Why the moves of Sebastiani, Clos du Bois brands aren’t uncommon in wine business
The recent closures of the Sebastiani Vineyards and Clos du Bois wineries and relocation of the brands to other production facilities came as a shock for those who have associated the names with their locations over decades — or a century, in Sebastiani’s case.
But experts who have handled many deals North Coast wine properties say those business decisions, as painful as they are for the workers involved, are a common reality for when bottle prices are out of whack with the costs of doing business in the region.
A common life cycle of wine brands is with more consumer popularity comes the benefits and headaches of expanding production of the brand, according to Mario Zepponi, whose Santa Rosa-based beverage alcohol mergers-and-acquisitions firm has handled various sides of significant deals in recent years.
“With more volume comes more costs,” Zepponi said.
The Clos du Bois brand started as a Sonoma County-centric label. But as it was positioned under a succession of owners to be a mass-market wine, the pressures of the retail marketplace call for balancing the pricing structure and costs of production. When Sonoma County grape prices go up rapidly, taking up the winery price accordingly ripples through distribution to the shelf price and can result in lower sales volume.
So a common tactic for North Coast wines with increasing costs for grapes or bulk wine is to expand the sourcing, say to a bigger appellation such as “California.” But then the brand can become less associated with the higher-cost appellation where it started, Zepponi said.
The situation is quite different for “cult” high-end North Coast brands such as Napa Valley’s Screaming Eagle or Russian River Valley’s Merry Edwards, where higher bottle prices can act as a governor for sales when production is only a few thousand cases annually. And for such exclusive businesses, it’s all about the vineyards and the production process at the winery, as was the case for Roederer’s acquisition of Merry Edwards.
“Assets couldn’t be dissociated with the business,” said Robert Nicholson of Healdsburg’s International Wine Associates, of the Merry Edwards deal.
And the minority investment from the Faiveley family of France's Burgundy region investment early this year in Williams Selyem Winery was based largely on the vintner’s connection to Sonoma County pinot noir grapes, Nicholson said.
At the other end of the spectrum is Michael David Winery’s sale of the 7 Deadly Zins zinfandel brand in 2018, a deal Nicholson’s firm helped broker. The Wine Group bought the Lodi-based brand, which at the time didn’t have its own winery for the 300,000 cases produced annually.
But Michael David Winery had purchased a surplus Sonoma County winery the preceding year, picking up a surplus Alexander Valley facility from Silver Oak Cellars, which had just built a new winery nearby. A goal for the Lodi vintner in that North Coast purchase was to have home for local fruit and a local brand, the Business Journal reported at the time.
And there have been other relocations of North Coast brands out of wineries, to move in higher-value brands. A key example was Constellation Brands’ move of the Franciscan brand out of a Napa Valley winery after the 2016 purchase of The Prisoner high-end cabernet sauvignon portfolio for $285 million, part of the New York-based company’s “premiumization” move away from lower-end brands.
“These assets get repurposed,” Zepponi said. It could be by the owner of the facility, bringing in a brand that needs more connection to the appellation or to a new owner with a similar intention.
For example, Treasury Wine Estates sold its underutilized large northern Sonoma County winery in Asti to E. & J. Gallo Winery, and Gallo also bought The Ranch custom winery in Napa Valley. Gallo then shifted around North Coast brands to those facilities.
Cultural differences in brand–asset linkage
The track record of West Coast and California North Coast wine business acquisitions has been that buyers of brands with just intellectual property, inventory and contracts for grapes and bulk wine typically are from the U.S., and buyers of “integrated wineries” that also have their own production facilities and vineyards usually have been from outside the country, according to Zepponi.
“That does not mean the domestic buyers do not care,” Zepponi said. “International buyers typically are from the Old World, where it starts with a vineyard and then goes to a production facility and then a brand is produced. If you don’t have vineyard assets, you do not have control over quality, and there is a cultural disconnect.”
Value of irreplicable permits
Some North Coast wineries are more valuable for their capacity, events and other permits than for the brands produced there. Napa County adopted its Winery Definition Ordinance in 1990, limiting production and visitation of facilities approved thereafter, and Sonoma County later this year is considering regulations for winery events in three popular areas (Russian River, Dry Creek and Sonoma valleys).
“It’s not like 50 years, when everybody could build a facility and build it as big as you want,” Zepponi said. “Now you have the land-use challenge of getting a permit, so wineries have independent value because you just cannot put another big wine production facility in their current locations.”
Another example of irreplaceable credentials are production facilities in Napa Valley that have “grandfathered” permits that allow them to truck in more of their fruit from outside the county, Zepponi said.
Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at email@example.com or 707-521-4256.