Napa Wine & The Winemaking Process

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.

Russell, can you share some context to when you joined Patz & Hall and the history of the winery?

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.

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.

In 2016, we were asked, by the Ste Michelle Wine Estates Group, if we were interested in selling and we were.

Did the couples own their own facility or were they manufacturing the wine elsewhere?

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.

Roughly, how big do you need to be to actually afford to build your own facility?

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.

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.

How has winemaking capacity evolved over the years in Napa Valley?

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.

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?

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.

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.

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?

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.

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.

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.

Do you see that changing and corporations buying more of the land from independent growers?