Looking back: Wine industry saw virus regulations flux, but M&A deals rise in 2021

The long tail of impacts from the North Coast wildfires and global coronavirus pandemic stretched into 2021, but the revived business environment had more buyers of wine business assets opening their checkbooks.

On June 15, when California ended its color-coded system of restrictions on indoor capacity, North Coast winery tasting rooms joined restaurants and other indoor venues statewide in getting relief from 16 months of pandemic restrictions.

But by fall the new omicron virus variant led to a rollback of some overseas travel by Thanksgiving.

As in 2020 survival the shift of marketing to outdoor hospitality and direct-to-consumer efforts for tasting room- and restaurant-dependent vintners and to stores has helped propel sales of wine directly to consumers to 10% of U.S. sales.

Earlier this month, industry analyst Danny Brager put the figure at $600 million on over 1 million cases. That’s up from the 1% to 2% level where it had lingered since channel modernized with the arrival of the dot-com era two decades ago.

But vintners are still waiting for the return of restaurants, a lifeblood for premium producers. The Press Democrat reported that the ranks of dining options licensed to serve wine have fallen precipitously, down 40% in the first year of the pandemic alone, according to the Wine Market Council.

“Wine sales through the restaurant channels will not recover to pre-COVID levels in 2021 and, more likely, for many years,” wrote Rob McMillan in Silicon Valley Bank’s State of the Wine Industry report early this year. Sales of West Coast premium wine slipped 7% in 2020.

M&A boom

Experts say a string of mergers and acquisitions, like Francis Ford Coppola Winery, Frank Family Vineyards, Chateau St. Jean, 30 labels from Constellation Brands, and Ste. Michelle Wine Estates, point to a reawakening of the North Coast wine business and even more such activity next year.

“I think that we're seeing more transactions in 2021 than in any year since 2017,” said Robert Nicholson of Healdsburg-based International Wine Associates.

There have been a dozen sizable wine business M&A deals his Healdsburg-based firm has tracked so far this year, compared with eight last year, seven in 2019, 11 in 2018 and 14 in 2017. But the total deal value so far in 2021 has been “very high,” at $3 billion to $3.5 billion, Nicholson said.

But the 2021 deal value tally is skewed by three major transactions, including the one for Ste. Michelle, he said.

Constellation Brands sold 30-plus lower-priced brands to E. & J. Gallo Winery for $810 million. Napa-based Delicato Family Wines bought Sonoma County’s Francis Ford Coppola and Virginia Dare wineries in a deal estimated to be worth over a half-billion dollars.

Predictions of a robust M&A outlook for 2022 is based in part on deals in progress and set to close were shelved during the economic uncertainty and travel restrictions of the coronavirus pandemic, according to Mario Zepponi of Santa Rosa-based M&A consultancy Zepponi & Company.

Wildfire insurance debacle

In late 2020 and early this year the industry saw a wave of insurance cancellations and nonrenewals for wineries and vineyards in North Coast areas deemed high fire risk. In mid-October, Insurance Commissioner Ricardo Lara ordered the California FAIR Plan, the state’s insurer of last resort, to increase 24-year-old coverage limits and doubled down on a pledge from this year to require insurers to price in mitigation measures that property owners already were taking to help prevent losses.

The move follows the quick passing and signing this past summer of Senate Bill 11, which unlocks the statutory shackles that have prevented the state’s insurer of last resort from writing fire policies for winery and vineyard buildings and infrastructure.

Large North Coast fires in 2017, 2019 and 2020 not only caused substantial losses in Sonoma, Lake and Napa counties but also were the bulk of the losses across the state those years, the agency reported.

“While the North Coast represents just 8% of the state’s commercial agricultural and farm owners insurance market, total incurred losses were 45% of the statewide total for those years,” the department said. That statewide total was $687.7 million.

Smaller, smoke-free harvest

Early, fast, light and smoke free. That’s how growers and vintners summed up this year’s North Coast wine grape harvest, which mostly wrapped by November.

Unlike last year’s wildfire-shortened season, which resulted in double-digit drops in tonnage picked in Napa and Sonoma counties, this year’s lighter-than-average tonnage is being attributed largely to a second straight year of drought. Even with the educated guesses and decades of experience, the full scale of this year’s harvest won’t be known until the first official tally of the crop, set for release in early February.

The five-year average for Sonoma County has been around 220,000 tons a year for the past four years, based on Business Journal analysis of the California Grape Crush Report. Last year, with picking cut short amid some smoke damage concerns yield was 147,000, nearly one-third below average.

Napa County’s tonnage last year also was one-third below average, with only 98,000 tons picked.

Crops in Mendocino and Lake counties took a larger hit than elsewhere in the North Coast and California, with yields for cabernet sauvignon in Lake off by as much as half, according to Glenn Proctor, partner in wine and grape brokerage Ciatti Co.