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WINE: Wine experts debate second labels vs. bulk sales

BRAND DILUTION IS RISK, BUT VINTNERS SAY WAYS EXIST TO BE SUCCESSFUL

To bottle excess wine as a second label or sell it as bulk wine or offer it only by the glass – that question sparked a lively discussion in front of nearly 300 people at the Business Journal’s 2008 Wine Industry Conference on April 9.

Famed antitrust attorney and Chalk Hill Winery vintner Fred Furth from the audience reacted to a comment from panelist Peter Seghesio that, as CEO and winegrower of Seghesio Winery in Healdsburg, he likes to limit the amount of wine sold as bulk to no more than 8 percent of total production.

Mr. Furth said he had taken the advice of vintner Jess Jackson, who has been very successful at launching a variety of brands, and used excess wine in a second label, the Imagine chardonnay. Imagine, which supports charitable efforts, retails for $17 a bottle while the lowest priced Chalk Hill brand wine is a $40-a-bottle estate chardonnay.

Mr. Seghesio said his winery had considered a second label but determined selling the excess wine in bulk was better than risking diluting the brand. “We would have to mandate to our distributor that the second label would only be sold by the glass and not on the wine list,” he said.

That’s the approach panelist Sam Bronfman took when he was president of the Seagram Chateau & Estate fine wine group, now owned by Diageo. The Sterling Vintner’s Collection second label was only sold on premise to avoid confusion with the Sterling brand, though now the second label is sold in stores.

“You have to be extremely careful with brand equity,” said Mr. Bronfman, now president of mezzanine wine finance specialist Bacchus Capital.

“When you use the same name, it’s dangerous,” he added. He said a second label can help a winery with distributors, but it should have a different name.

“You can use a separate name,” he said, “but the tie to the main brand on the back label, while not obvious to consumers, allows you to have a larger portfolio with distributors.”

Duckhorn Wine Co. was careful in creating the Decoy second label, which mentions Duckhorn on the back label, as an entry-level brand. The company didn’t source grapes for the brand separately and did not skimp on quality at the risk of souring consumer expectations for Duckhorn wines retailing for twice as much, according to chairman and conference panelist Dan Duckhorn.

The company then had a lower-end tier called Dented Can not connected in label messaging with Duckhorn.

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Conference keynote speaker Bill Price, whose investment group sold Beringer to Foster’s Group and who made a $100 million bid for the bankrupt Legacy Estates wine group, said we’re in the first year of a projected two- to three-year period of escalating prices paid for wine businesses in relation to earnings.

“In a growing or consolidating industry, it generally pays to sell early or late,” he said, regarding timing in relation to the trend. “If you sell in the middle, there generally are compressed multiples.”

The wine business is approaching a “historic bubble,” as Mr. Price called it, in which as many as 1,000 of the 2,400 wineries in California, Oregon and Washington could be for sale in the next 10 years, according to a recent Silicon Valley Bank/Scion Advisors survey of family winery succession plans.

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Perhaps the quote of the event came from Mr. Bronfman, who was asked by a member of the audience to explain how Bacchus Capital’s mezzanine funding wouldn’t have a takeover clause buried in the contract. “Many of our investors when we started wanted us to be a vulture fund so we’d lend to wineries to take them over,” he said.

But he said Bacchus is committed to the long term and the best interests of the wine industry and the people in it. Besides, he added, a vulture fund wouldn’t last long.

“I was concerned from the beginning about our reputation, because if we would lend and then take over, then the next time we knock on a door they will have a shotgun,” he said.

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You can reach Jeff Quackenbush at jquackenbush@busjrnl.com or 707-579-2900 ext. 206.

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