Impact Napa Conference 2014: Alex Ryan, Duckhorn Wine Company

It's not hyperbole that the top executive of St. Helena-based Duckhorn Wine Company grew into the role, long before Alex Ryan became chief operating officer and general manager in 2000 then president in 2005.

Though his connections to Duckhorn go back to its early days, Mr. Ryan joined the company full-time in 1988 and became vineyard manager in the early 1990s. Later he was vice president of vineyard and winery operations, developing the estate wines program.

At the Impact Napa Conference on Thursday, Mr. Ryan is set to be part of a panel discussing the balance between Napa Valley "quality of life" factors and of the economics of the county's largest industry. The Journal asked Mr. Ryan about his nearly three decades of living and working in Napa Valley and how the wine business has approached that balance.Tell us about the business and your connection to the it and the industry.

ALEX RYAN: Duckhorn Wine Company was founded in 1976, and the first harvest was in 1978. The company was started by Dan and Margret Duckhorn and a small group investors. There has been strong, consistent growth from the first release of wines in spring 1980.

The business has gone from a single brand with 1,600 cases the first vintage. This year we expect to produce just under 500,000 cases after 37 vintages so far.

We now have six significant brands. Duckhorn Vineyards in Napa Valley is the largest. Paraduxx is a blend of Napa Valley cabernet sauvignon--based blends. Goldeneye in Mendocino County's Anderson Valley is focused on pinot noir. Migration is Russian River Valley pinot noir and chardonnay. Decoy is a new fireball brand made from Sonoma County wine, but the brand has been around 25 years. Canvasback comes from Red Mountain in Washington state, and the focus is cabernet sauvignon.

Each of the brands has a unique, passionate winemaker working in appellations where the varieties do best, so there are six winemakers. The focus is not just on the brick-and-mortar winery but on estate- and grower-raised fruit. There are active direct-to-consumer sales. In California we go direct to trade, which is unique for a company of our size. We have robust three-tier sales in 49 states.

We have about 150 super-great employees in Sonoma, Napa and Mendocino counties and one guy in Washington. We're doing business the way we did day 1 -- very hands-on and very direct. We like direct connections with consumers. On a larger scale, everyone here has passion for Duckhorn brands, with actual winemakers and actual grapes. We've been blessed by great success.

I've really only held one job. My first paycheck was with Duckhorn in 1981. I got the opportunity to work here from my best friend's father, Dan Duckhorn.

My family moved to Napa County in 1975. In high school I met John Duckhorn and fell in love with his father's drive for his business. I attended Fresno State and earned a degree in viticulture, then I came back in 1987--88 and climbed through the ranks at Duckhorn. I was only the second person to hold the position of CEO after Dan Duckhorn.

Our goals are pretty simple in a complex business. We want to have our wines sold wherever luxury-tier wines are sold around the world.How has the way the industry operates in the county changed?

ALEX RYAN: It's changed a lot, but it also hasn't. The spirit and passion of residents has been the same. We've always complained about traffic.

I think what's changed is the need for the customer -- whether the trade customer or the consumer customer -- to get closer to their product. They can find and buy our wines anywhere in the world and in the U.S. And many times it's cheaper than from us, because we're not going to undercut our local retailers.

It's important for customers to get behind the scenes and get to know the local winery. If we were selling bowling balls, I don't think there would be a need for customers to go to the local factory to see how they are made.

But a great wine is a social process. People have a need to get closer to their brands. The first way is to meet the local retailer, and the second is to meet the restaurateur. But the best way is going to the winery and tasting room -- and maybe meeting the winemaker.

It's not just the wine industry that does this. Look at the way marketers in other industries use direct-sales tools like developing an app or some way for the company to get closer to the customer. They expect your bowling ball to be perfect and expect your wine to be best in world and will not accept anything less.

All wine regions in world are getting hot, exciting and unique and trying to sell an experience. I believe competition with other winegrowing regions is real, and they are getting very aggressive. Social media is being coming a big part of this. There are now wine regions from southern California to Canadian border.

This competition is twofold. First, there is just the local agritourism experience, in that grapes happen to grow in beautiful locations. Second, these regions have caught up to making great wines really fast. Thirty years ago, Oregon wines may not have been consistently high-quality, but now they are nipping at Napa Valley's lunch.What is Duckhorn's approach to three-tier, direct sales and exports for each brand?

ALEX RYAN: We have not changed very much. We are kind of unique and have been unique for many years. We're very active in telling the story at the winery, and we've always welcomed trade customers.

Our best marketing is done at the winery, and I argue that applies to any winery. We have a very diversified approach to how you build national lasting brands. [The] three-tier [distribution system] is a very active and necessary part of the wine business in the U.S. We do direct-to-trade work in California, taking on some distributor responsibilities and getting closer to customers. We've done that since day 1, and it takes a lot money and a lot of work.

Direct-to-consumer marketing is kind of a lightning rod right now. How many wineries are too many, and have they gone too far in what they're doing? I've been a local resident since I was young, and my kids have gone to school here. But Napa Valley couldn't sustain itself without the wine business.

I use the term "wine industry" to mean wineries, vineyards, hotels and support services. They are absolutely reliant on one another. Everyone in the stakeholders group wants and needs "smart growth," and there are a lot of interpretations on that. The consumer marketing piece is really critical, and I think it needs to be done on a larger scale.

We're not just selling the guy walking out the door a bottle of wine. We want people walking out of Beringer or Mondavi or Duckhorn to go back and tell their friends about it. We want them to come here and stay in hotel rooms and eat in restaurants. But the long-term value of a customer is their buying wines at local stores, and that is through the three-tier distribution system.

Each of our brands has a different theme in architecture, wine and hospitality style, which is natural. At the end of the day, we want customers to walk into the facility. Direct-to-consumer is also about snail mail, the Internet or phone conversations.

The goal is that customers made a connection with our brand, got the special customer service they wanted and met someone they like at winery. The third goal is to help make a link between various appellations, because if they like the Russian River Valley appellation, style or area, probably they would like Migration. And if they like coming to Napa, they will like Duckhorn, or if they like coastal pinot noir, it would be Goldeneye. We find out what the customer likes and make a connection -- and try to sell a few bottles of wine.How have the economics, barriers to entry and profitability potential changed in those channels for big and small brands over time?

ALEX RYAN: Barriers to entry are a big part of the challenges the small community is in. I have read that in Temecula, they're dealing with too many people or not enough. Even in Malibu and Santa Barbara, they're talking about regulations on wineries. Go up and down the coast, and all the wine major regions are beautiful and near urban areas, and they all have agricultural, industrial and tourism impact problems. Napa is not unique, but I think it's on top of the heap.

Barriers to entry have reduced significantly. When I got into the industry, there were not many custom-crush operations and grape sources. If you didn't have a winery, you were not making wine.

With custom crush, you do not have to have a facility and equipment but can buy grapes and make wine. You do not have to have the commitment to brick-and-mortar wineries like in past. The capital outlay, commitment and barriers to entry have changed dramatically.

That's part of why wine has become more acceptable and sexy. It also supported in the last 25 years rapid growth in the number of brands from an appellation. That also brings a slew of opportunities and challenges to a region.

Social media and the Internet in general have made it easier to market and sell wine. But when there are a lot of new wineries, we might begin to ask how much is saturation.

That has set the stage for rapid growth in the number of brands in our local region and in the world. Walk down [a grocery wine] aisle, and look at all the brands. How you out-compete the guy on the shelf is to invite the customer to the winery.Are direct-to-consumer costs higher than vintners anticipate?

ALEX RYAN: When you are dealing with the consumer at the retailer level, it costs a lot of money. When they are buying a bottle at $60--$100 and up, expectations are high, and costs are expensive. It's probably not as lucrative as you might think at first glance, when you add up the full costs.

But it's not about the cost of that sale that day but about building a relationship with customers long-term at their homes, which are most likely not in Napa Valley -- or California, for that matter. You have to consider carefully what a consumer sale is driving.How do we balance a rural, agricultural setting in Napa Valley with concerns about winery profitability without more direct marketing?

ALEX RYAN: I think the most dangerous thing for the industry is to think one size fits all. Napa is different than Sonoma or Santa Barbara. But Napa County -- unfortunately or fortunately -- is a monoculture. We're all to blame as residents and the industry in wanting our friends to come to Napa.

Nobody wants bad growth. Regulations have changed over time. A one-size-fits-all approach will not work with regulation, because technology changes. We've done a good job with input from industry groups and residents then changed the regulations over time. We can't hide from the problem that we have to manage this thing we've created in Napa County.

You can't manage a finite number in the rules, because life, the industry and the world change. We've been making changes to the regulations since we garnered recognition in the 1960s. The business has a built-in natural selection. Ultimately, it will take a lot of work of stakeholders and county of Napa government being the referee of stakeholder needs. There will be no perfect fit, but we should take the next best thing that meets our needs long-term.

It's illogical to set a spear in ground and have it accurately apply to business over as long of a time as it has been. I don't agree with all the regulations we've had along the way, but I accept them as the cost of doing business.

The wine industry can't be put in a box, because it is so segmented, with small and big wineries, brands with and without wineries, and vineyard owners making wine. One of the largest reasons for deciding what to do next depends on the marketing programs and how big-, medium- and small-sized wineries do business differently, and many are successful at it.

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