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North Bay Business Journal

Monday, April 21, 2014, 6:30 am

Wine Industry Conference Q&A: Rick Magnuson, GI Partners, and Alex Ryan, Duckhorn Wine Co.: Investment helps Duckhorn fly higher

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    Rick Magnuson in 2001 founded Menlo Park-based private-equity investment firm GI Partners, which has more than $11 billion under management for pension funds and institutions.

    The Silicon Valley firm acquired a controlling share of Duckhorn Wine Co. in 2007, a deal reportedly valued at around $250 million. GI Partners also has advised pension fund CalPERS on its investments in California and Oregon vineyards.

    Rick Magnuson

    Starting with Duckhorn Wine as a viticulturist in 1998, Alex Ryan has been guiding the flight of St. Helena-based Duckhorn Wine Co. since being named general manager in 2000 and co-founder Dan Duckhorn passed the role of president and chief executive officer to him in 2005. Mr. Ryan was key to the launch of estate brands Paraduxx and Goldeneye as well as the relaunch of the Decoy label.

    The flock of Duckhorn brands has grown since Dan and Margaret Duckhorn started Duckhorn Vineyards in 1976. From 15,000 cases a year initially, production of the Duckhorn Vineyards, Decoy, Paraduxx and Goldeneye brands from four wineries and more than 1,000 acres of owned vineyards now is “somewhere south of 500,000 cases,” according to Mr. Ryan.

    Alex Ryan

    Mr. Magnuson is set to be the keynote speaker at the Business Journal‘s 14th annual Wine Industry Conference in Santa Rosa on April 22. Mr. Ryan and he plan to talk about how Duckhorn Wine weathered the global financial crisis and came out much stronger. They spoke with the Business Journal on how their collaboration accomplished this.

    How has Duckhorn Wine Co. changed with the involvement of GI Partners?

    ALEX RYAN: It was an interesting time when they bought us. It was right after the peak of the pull-through market, when allocations of wine reigned free and prices went so high because consumers could not get enough.

    I’ve been with the company for 30 years. We were wed to a certain way of thinking, coming with a tightly held view of the way the luxury wine market had operated up to the monumental change in how you sell wine.

    One of the things of a private-equity group is it is a very open and direct approach to business. They came into a growth-oriented wine company and asked hard questions in that, “This had worked in past, and have you thought of using these standard business practices?” The larger we got, these more disciplined practices helped.

    RICK MAGNUSON: One thing that hasn’t changed, which is unique, is that we still have Margaret and Dan Duckhorn on the board. We have sought to keep their engagement and involvement, both because they are willing to do that and we found a way to make that happen.

    We’ve grown the management team with some new C-level executives, such as new heads of marketing and finance. The head of sales is still there. It’s great management team who enjoy the job and want to grow the company.

    How have the Duckhorn Wine portfolio brands been performing?

    MR. MAGNUSON: Very well. We’ve experienced 30 percent annual growth [for those brands] in each of the past several years. It’s been a tremendous story in terms of performance. Lowest price for the Duckhorn Wine portfolio is $25 and the highest is $125.

    Decoy has had tremendous growth, approaching 300,000 cases a year. It was a business risk. Rather than cannibalize sauvignon blanc and Duckhorn, through its distribution Decoy is pulling higher-priced wines into places where they didn’t exist.

    What approach has been taken in building each of the brands?

    MR. MAGNUSON: From the portfolio side and the distribution side, we’ve been working actively on both. On the distribution side, we continue to go direct [to trade accounts] in California, and that’s different from others. It’s a way to test programs with on- and off-premise accounts.

    We put in place a wine club that it really didn’t have before we started. Now, it has 8,000 members. It’s fueled by visitors to the tasting rooms. We’ve built products just for the club that are only sold to club members or at the winery: vineyard-designates and higher-priced wines, and brands not available to the public.

    ALEX RYAN: Duckhorn had a mailing list, and it was active. In the pull-through market, we didn’t have to get involved in [a wine club]. In the after-recession market, we realized that a lot of people wanted to be part of the Duckhorn family of wines.

    MR. MAGNUSON: Duckhorn Wine Co. has three different tasting rooms and each has a focus: Duckhorn Vineyards is about that brand; Paraduxx is about chardonnay; Goldeneye in Mendocino County’s Anderson Valley is about pinot noir. Turnover is an issue, but our team has done a great job creating a higher-end experience. They require reservations at Duckhorn Vineyards and on weekends at Paraduxx. They do not have bars where people just come in to have a drink, but they have sit down with an educator and have a set experience.

    We helped reposition and expand varietals. When we acquired Duckhorn, they didn’t have a chardonnay, the biggest selling varietal. We got the sense that they didn’t have one because chardonnay is not a Bordeaux variety. They had a sauvignon blanc, but they thought chardonnay would cannibalize sauvignon blanc and Duckhorn. They’ve made investment in chardonnay and now Migration and other brands have a chardonnay, and after seven years they’re coming out with Duckhorn chardonnay.

    MR. RYAN: Chardonnay is the queen of whites. We ventured into it in the past with Decoy and Migration, but now we have a more focused push with marketing and sales campaigns.

    MR. MAGNUSON: An area in which we had meaningful impact was portfolio construction, and we realized Duckhorn did not have an entry-level wine below $50. When we acquired Duckhorn, Decoy was used mainly for overflow of wine from Duckhorn, and only a couple thousand cases were made then sold at winery. They have taken it from a red blend to varietal cabernet sauvignon, merlot, pinot noir and others, and all at $25.

    MR. RYAN: The Decoy brand had been around since the mid-1980s as second label for declassification wines. During the recession, it was a Duckhorn product and a Bordeaux brand people could purchase. GI Partners professionals investors thought we had greater opportunity under the Decoy brand without disturbing the over-$50 brands.

    We relaunched it in new packaging and reallocated the focus from Napa Valley to Sonoma County, because that area has a broader range of varietals — zinfandel, pinot noir, merlot, cabernet sauvignon, chardonnay. We refer to it as a “gateway duck,” in that it is firmly entrenched in the Duckhorn portfolio of brands and gives a way to try and experience Duckhorn, and hopefully trade up.

    MR. MAGNUSON: Wine by the glass was another area in which we helped. Five years ago, they thought a brand served by glass would take away from the perception of quality. Now we know wine by glass is more frequent, and it was something they did not have before our involvement.

    How has production capacity and grape sourcing been changing for the brands?

    MR. RYAN: It’s been an interesting evolution together. [GI Partners'] approach was bolt-on acquisitions. We felt our internal famly of brands and the waterfowl theme that we fiercely protect have given us a huge platform. There is commonality and reliance on quality and consistency. There is an opportunity to grow brand maybe a little more slowly. While there are great brands to be purchased out there, we have to ask whether the acquisition and marketing of that brand would detract or take away from the mothership brands.

    It was a market-risk analysis. Organic growth was more risk averse, and that has proven to be true. Production is somewhere south of 500,000 cases a year for the portfolio.

    MR. MAGNUSON: As we have grown the brands, we purchased additional vineyards, but grower fruit is a higher percentage of overall production. Owned vineyard acreage is about 500–600 acres.

    We built one production facility in Anderson Valley for Goldeneye and recently purchased one in Hopland for Decoy. We had been using custom crush, and as those brands have grown they moved to their own facilities.

    Interestingly, over the seven years, unlike others, we have not acquired a third-party brand. We’ve decided to grow within the Duckhorn framework. The salesforce seems to think it gives them a more coherent portfolio to work from. KJ has all sorts different brands as does Foley and others. That hasn’t been part of the Duckhorn culture. Makes growth that much more challenging, but it has been rewarding.

    The Washington vineyard acquisition in December was relatively small [20 acres] and will be for Canvasback. It was a [Paraduxx label], and when we came in, it was a red blend. It was shut down and will resurrect itself.

    How has demand for private equity changed from high-end wine producers in recent years?

    MR. MAGNUSON: There are some regulatory barriers for private equity getting into the wine industry. There a prohibition for owning two parts of the three-tier distribution. You can’t also have something like a grocery chain or gaming company, so people think long and hard before an investment in wine or spirits. Now, there are only a couple private equity groups with investments in wine, TPG Growth Fund through The Vincraft Group and [CHAMP Private Equity's] Ascentia [Wine Estates] investment.

    For groups wanting to sell, there is a good deal of volume. But with Duckhorn wanting to build its own brands, we haven’t taken advantage.

    Are there more wine-related investments coming for GI Partners? If so, what is GI looking for?

    MR. MAGNUSON: We invest in four sectors: Technology is a big part, financial services, health care and leisure/retail, where Duckhorn is. In the spirits and wine business, we understand price points and people in the industry and hopeful we can make one large investment in our fourth fund.

    We just raised our fourth fund. Right now, on file it has $1.6 billion. But it is still marketing, and we expect that to be finished in the next month or two. So in that [fund] we can create a new wine business separate from Duckhorn, and that’s exciting. It could be something complementary, and maybe competitive.

    With Duckhorn, we continue to look to acquire vineyards or production facilities without brands. It’s in the DNA of that organization.

    For the new platform, we will look for something substantial. It likely will be deployed in the next couple of years. We have great expertise, and we really like the business. Its been a good experience for ourselves and for the management and the customer.

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