Family. It is one of the distinguishing characteristics of the wine business, at least according to some scholars. But today’s news from Vinum Capital LLC makes we wonder about the future of the family winery business model.
Family businesses are supposed to be disadvantaged in the big time business world. Their family-ownership structure is supposed to limit access to capital and make expansion and effective management difficult. And yet some of the most famous names in the wine industry are family-owned firms. Some, like the Gallos of California, have kept ownership closely held for years. Others, like the Antinori of Italy, have experimented with outside capital only to return, at considerable expense, to the family model. Still others, like the Mondavi, illustrate just about everything — the problems of family businesses (the family feud that caused Robert Mondavi to strike out on his own), the benefits of family business (the rise of the Robert Mondavi brand) and problems of taking a family business public (the eventually takeover by Constellation brands).
All in the Family
Why does family ownership seem to be an advantage in wine where it is seen as a disadvantage almost everywhere else? One theory is that it is all about trust. Family firms are forward-looking high-trust environments where long term relationships can grow. The wine industry, people say, uniquely benefits from the long term commitment and close trusting relationships (with correspondingly low transactions costs) that family relations can provide.
It is said that the success of [Yellow Tail] wine is due to the fact that the Casella family (Australian winegrowers) and the Deutsch family (American distributors) were able to work together effectively to promote the brand because both sides of the deal were high-trust family firms. I am not sure how much faith to put in this idea (economists are trained to be suspicious of “cultural” explanations of economic outcomes), but I recall that Steve Smith, the celebrated New Zealand winemaker I interviewed a few years ago, felt it was very important for his family-owned business (Craggy Range — owned by the Peabody family) to work mainly with family-owned distributors in export markets. Smith is smart, so maybe there is something to this family business thing.
But the family-owned wine business may be an endangered species according to a recent study by Silicon Valley Bank, a major wine industry financial institution. They report that as many as 51% of these family wineries (in the western U.S.) will likely be up for sale in the next decade as the founding generation retires and is not replace by younger blood. One limitation of the family business model is that it only works if generations of family members want to run the business. Wine is glamorous but hard work, so it is perhaps not surprising that heirs might prefer cash.
A New Business Model
Vinum Capital has established a $250-million private equity fund (Vinum Capital Partners I LP) to acquire certain family wineries as they come on the market, invest in them so that they grow to be large enough to be of interest to larger firms (Constellation Brands?) and then sell them at a profit. The basic business model is shown in the image above.
“Our objective is to help provide liquidity for family-owned businesses,” according to Vinum’s press release, “Many of them have been in business for 20 to 40 years and there may not be a second generation willing or able to take on the business.” Large wine companies are interested in operations that produce at least 300,000 cases per year, according to Vinum, which sees itself as being able to muster the resources to get some family-owned firms to that level.
The fund’s managers certainly have a lot of experience, both with family businesses and at the corporate wine level, so maybe this is a good business plan. I know that a number of high-profile family wineries have recently “transitioned” to corporate control including Erath in Oregon, purchase by Ste Michelle Wine Estates and Stag’s Leap in Napa Valley, sold to a Ste Michelle – Antinori partnership.
A Natural Experiment
I’m pretty interested to see what happens because I view this as a natural experiment. Vinum’s plan will work best if people are wrong about family wineries — if the particular advantages of the family form of business organization are not really important factors in winery success after all (or if they lose their effectiveness above a certain scale). If the plan works it might mean that wine is doing more than passing from one generation to the next — perhaps it is transitioning from a special type of business where long run relationships and trust are key to one where traditional business factors such as economies of scale, distributional effcieincy and brand strength matter more. Stay tuned for the results!