Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:20} Russell, can you share some context to when you joined Patz & Hall and the history of the winery?

{audio:0:00:27} Patz & Hall was a partnership of two couples, formed in 1988, to produce single vineyard or terroir designated Chardonnay and Pinot Noir. They brought in expertise of winemaking and sales experience and ran the company for about 16 years, by themselves. In 2005, they realized that they had taken the brand as far as they could and brought some consultants in, to design a strategic plan. The result of that was creating a general manager and president role, to help formulate some business disciplines. They also realized that, as two couples, there could be opportunities for them to disagree and have no decision-making governance to resolve a deadlock.

{audio:0:01:21} In 2005, I joined their company, as their first employee and as President. Basically, I executed their strategic plan and brought staff in. The beauty of some of the decisions they made included creating a governance situation, by bringing in an outside board of directors. They then had a vehicle for decision making and, with my role as a business person, I brought the business discipline in and we ran wonderfully for 11 years.

{audio:0:01:57} In 2016, we were asked, by the Ste Michelle Wine Estates Group, if we were interested in selling and we were.

{audio:0:02:09} Did the couples own their own facility or were they manufacturing the wine elsewhere?

{audio:0:02:16} They did not own their own facility nor did they own any vineyards, but they had the formula. They used a custom winemaking facility for 19 vintages. In my second year, we realized that we could afford to have our own facility, so we leased a warehouse and built a state-of-the-art Chardonnay and Pinot Noir specific facility, in 2007.

{audio:0:02:41} Roughly, how big do you need to be to actually afford to build your own facility?

{audio:0:02:46} Building your own facility requires a lot of capital and, depending on where you are in the country or the world, it may be difficult to get permits from the local government to build one. You can build a winemaking facility in your garage, if you so choose. They can come in different sizes, but the beauty of a custom winemaking arrangement is that most people that build a building for themselves, never build it for their current state; they always build it to what they will grow into. In the early years, it is likely that they will have excess capacity and that is an ideal situation to make someone else’s wine, to utilize that capacity.

{audio:0:03:27} As the general manager of a custom winemaking facility, here in the heart of Napa Valley, my competition is anyone who has extra capacity in their winery.

{audio:0:03:37} How has winemaking capacity evolved over the years in Napa Valley?

{audio:0:03:43} There is more and more competition. People are realizing that it is very capital intensive to build your own facility. The key to success is having a successful brand and a successful sales strategy. The easier part of the component is actually making the wine. Over the years, there have been a lot of build outs of bottling facilities and custom winemaking facilities, just to serve that community of small producers who don’t need to build their own winery.

{audio:0:04:15} Taking Patz & Hall, for example, they would have the formula so they would know how they want to make the wine? They would have a relationship with the growers and then use a custom winemaking facility, with bottling, etc. They were really just dealing with the ingredients and the winemaking side of things?

{audio:0:04:34} That’s right. They provided their own barrels, because that’s a very specific spice element and maybe some specialized equipment that the custom winemaking facility didn’t have. That’s pretty much it; a very low-capital entry into the business.

{audio:0:04:49} With regards to vineyards, that’s another very large capital outlay. Their formula was to find the very best growers and find the very best section of that grower’s vineyard and contracting for that section. If you are willing to pay the price, you can cherry pick and buy a specific section and that’s what they did.

{audio:0:05:17} Can we walk through the process, starting with the growers? At a high level, how consolidated or fragmented are the growers in the US? Are there many different growers you could have options for or are there, typically, only a few that you can really go to and, therefore, the competition is quite high?

{audio:0:05:48} Across the country, there is a good balance of wineries who have their own vineyards, versus independent growers who are just farmers and they grow the grapes and sell them and their business cycle is complete; someone else takes the fruit and makes it into wine. We’ve seen some consolidation and that is, basically, controlling market share here in the Napa Valley; I’m specifically speaking about the Napa Valley right now, in northern California. Because our availability of fruit is limited, there are very few further areas to develop here in Napa. We are almost fully developed with regards to where we can plant a vineyard.

{audio:0:06:32} Supply is becoming limited but demand continues to increase. If there is a winery who wishes to have more market share of a Napa Valley labeled wine, they are likely to go out and buy a vineyard from an independent grower.

{audio:0:06:50} I wish I had the actual statistic, but I’m willing to say that, probably, 60% of the Napa Valley land is owned by individuals and families and maybe 40% by wineries and corporations.

{audio:0:07:08} Do you see that changing and corporations buying more of the land from independent growers?

{audio:0:07:16} It’s likely to increase, only because the land values are increasing dramatically here due to that supply and demand imbalance. Wineries are willing to pay more and more and more. You will see a bit of that American dream of buying a piece of land, farming it and selling it for a crazy price and being able to retire. We also have multi-generational families who don’t need that huge influx of cash and they are willing to continue farming. It is a beautiful area here, so there are some of those families who are working very hard to keep that ownership within the family.

{audio:0:07:57} Typically, how far in advance do you need to source fruit, for a vintage?

{audio:0:08:03} If your harvest is in September and October, contract renewals usually occur in the winter time of December or January. If you are trying a new vineyard, you are likely to sign a short-term contract of one or two years. We used to call that a look-see. We will see the flavor profiles and how the farmer is farming it. If we’re pleased, we will likely want to sign a longer-term contract which renews, maybe with some inflationary parameters. Let’s say you sign a five-year contract, on the completion of the fifth year, it extends one year. That helps lock up that consistency that you are hoping for, so long term is very common.

{audio:0:08:54} Given the supply and demand challenges, are you seeing those contracts changing or extending, in any way?

{audio:0:09:01} They can. Certainly, a lot of young and small wineries are often burdened by cash. Maybe the richer and more well-established wineries pay on time and sometimes those decisions come into play. With this crazy high-demand environment that we had here in the Napa Valley, the only changes you were likely to see is an increase in price a little bit more aggressively than the winery would like to see. Other than that, there is usually some great consistency.

{audio:0:09:36} Let’s say we’re a winery and we’re sourcing fruit. What would the contract typically look like? For example, in a five-year contract, is there a certain tonnage of fruit that you would deliver at certain times?

{audio:0:09:52} They can vary quite dramatically. First of all, a contract would identify the varietal; I’m buying Cabernet Sauvignon from you. You can pay by the ton – 2,000 pounds; it’s not in the metric system yet – which is the standard unit of measure here in the US. There will be the price and terms which could be, we’ll pay 60 days after harvest or we’ll give you 50% in this particular period of time. Then there’s usually some aspects related to the harvest window, based on the grape chemistry which is mostly related to Brix or sugar level. When the sugar levels get to a particular range, then we have so many days that we can pick. Some contracts can be one page; others can be multiple pages, in regards to the details.

{audio:0:10:51} With the new experiences of wild fires, we are going to be starting to see some contracts have parameters on smoke related issues and the types of testing that need to be done before a decision is made as to whether the contract will be honored or cancelled. That is something new that is happening here and, of course, it’s been going on for years in Australia and other places. The 2020 fire, that was in the middle of the Napa Valley, caused a lot of controversy regarding what to do, both during the fires and after, in terms of the analysis and merchantability of the grapes themselves.

{audio:0:11:37} How have you seen pricing change, for the fruit?

{audio:0:11:39} Here in Napa and other areas in California, every winery is required to report to the State of California what they pay, by variety and by region. The state accumulates that information and publishes a report in around February or March, called the Grape Crush Report. It shows the averages paid for varieties, by region. Many growers will then target the average price of their fruit, or average plus 10% or 15%. You can see a snowball effect, where you have high demand and you have a contract that is based on an average. When the average increases, the price increases in a multiplied effect. That is one basis.

{audio:0:12:35} Others will fix their price and say, I would like 2.5% inflation every year and will sign a contract for multiple years. Generally, the regional and varietal averages have been used as a basis for pricing.

{audio:0:12:51} How do you see the pricing evolve? Obviously, it’s driven by supply and demand, but when you are looking forward two or three years, how do you see the fruit pricing change, in Napa?

{audio:0:13:02} There was an exception with the 2020 vintage, where we actually saw a decline for the first time, for Cabernet Sauvignon. Even in times of recession, we see those prices for that fruit flattening and not declining, over the history of recording. There are other varieties that maybe lose appeal. Merlot was an example, 15 years ago, when a movie Sideways came out and the character in Sideways loved Pinot Noir and hated Merlot. The Merlot market actually declined in this country because of a silly movie in Hollywood. The demand for Merlot declined and the prices declined.

{audio:0:13:48} With the exception of Cabernet, here in Napa Valley, we will see fluctuations based on the economy changing.

{audio:0:13:56} Is the fruit in a $100 bottle of wine materially different compared to a $20 or $30 bottle?

{audio:0:14:06} It certainly can be. It is primarily based on the region or area where it is grown. There are better areas to grow quality fruit. In the Napa Valley, for example, there are super high premium luxury areas and then there are other areas, based on soil composition, temperature variations, orientation of the vineyard. Additionally, the level of farming has an impact. The winery is going to want the grower to apply many different passes, such as removing leaves, positioning the shoots, removing the green clusters, to hone in on the very best fruit.

{audio:0:14:56} That can be compared to a vineyard that doesn’t have the ideal location. Maybe it’s in heavier soils, along the river bank. It’s still in the Napa Valley; we have the Napa River that runs right through it, but there are heavier soils there and it’s less ideal for Cabernet Sauvignon, for example.

{audio:0:15:11} There is a difference between a fruit that you would buy for a $100 bottle and a $20 bottle.

{audio:0:15:17} Is it materially much more difficult to get access to those better vineyards or quality of fruit?

{audio:0:15:24} It is, because they are limited in size and, over many, many years, those quality areas have been identified and are well-recognized. For example, the famous To-Kalon vineyard is in the heart of Oakville, right here in the Napa Valley and it’s slightly elevated so it has better drained soils. There are fewer choices but definitely in high demand.

{audio:0:15:56} Did the bigger corporate wineries tie up those areas for longer periods so you couldn’t get access to them?

{audio:0:16:04} They can, yes. Or they will actually try to buy them and then they will completely control them. There are some here, still owned by families and that’s really good to see because they will diversify who buys the fruit from them.

{audio:0:16:21} From the growers’ point of view, do they prefer longer-term contracts, to lock in selling the supply that they are producing and stabilize their cash flow, rather than have shorter-term contracts that have to renew regularly?

{audio:0:16:35} That’s very true for a solid winery buyer that has a good, solid track record of paying on time. The winery can also help brand the vineyard. Let’s say that your fruit is so unique that they want to identify the name of that vineyard on the bottle. We refer to that as a single vineyard label. The winery can actually help the grower become branded and be in more demand by making excellent wine, getting high scores and marketing the vineyard by labelling it as single vineyard.

{audio:0:17:10} Does the grower give you much better pricing if you have a five, six or seven-year contract as opposed to a two-year contract?

{audio:0:17:19} I think the growers would have a tendency to provide a more attractive price for a longer-term contract, as opposed to a higher price. It would not be significant, but it would be likely they would offer some better terms, in regards to price, to have a longer-term commitment and that security.

{audio:0:17:41} If the winery is going to be asking them to do more, such as more passes, producing higher quality, the grower expects to be paid for that. You will get a higher price from a winery who is asking you to do a lot of work in the vineyard to produce that very high quality.

{audio:0:18:01} What do you see as the major challenges of sourcing fruit, over the next three to five years?

{audio:0:18:07} Certainly, pricing, demand and the challenges of global warming are going to be monitored. What is the climate change doing to our little region here? Water availability is very important. However, there are many growers here who remember 50 or 60 years ago, when vineyards were not irrigated; they didn’t need to be irrigated. The vines were spaced in wider zones, to allow the root systems to go and find their water.

{audio:0:18:45} When growers and wineries got more aggressive, to hopefully increase yields per acre, they planted the vines closer and closer to each other and, therefore, the roots are competing for water and they had to introduce drip irrigation. We may go back to dry farming here as we have the soil structures to allow for water to be held in the soil throughout the growing season, so that is going to be a big challenge.

{audio:0:19:14} Of course, with the supply and demand issue, there are challenges to us, in the overall wine industry, where we see younger consumers of alcoholic beverages choosing alternatives as compared to wine. The wine category isn’t growing as aggressively as seltzers, ready to drink cocktails or craft beer and things like that. That will affect growers, in terms of whether they decide to continue to grow grapes or not.

{audio:0:19:51} So we’ve got the fruit; we’ve purchased the fruit on five-year contracts and then, I guess, it’s getting shipped to the facility. Can you describe what a typical facility looks like, for winemaking?

{audio:0:20:04} For both large and small, you will have an area that we refer to as a crush pad. It is usually concrete or some sort of solid surface that allows the fruit to come in and be delivered to an apparatus that can be used to either destem the berries from the cluster or deliver straight to a press. For example, in some white wines, winemakers wish to take those clusters of berries and throw them into a press and create juice immediately, as opposed to destemming the berries and pressing. In your crush area, there will be some receiving hopper, the destemmer and the presses.

{audio:0:20:52} After that, you have a fermentation area. There will be an area designated for the type of vessel that you are going to ferment the fruit in. The crush area, in places such as California, where we have no rain during the season, are usually outside but under a cover of some sort. In other areas around the country, they may have those crush areas inside a building.

{audio:0:21:20} Then you have the aging area. That can be an area for barrels, if you’re going to be aging that way, or additional tanks of some sort. Lastly, you want to have an area designated to bottling. In a small winery, your bottling may take place over a two to three-week time period, so it’s not necessary to invest in bottling equipment. There are companies now that have mobile bottling units, on the back of tractor trailers, that will come in, perform the bottling and leave. But you need a nice working area for those trucks to pull in.

{audio:0:21:57} The only difference between the aging areas and fermentation areas are the difference between the type of wines you are making. For example, in the case of Chardonnay and Pinot Noir, you need two thirds of your space designated for fermentation and only one third for barrel aging, because it’s a one-year process. But for a red wine, you want it to be in barrels for two years, so your barrel area will be two thirds of the space and the fermentation area will be one third of your overall space.

{audio:0:22:35} How do you see these facilities evolving, in terms of the technology and structure and design of the facility?

{audio:0:22:43} Certainly, more modern facilities are looking at energy and water usage and trying to reduce the use of both. They are coming in with solar or reusable water, particularly in the case of modernization, which will include automation. More modern facilities are looking at ways to reduce labor and automate. For example, in the fermentation of red wines, you are usually punching down or pumping over the cap that is forming as the skins are fermenting with the juice. Traditionally, you have a hose that you hook up at the bottom of the tank and somebody is holding that hose. It is pumping over and creating a stirring effect. More modern equipment has automated pump overs, where they have the apparatus inside the tank and you dial in with your cellphone and you hit the button and it starts; there is no labor involved.

{audio:0:23:49} You said you don’t need bottling equipment because you have the tractor that can come in and deal with that on a temporary basis. What is the most expensive part of that, in terms of the equipment required and the cost of each of those areas?

{audio:0:24:07} If you look at the total operational cost of a bottle of wine, it’s usually the cost of the juice that is the highest piece; the cost of the grapes. The overhead incurred by the winemaking process and the bottling are less than the actual grape cost. Then the packaging is the next piece of the cost of goods. You have choices; they don’t all have to be in 750ml bottles with a cork. They can be single serve in Tetra Paks; they can be in balloons in boxes; they can be in large, three-liter boxes. Usually, the packaging is a fairly large component of it. The bottling fee itself is usually immaterial because this equipment is highly automated and can roll through many per minute.

{audio:0:25:10} When the fruit comes into the facility, what happens?

{audio:0:25:15} It’s up to the winemaker with regards to how he or she would like the fruit handled. As I said earlier, in the case of a white wine, you can either destem the berries or you can have those clusters crushed. Immediately, we want to crush or destem and/or press. As soon as that grape cluster is picked from the vine, we want to process it. Hopefully, the grapes have been harvested in the middle of the night, so the fruit comes in nice and cool because, eventually, we want to cool that fruit down anyway. If it comes in warm, it’s a bigger challenge for us to destem, crush and then chill that down before we start fermentation.

{audio:0:26:02} That’s the first thing; the fruit gets handled, destemmed and pressed. It is sent into a vessel and, again, we can inoculate a fermentation or we can wait a few days. Some winemakers like to employ this concept of extended maceration, which lets the material sit for a while, before the fermentation starts; there are certain kinds of extractions that happen. There are a lot of decisions that are made in that very short period of time. It is one of the most critical times of the winemaking process.

{audio:0:26:36} When you are running a custom facility, do you have a specific rate for crush per ton?

{audio:0:26:48} It can be done a little differently in each case. Some wineries just have a flat fee, from start to finish. If you want us to make you a case of wine, it’s going to be X hundred dollars a case, regardless of what you ask us to do. At our company here – Napa Wine Company – we have a cafeteria plan. Every process that you ask us to do has a rate. In the case of fermentation, we design the rate to the sized tank we need. If you bring in so many pounds of fruit, we know what tank that is going to be and there will be a rate for that. Of course, the larger lots are priced less than the smaller lots, for efficiency reasons.

{audio:0:27:34} I imagine the same applies to crushing? The more fruit you bring in, the cheaper the crush per ton?

{audio:0:27:42} Yes. We will receive your barrels, if you want wines to be put in barrels and there is a rate; there is a storage fee and handling fees. In the case of bottling, at the end, a larger run is certainly less expensive than a smaller run, because we can have more throughput and we can run more efficiently with larger lots. Yes, there are volume benefits in a facility like ours.

{audio:0:28:10} How much does the barrel really matter to the end product?

{audio:0:28:16} The barrel can be looked at like a spice rack for a chef. If a winemaker wants some vanilla flavor, you can get vanilla flavor from a barrel because when they are assembling a barrel, they’re assembling those wood staves over an open fire, with water. That fire is caramelizing the sugars in those wood staves; they call it toasting the barrels. Based on the level of char, you can get heavy, medium or light toasts and you can also choose wood staves from a different forest, whether it’s in Missouri, in the United States, or it’s a French forest. Every barrel has a different flavor. The winemakers assess the type of flavor they like and they can choose, or not choose, to have that wine exposed to that barrel.

{audio:0:29:16} There are other ways to get oak flavoring into wine. We have oak chips that are put in large bags – it looks like a large teabag – and we can float those toasted chips in a tank to impart some smoky component that a winemaker is looking for. Or they can choose not to use a barrel at all. There are other techniques to create texture and flavor, without a barrel.

{audio:0:29:43} Roughly, what is the difference in the pricing per bottle, between those three core processes? Crushing, fermentation and the barrel and bottling price?

{audio:0:30:00} Off the top of my head, you can look at the difference in barrel prices. French barrels are running €800 to €900 for a barrel, which converts to US $1,100 per barrel. A barrel from an American oak forest would be $300. There is a big price difference between the French oak and the American oak barrels, down to toasted staves and toasted chips and things like that.

{audio:0:30:37} You can get 300 bottles from a 225-liter barrel. If you are spending $1,100, you can do the math. You can use that barrel two or three times before the flavoring becomes neutral. But it’s a large cost. It’s probably $8 to $12 per case of wine, or almost $1 per bottle.

{audio:0:31:09} We’ll just use a simple example of a $100 case, which is 12 bottles. It’s likely that $20 of that $100 is the package. From the $80 left over, the winemaking process is around $40. Now you have another $40 to spend on the fruit and maybe a barrel. You can break the costs down into different parameters and they are going to be different based on the amount of inputs you are going to put in and what you eventually charge for your wine.

{audio:0:31:44} When you run your facility, it’s really driving scale. Maxing out the fermentation tanks and maxing out the fruit through the crush pads really does reduce your unit costs, materially, to increase your margins?

{audio:0:32:00} It does and it’s the same as any manufacturing facility. You want the maximum throughput or production for what you have. Here, we manage the business by looking at various KPIs. The primary unit of measure, for me, is a gallon of wine managed. I look at various departments, whether it’s the seller or the barrel team, and I look at the amount of gallons that they are managing, on a monthly basis, and I compare that to the fixed and variable costs that they are incurring.

{audio:0:32:37} In addition to that, I look at the amount of revenue that we are charging for those functions so we can dial in, in regards to our key performance indicators. When it comes to bottling, I look at a nine-liter case that we are producing. I grew up in a village that had a lot of manufacturing. We had a Ralston Purina plant, producing dog food; we had wineries; we had food companies, making peanut butter. They would run 24 hours a day. They would, most likely, run two producing shifts and one maintenance shift, from midnight to 8:00AM. We don’t see that a lot here yet, in a luxury farming community. We will see one shift and, sometimes, a second one. Sometimes it is governed by the amount of production that the municipal government – in this case, Napa – allows you to produce.

{audio:0:33:37} When you ask permission to build a winery, they will come in and say, based on your location and your request, we will grant you this level of production. Then you will build a facility to accommodate that and you are unlikely to need to run a three-shift manufacturing environment.

{audio:0:33:58} We’ve gone through the cost of goods and then, obviously, you have to sell the wine. That has changed a lot during Covid and post-Covid. How have you seen wineries really evolve, over the last few years and, specifically, with Covid, in terms of selling the products?

{audio:0:34:16} Focusing on the US market, we have what is referred to as the traditional three-tier marketplace. This emanated from the repeal of Prohibition where our federal and state governments heavily license and require certain tiers of ownership of the wine. The three tiers include producer – the winery – a wholesaler or distributor and then retailer.

{audio:0:34:47} There has been a tremendous amount of consolidation in all the tiers. One area of consolidation of most significance is the middle tier. For example, if I’m a California winery and I want to sell my wine in St Louis, Missouri, I am required, by law and Missouri law, to have a licensed wholesaler buy and resell my wine. I cannot sell directly to a retailer.

{audio:0:35:14} There has been a consolidation at the wholesaler level, where there are fewer choices for smaller wineries. Because of that, the larger wineries get more attention and so that has moved smaller wineries to employ the direct-to-consumer model, over the last 15 years or so. We have had some positive legislation to help in that area. Primarily, in 2005, the Granholm Act, which was a Supreme Court ruling, ruled that states cannot discriminate. For example, if New York state has a winery there and allows that winery to sell directly to their residents, they need to allow out of state wineries to sell to those residents, as well.

{audio:0:36:01} That ruling opened up direct shipping, in states that really wanted to benefit their own wineries. In order to do that, they had to allow other wineries to ship to customers. Because of this consolidation at the wholesaler level, smaller wineries are employing this direct-to-consumer model, where they can now have a website, take an order and ship that order through UPS or FedEx or whichever mechanism they choose and they can do it in a legal way.

{audio:0:36:27} What are the big challenges shipping DTC? I guess the cost of shipping across states is as much as the case, in some cases? But also, you’ve got to market yourself online?

{audio:0:36:37} That’s correct. What is the vehicle to gain people that are interested in your brand? It takes many different forms. One was the traditional model of having a tasting room. This would be similar to Hershey, Pennsylvania, giving customers a tour of the plant, showing them how they make chocolate and, at the end of the tour, you get a little taste of the product. We did the same years and years ago, inspired by Robert Mondavi who said we should allow people to come and visit us in the Napa Valley and taste our product.

{audio:0:37:11} That evolved, over time, but that’s the best way to gain a lifelong fan; spend 45 minutes with them, tell them your story and give them a chance to taste your product. They give you their name, address and credit card and you start to ship your monthly allotment to them.

{audio:0:37:33} The next best is still being in front of a customer; maybe it’s at a festival or wine dinner. Then, of course, using the internet through social media advertising and other types of mechanisms. There are the traditional paper catalogues, from 20 years ago, who used to buy names. There are some wineries who buy lists and send a blind e-blast, to see if they get any hits. They play the statistics and maybe a 2% or 3% hit is worthwhile for them and, all of a sudden, they’ve got some new people to market to.

{audio:0:38:10} How do you see tasting rooms changing, post-Covid?

{audio:0:38:16} Certainly, during Covid, there was no traffic whatsoever. However, we were able to reemploy those people by giving them a telephone and calling the database. The amount of orders we received, from our existing customers, grew greatly and helped cover the loss of the visitor traffic. I think it will, basically, be a reversal. Those people will leave their phone banks and they will go back into the tasting room and start seeing customers. We’re seeing that, certainly in wine country, in northern California, the amount of traffic has increased, as mass requirements have been lessened.

{audio:0:38:54} The other thing that we’ve seen, in regards to an evolution of a tasting room is that we’ve gone from a belly up to the bar, throw my glass out and get a pour of something I don’t really know much about, to a more lengthy experience combined with food. Of course, the cost of that has increased but a lot of smaller tasting rooms are focusing on giving a great customer experience. You have to have a great photo moment for the new generation of Instagrammers so you have to have a great place to take a picture. That’s really, truly happening. You see every new winery that opens has some sort of fabulous experience involving food pairing.

{audio:0:39:42} Can we discuss more specifically about Napa Wine now and really, how you work with customers? Maybe you could explain how the relationship would work between Napa, when they sell capacity to external winemakers at Naked Wines, for example.

{audio:0:40:00} For them, or any other customer, we are a licensed winery that provides a winemaking service for a licensed alcohol beverage seller of some sort. We can be a winery, for a winery or we can be a winery for a retail chain that has a license to sell and they want us to make a particular wine for them. We employ a winemaking team; the customer usually has a winemaker or a winemaking decision maker. They control their quality and they send us directions and what they would like us to do. Our team reviews it, employs that into a work order, it gets sent into the cellar and the cellar goes and executes it.

{audio:0:40:48} Our customers range from someone who just needs crush, fermentation and holding because they may have their own bottling line, or a true negociant, where they fish for already made wines that are for sale. They buy that wine, deliver it to our facility where we finish it and bottle it for them. Or they are a customer from start to finish. That would be a brand owner and they want us to lock, stock and barrel; ferment, crush, age and bottle.

{audio:0:41:26} We manage our facility by looking at various capacities and who would work and who might not work. Luckily, we started with a very large facility so we have a generous amount of space. The industry has changed here, too. We are in the heart of the Napa Valley and, when the facility was built, 50 plus years ago, there were large lots coming in from the central part of the state and areas of Napa. As competition has increased, growers are less willing to put their fruit on a truck and drive three or four hours to our facility. So we are now evolving into a more high-touch, lower-volume operation.

{audio:0:42:09} The benefit of that is that we gain higher margins than handling these large, bulk lots. But it is requiring us to relook at our facility and orient it to those high-touch areas.

{audio:0:42:21} Do you have a preference for type of customers or who you rent your space to?

{audio:0:42:28} My ideal customer is already a winery, who doesn’t have any more capacity. They are expanding their brand and they need me to crush, age and ferment for them. That complete process is the best customer for me, with regards to being involved in every aspect of their winemaking and where I can generate the best revenue.

{audio:0:42:51} Other companies, like ours, have also diversified over the years. We have the luxury that the family that owns our facility has a large vineyard holding, here in the Napa Valley, so we actually grow our own fruit too. Another business that we are looking into is private label. This would be someone who wants us to make their wine for them, all the way through the process and they have a sales vehicle; they have a chain of restaurants or retail stores. That is another way that we can generate some greater margin than just the processing margin.

{audio:0:43:27} Using the hypothetical Naked Wines example, effectively, they have employed winemakers so would they almost send the winemaker to your facility? Naked Wines still pays their salary but they are working on your site?

{audio:0:43:45} That’s right. Naked, in their beginnings, purchased a facility in Sonoma, but their winemakers and their brands are growing at a great rate and so they are needing additional capacity. They are finding key partners. We could be one of those types of partners for them.

Napa Wine & The Winemaking Process

Former Director at Ste. Michelle Wine Estates

inpractise.com/articles/napa-wine-and-the-winemaking-process

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Russell Joy

Former Director at Ste. Michelle Wine Estates

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Napa Wine & The Winemaking Process(August 3, 2021)

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