In the summer of 2021 two local wine producers—Santa Rosa’s Vintage Wine Estates (VWE) and Napa Valley’s Duckhorn Vineyards (NAPA)—issued stock on Wall Street and went public. Initially these stocks did well. However, that initial enthusiasm faded quickly, with both companies now well down from their initial launch prices. And although 2022 hasn’t been pleasant for most companies on the stock market, it has been especially cruel for these two wine companies. At one point in the last quarter of 2022, the S&P was down nearly 18% for the year, while VWE was down by a whopping 73%, with NAPA faring only a bit better, off 35%.
Don’t get me wrong. The folks on Wall Street love wine. The amount of wine consumed during high-profile dinner meetings in Manhattan helps New York remain ranked as one of the top five wine-consuming states in America. But drinking wine is very different from understanding the business of wine.
The Street has done relatively better with behemoth companies that produce both wine and a collection of other alcoholic beverages. These include Constellation (STZ, down only 4% YTD) and Diageo (DGE, down nearly 11% YTD). However, for wine-only producers such as NAPA and VWE the track record is dismal.
The wine-business model is mostly antithetical to the turn-and-burn next-quarter culture of financial markets. In the world of winemaking, quarterly timeframes make little sense. Wine cannot be made on demand. Grapes can only be harvested once a year and are subject to weather fluctuations, labor shortages and many other single-year factors that make each vintage highly variable. But even after being made, many wines need to age for years before they can be sold.
For large alcohol producers such as Constellation and Diageo this yearly variation can be offset by on-demand products like beer or distilled spirts such as vodka.
A history of long-term failure
In 1984, Chalone Wine Group—with $1.7 million in annual sales—raised $5 million from an IPO and became the first publicly traded premium wine-only producer in the United States. The influx of cash sent the company on a buying spree in which they soaked up small wineries and vineyards. The strategy went well at first, with investors willing to wait for returns or swap cash dividends for wine. Within a few years, however, the losses mounted. In 2005, Diageo purchased the company and then sold it in 2016 to Foley Family Wines.
The Robert Mondavi Winery went public in 1993, selling 2.5 million shares for just over $13 each, raising nearly $30 million in the process. Soon after, the winery faced mounting challenges with slowing sales and tensions within its leadership. The winery eventually sold to Constellation Brands for a record-breaking $1.03 billion in 2004.
In 1976, Joel Peterson launched Ravenswood—a Sonoma County wine producer known for its Zinfandel. In 1999, Peterson raised nearly $11 million by taking the company public. In 2001, Constellation Brands purchased Ravenswood for $148 million. Today the once-revered brand is only a shadow of its once-glorious self.
After those initial heady days—and until only recently—Wall Street had become reluctant to enter the wine-only business. But that didn’t mean investors had lost interest. In early 2007 private equity (PE) firms quietly were gaining increased sway. In hindsight it was clear that if PE was entering the space then Wall Street would eventually follow. The goal of most PE is to get a company groomed to the point where it gleams so brightly that the Street will pay a premium. And that’s just what happened.
In 2007 the PE firm GI Partners purchased a majority ownership of Duckhorn. In 2016 it sold its stake to another PE firm—TSG Consumer Partners. In a move that should not have shocked anyone, in February 2021 Duckhorn filed their initial public offering (IPO). Funds raised by the IPO were used to pay off debt and investors with the rest used to purchase vineyards and wineries, à la the Chalone Wine Group strategy.
VWE was created in 2003 by Pat Roney with financial backing from Leslie Rudd. Roney’s strategy has always focused on “value” wines, and today his company produces millions of cases. Vintage did not go public through an IPO but instead used a SPAC (special purpose acquisition corporation). These mind-bending SPAC deals merge a new company with an already public company—in this case, a PE firm located in the United Kingdom, Bespoke Capital Partners.
What will happen with VWE and NAPA stock is anyone’s guess at this point. Given global challenges and supply-chain woes, it’s unlikely that the current challenges facing these companies will reverse any time soon. Then again, given that wine is a product with intrinsic value—it can age, increase its value over time and eventually be consumed—then perhaps hope for a better future for such deals is warranted.
