toro, which is also fully integrated, but has expertise from many employees all along the wine food chain. In other words, either grow bigger to hire all those required skill set or be in a market niche that can absorb your inevitable lack of expertise.
In conclusion there are many successful wine investments all over the world today. Many of the best investment are from companies that specialize in a speciﬁc segment of the wine sector, grape growing, winemaking and sales and marketing. A few vertically integrated businesses are proﬁtable either because of a dominant position in the market combined with a large knowledgeable pool of workers (think Gallo or Concha y Toro) or because they have found a niche they can survive in undisturbed despite their inherent inefficiencies (think small local producers as well as many estate luxury segment wineries). Even though the underlying growth trends of the wine industry are better in the New World than the Old World, opportunities are everywhere for the right focused business plan and indeed many ﬁnd the wine business to be a very wise investment.