For the Mondavis, It's a Long Way from Muscatel


By Thane Peterson Robert Mondavi Corp. is on a roll lately. The company is putting the finishing touches on a $28 million renovation of its winery outside St. Helena, Calif., and it has a grand pavilion that opened in February at Disney's new California Adventure theme park in Anaheim. Meanwhile, Mondavi's Woodbridge line recently became the best-selling wine brand in America in the $7-plus premium range (measured by dollar sales volume).

Not surprisingly, the winemaker is doing well financially, too. In the six months ending Dec. 31 (the first half of its fiscal year), earnings were up 19%, to $26.6 million, on revenues that jumped 21%, to $245.7 million. Its shares (MOND) are trading at around $51, near the 52-week high of $54.06.

Wall Street's rosy appraisal of this family-run California winery also can be seen as an endorsement of the Mondavi clan's goal of becoming a global leader in the business. While company shares are publicly traded, the Mondavis hold a 50% stake and control 92% of the voting shares. Many other Napa Valley winemakers are being taken over in a wave of consolidation. Kendall-Jackson, for example, is for sale, with huge outfits such as France's Diageo, Britain's Allied Domecq, and America's Brown-Forman taking a look. The Mondavi family, however, continues building operations in France, Chile, and Italy as part of its determined effort to go it alone.

On Mar. 2, I visited the winery and spoke with R. Michael Mondavi, 58, company CEO and president since 1994. The son of founder Robert Mondavi, he and younger brother Timothy are the company's top operating executives, while their father remains chairman. Here are edited excerpts of our conversation:

Q: It's amazing how far wine has come in the U.S. in the last few decades...

A: You want some shocking numbers?

Q: Sure.

A: In 1965, 82% of all wine sold in America was port, sherry, or muscatel -- with 20% alcohol content or better. Only 18% of all wine sold was table wine, and of that, 98% was jug wine. Only 2% was premium wine.

Today, it's only 3% to 4% port, sherry, or muscatel. And over 54% of the dollar value of all wine sold [is] more than $7 per bottle. And over 85% of all wine sold is over $4 per bottle. So, the wine industry has changed dramatically. Twenty-five years ago, if you said you were in the wine industry, people said: "Oh, you make stuff for winos." I haven't heard the term "wino," or heard people refer to skid row and wine, in 15 years. So the whole perception of wine has changed.

Q: Yet most Americans still don't regard wine as an integral part of a meal, as many people in France and Italy do.

A: Presently, 11% of the [U.S.] population drinks 88% of the wine. Needless to say, that's not the good balance most businesses look for. The reason Americans don't drink wines more frequently is that they're intimidated by wine, or they don't think it's the right occasion for drinking wine. We, along with the rest of the industry, are trying to eliminate the intimidation.

Q: I lived in France for five years, and one reason wine is more of an everyday drink there is that you can buy a comparable bottle of wine for less than half the $6 or $7 you pay for a bottle of Woodbridge. Why is that? Is it higher taxes in the U.S.?

A: Part of it is. In certain states, there is tremendous taxation. Also, in Europe they use more...direct marketing, whereas in the U.S., with the repeal of Prohibition, they gave the states control, and the states have mandated that beer, wine, and spirits have to be sold through a local wholesaler. That adds another 28% to 35% to the costs. It's amazing how much it adds to the cost to the consumer.

Q: So, it's not even taxes. It's inefficiency?

A: It's a combination of taxes and inefficiency.

Q: What's behind the strength of Mondavi's share price and financials recently?

A: When the investment community thought the technology sector was the darling, we and other traditional companies didn't do that well. Now, that vision has changed, and companies that are well-grounded and poised for good and continued growth are back in favor. I'm pleased, needless to say, to see that. I'm also pleased to see that even with the question marks about the economy, premium wine sales seem to be very strong.

Q: But 10%-plus net profit margins like Mondavi's are quite good. What's driving that?

A: [It's] the premium wine industry that has been growing at double-digit rates over the last decade, and that is projected to continue to do so. What's driving the profitability is that we are having more and more higher-priced, high-quality wines [in our sales mix]. The other thing driving it is that a higher percentage of our vineyards each year goes from the development stage to actually producing grapes. That raises the quality of the fruit and also lowers the cost of the fruit. It's less expensive to grow the grapes than to buy them. We're going from 7% internally grown fruit to 20% by 2004.

Q: Are people buying your Opus One superpremium wine at $140 per bottle?

A: Are people buying Opus One? We are in trouble because we don't produce enough! It's on allocation and sells out within three to six weeks of every offering. I'm asked all the time when I'm traveling: "Can you get me a case of Opus One? Can you get me a case of Opus One?"

Q: You've got wine-growing property and wine labels in Chile, Italy, and France. Do you see the wine industry becoming global?

A: It absolutely is. It's not just producing in one area and marketing in different areas. It's having production and availability of wines from a number of different regions and being able to sell them globally. There will be continued consolidation. Foster's Brewing has just taken over Beringer. In Diageo's acquisition of Seagram's, I believe 197 brands of wine were involved. The vast majority are European brands, but the companies are becoming more and more globally oriented.

Our competitors also are involved globally. Kendall-Jackson has vineyards in Chile, Argentina, and Italy. Gallo buys wine in Australia and Italy. Beringer also has wines in Chile, France, and Italy. It seems that all the wine companies that are growing dramatically have to be [doing business] on a global basis.

Q: Do you expect a few giant wine companies to emerge, or perhaps giant wine companies as units of even bigger spirits companies?

A: I think both are going to take place. I think certain family-controlled wine companies will continue to grow and prosper. And also, certain multinational companies will get into the wine business. Some will prosper. And some will -- as has happened historically -- decide that there are better things to do and get out of the business.

Q: It's not a business where economies of scale will necessarily prevail, is it?

A: No. It's a quality business, an image business, and one that has to be managed very carefully from a financial standpoint. The return on assets is not as large as in some other businesses.... The margins are [high] on ultrapremium wines, but you have a large capital base that needs to be supported.

On a cash-flow basis, it's also tough. If you buy a property today and plant it, you don't get a harvest until 2006, and you don't sell the wine until 2008. You have to have some pretty decent margins when you first start selling to give you a decent return on assets.

Q: Do you have another generation of Mondavis coming along to take over management of the company one day?

A: Yes, we do. We have a couple working with us now, and I'm sure more will join us.

Q: But you still have a few more good years in you?

A: If I'm anything like my father. He's 87 and still going strong. I'm only 58, so I've got at least 25 more years.

Q: Let's talk about the $28 million renovation of the winery. That's a lot of money.

A: It's a hell of a lot of money.

Q: I know it gives you a better visitor's center at the winery, but what does it give you in terms of wine-making?

A: It gives us a phenomenal advantage and opportunity. The 56 French oak fermenters that we're using for our [red wines such as] cabernet sauvignons and merlots give us a softness and finesse that you can not get with stainless steel fermenters.

Also, we've designed the facilities so the quality of the fruits can be respected. I'll give you an example: Take a pear or apple, cut it in half, and smell it. It's full of wonderful aromatics and fresh, fruit character. If you let it sit for just 10 minutes, it starts to oxidize and turn a little brown, and most of the fresh fruit character is gone when you smell it.

The same happens with grapes. If you have the grapes harvested in smaller containers so they don't get crushed in transit and then gently put them through the crusher and into the tank so they can begin fermenting, you're going to have more delicate wines with additional flavor and character.

Q: Are you using a lot more organic growing techniques?

A: We do. Our focus is on natural growing techniques and sustainable agriculture. My brother [Timothy] in the mid-70s realized that a lot of us in agriculture were using far too much herbicides, fungicides, and pesticides. We realized that for 7,000 years, grapes had been grown naturally, and only in the last 50 years had a lot of [chemicals] been used. So, we've been growing grapes naturally for years. We believe you can grow higher-quality fruit just as economically without being chemical-dependent.

Q: Another thing I found interesting is that you have a system of blind taste-testing of the wine you get from the 300 or so growers you buy grapes from.

A: Yes. We keep each of their vineyards' [crops] separate through the barrel aging. We bring in teams of growers and blind-taste wines from each of their vineyards. They grade each of the wines without knowing which are which.

Q: Do they have an incentive to do that?

A: Absolutely. The better wines end up as a reserve or district wine, and the higher the level of the wines, the more the grower makes per ton of grapes.

Q: Why is it that premium wine sales over the last 30 years haven't gone down during economic downturns?

A: If I knew, I'd be a lot more successful. But my belief is that, as you go into a recession, [wine drinkers] may decide not to buy a new car [or] make certain other major purchases unless they really have to. But they don't give up the day-to-day rewards. They may say: "Monday night, I'm going to have a tuna salad for dinner instead of going to a restaurant." But they'll also say: "Let's have a nice glass of chardonnay with the tuna salad -- add a little ray of sunshine to the day." Peterson is a contributing editor at BusinessWeek Online. Follow his weekly Moveable Feast column, only on BW Online


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