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North Bay Business Journal

Monday, August 27, 2012, 6:30 am

Impact Napa 2012: Mario Zepponi, Zepponi & Company

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    Zepponi & Company

    200 Fourth St., Ste. 300, Santa Rosa 95401, 707-542-7500, zepponi.com

    Mario Zepponi

    Real estate and corporate attorney Mario Zepponi started Zepponi & Company as a wine industry mergers and acquisitions consulting practice.

    In the past several years, the firm has been behind the scenes on a number of major wine deals totaling nearly $1 billion in value.

    Mr. Zepponi will be part of a panel discussion at the Impact Napa 2012 conference the morning of Aug. 30. He spoke with the Business Journal about the rapidly changing landscape for wine M & A.

    What does the North Coast wine mergers-and-acquisitions landscape look like now vs. previous years?

    Activity is steadily increasing from a low point in 2009. There will be continued activity on the M&A front. That’s a good thing. Wineries are much more healthy. Transactions are happening more on freewill than on some sort of distressed component or pressure from capital sources.

    Having said that, there is still not a lot of foolish money going into transactions. One good sign we have not had in the last four years was Constellation (Brands) was the first publicly traded U.S. wine company to have entered the market again. [See "Constellation to buy Mark West wine brand for $160 million," June 29.]

    What are the active groups of buyers now?

    Private strategic wine companies continue to be the most active. Then there are publicly traded wine companies, domestic and foreign. It’s good Constellation got back into the water, and I hope others will too. Everyone comfort level has risen that things have worked their way out of the system. They will look at their portfolios and compensate for gaps in those portfolios.

    What are the top considerations related to foreign investors?

    Foreign buyers are not a passing fancy. There is continued interest in the U.S. market from foreign entities, not just Asian and European buyers.

    Has there been slackening of M & A activity from Asia and Europe because of global economic problems?

    Two thoughts on this have been there would be a trickling off of interest with things happening with the euro and investors wanting to get out of the euro. We are not seeing tons of deals, but there is a lot of interest. A lot goes into a foreign company making an investment in the U.S.

    How is the forecasted wine industry supply changes affecting business decisions?

    There are pretty much two camps. The majority people are saying there will be a shortage, lock up grape sourcing and bulk-wine sourcing, and it’s a good time get fruit under contract.

    Naysayers do not buy into it and say we’re one good harvest away from everything being in balance again. Some wineries out there have done very well not getting into long-term contracts. They have their ears to ground. After a couple of short vintages, they’re not ready to buy into hysteria. They’re waiting for harvest to gauge wine supply.

    In recent weeks, there has been a little softening in the spot market for grapes and wine. That’s an indicator the tightness of supply is not as dire as everyone thinks and pricing got too aggressive.

    However, there is good reason to believe we’re headed into shortage. The U.S. overtook France in total wine consumption. There have been no significant plantings (in the North Coast) in last eight to 10 years, and now we’re in a situation where we need to put grapes in the ground.

    There are not a lot of places where one can plant in Napa. The only area is Pope Valley, but with existing land-use restrictions there are not a lot of opportunities.

    How are economic troubles worldwide affecting the local wine industry?

    The industry itself was at a low point in 2009, after the economy crashed in 2008. At that point, there were a number grapes and bulk wine on the market. Lots of wineries wouldn’t buy, and prices were extremely low. Added to that, there was a disturbance in luxury product sales, and there were reports on how difficult it was to sell wines over $30 a bottle.

    Wine has weathered the recession a lot better than other industries in the United States. The active price zone for consumers to trade down was $10 to $15 a bottle for people used to paying $30. There was a widespread discussion of that in 2008 to 2010, but you don’t hear a lot about that now.

    Wineries have adapted, and consumers are still obsessed with quality. Talk to upper-end Napa wineries, and you’ll find they recovered quite well. We’re not hearing how the Napa business model is unsustainable and needs to adjust. We heard a lot of that in 2009 and 2010.

    What are trends in North Coast wine sales and marketing?

    There will be greater movement to consumer-direct sales, particularly in Napa. It is not new, but the trend is continuing. Higher-quality and -priced wines requires stronger relationships with consumers. For wineries that do not sell a massive amount of wine, it is extremely inefficient to move wine through the three-tier system [producer, wholesaler and retailer].

    It will be interesting to see how larger brands view (sales) volume and pricing. I expect to see less discounting with tightening supply for wine brands. As distributors run out of wine to sell, I expect discounting opportunities to slow down. It will be interesting to see in Napa, where the cost doing business so much higher, if some wineries ease off that. Though they will lose some sales by easing discounting, they will be better off in the long run. It’s a deliberate decision to lose volume but guard pricing, knowing with a shortage in supply retailers at some point will be begging for inventory. I’m waiting to see that happen.

    Other things: with the shortage of supply if look at napa not a lot of places where can plant grapes. Ony area is Pope Valley but with existing land use restrictions not a lot of opportunities. Lot of aging vines in valley.

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    Comments

    1 Comment

    1. August 27, 2012, 8:53 am

      by Ray

      As the American wine industry continues to rebound and grow, atg what point will the medium to large winery conglomerates begin to show interest in some of ther other US wine producing states? I am, in particular, referring to their interest in M&A’s in the top 5 or 6 wine consuming states. It appears to me that having an established market and distribution organization in these states will fair well as these states continue to mature their wine industries. I would imagine there are some very good deals in the market place in some of these emerging wine markets?


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