Peter Mondavi Jr.: 'We cherish this valley and want to maintain it'

JQUACKENBUSH

August 26, 2013

[caption id="attachment_78856" align="alignright" width="200"] Peter Mondavi[/caption]

ST. HELENA -- Peter Mondavi, 98, and his sons Peter Jr. and Marc operate C. Mondavi & Family, producers of the luxury-tier Charles Krug brand at Napa Valley's oldest winery as well as the mass-market CK Mondavi brand.

Peter Mondavi Jr. is set to be a panelist at the Business Journal's Impact Napa: Wine conference Thursday in Napa.

Production of Charles Krug annually is about 75,000 cases of wines, including the Generations blend and the flagship cabernet sauvignon, from just more than 500 acres of Napa Valley vines. The brand has scaled down over the years as some smaller-production varietals were pared from the portfolio.

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About 1.6 million cases of CK Mondavi are made annually, and a key source for that is about 900 vine acres in the Dunnigan winegrowing region of Yolo County.

The company has about 120 full-time employees, including a national sales force.

Peter Mondavi Jr. spoke with the Business Journal about the prospects for the wine business from the perspective of a producer of popular-premium and luxury-class wines, business growth in Napa Valley through revenue rather than production and preparing the business for the fourth generation.What’s the outlook for the wine business?

We bring a lot of history and experience, with the family being here since 1943. We've seen all the ups and downs.

I focus on high-end brands, and Marc focuses on CK. We’re extremely diligent to separate production from those two markets and usually don't talk about them together.

For the Charles Krug and Napa Valley wines in general, it suffered noticeably in the recession, but it has recovered quite nicely. From a national standpoint, I see the demand for luxury brands to continue, but the sourcing is somewhat restricted. Napa County has about 45,000 acres planted latest figure, and there's not a lot more to be developed -- might be a few thousand acres here and there. I do see demand for Napa Valley luxury brands continuing and supply on a long-term basis being constrained.

For the industry, we are starting to see consolidations of luxury and high-end brands in California and coastal properties and even up to Oregon and Washington. Companies are expanding their portfolios of high-end and luxury brands by purchasing outside Napa Valley.

For CK Mondavi and brands that are larger, it competes clearly against international spectrum with Australia, Italy, France and Spain. It will continue to be competitive.

The big concern there is the distribution system, and consolidation of that system is the biggest bottleneck. A fair number of producers around world are being constrained in their sales. That has to be marketed and sold and we take full responsibility to maintain relevance in marketplace and distribution system.

Recent reports have the demand side continuing to grow as well. More people are slowly migrating to wine as the alcoholic beverage of choice. Supply is not forecast to keep up with demand. We have to have tactical efforts to get through the distribution system.What’s top of mind for your business?

For us and what sets us apart from many Napa Valley wineries is family comes first. We’re moving into the fourth generation. My kids and nieces are starting to work in the winery. First and foremost is securing this as a multi-generational family wine business in Napa Valley.

Part of what we're doing for that on the luxury side of business is not expanding and consolidating the portfolio. That started some years ago. We focus on a subset of wines -- what we've been known for decades -- in Bordeaux varieties. We’re becoming myopically focused. We’re not everything for everybody. It's quite a different business from years past.

The key reasons for that are we have looked at what our skill sets are and looked at capital and vineyards as resources and what is best-suited for them. Fortunately, those line up nicely with what the marketplace is looking for for years with sauvignon blanc and cab and merlot. One hundred percent of the Bordeaux variety fruit is coming from all our properties around the valley.

The distribution channels are quite crowded, so this allows us to carve a niche and focus marketing and sales efforts and winemaking efforts.

These are more profitable varietals, because Napa Valley does command a premium for those varietals. From a financial standpoint, it is a sustainable approach.

As for exports, on the luxury end Charles Krug has dipped its toes in the water with China. We're talking years down the road to develop that. We have started to ship more there and want to get there in the next year or so so we can promote it. That will organically grow as vineyards are developing and fallow land is destined to be planted. There is ability to produce incremental amounts within our vineyards.How does the wine industry balance the need for sustainable finances with community concerns about growth?

On the finance side, we’re more on the conservative side. It speaks to our longevity of 70 years as a family-owned business. Most of our financing is conventionally done, and cash flow is funding a lot of the capital investment. We’re not looking at volume growth per se. Our focus recently is on revenue growth, meaning improving the quality of wine that will justify higher prices.

We’re very cognizant of the community concerns about the small-town feel of the valley. We’re investing heavily in new hospitality center. We expect to get more visitors flowing into our winery versus others in the area. The new hospitality center will reduce the footprint of our buildings. because we're moving the hospitality center into the 1872 Redwood Cellar and and razing the existing hospitality center from 40 to 50 years ago and landscape over that area.

The winery sits in the middle of 150 acres of land. Once people come in, there is very little impact on community.

Yet the biggest issue in the valley is traffic, and we all have to address and come up with solutions. We don't know definitely how much our change to the hospitality center will divert traffic from other wineries.

There are a lot of business in Napa Valley outside wineries, such as hotels, spa and numerous restaurants. It's clearly a balancing act. We want the right people to come into the hospitality center, so we're not looking for the quantity of people coming in but for people investing in higher-end and limited-release wines.

On the transportation issue in the valley, a few years ago we relocated some accounting, sales, marketing and finance functions to the Napa County Airport area. Many of those employees commute from Napa, Marin County or other places in North Bay. That’s helped offload some traffic from the valley. The tons of grapes brought to our winery for crushing has remained relatively static but varies with the season. CK Mondavi is supplemented with production outside Napa Valley to minimize traffic impacts.What capital investments has the company been making?

The hospitality center will soft-open to the public by the end of November and have public openings in the beginning of 2014. The project broke ground in August of last year.

We completed a $4.5 million solar project that has been a significant contribution to the winery. With hospitality center project we did an almost $10 million seismic retrofit on the 1872 Redwood Cellar and 1881 Carriage House.

In the last decade, we've spent $25 million to $26 million in replanting vineyards and improving the Charles Krug fermentation and barrel area. That is focused on Napa Valley as the core and founding of the brand.

We’re more into sustainable business. We were looking into organic certification and did initial efforts. We try to grow organic as much as possible, and the reason for that is that the family passion lies in Napa Valley and its wines. This gives us more flexibility, and full certification reporting is pretty onerous. We’re in the fourth generation, and all kids have been raised in Napa Valley. We really want to preserve the natural environment as best as possible for future generations. Does that make better wine? Hope so.Anything else?

Our success and our longevity is about to move to the fourth generation. We cherish this valley and want to maintain it as best as we can.