Last week’s column about the rise and fall of the Taylor Wine Company of New York raises a number of interesting issues and one of them is the singular importance of family-owned and privately-held businesses in the U.S. wine industry and the very mixed record of publicly-listed wine corporations. In retrospect, a case can be made that Taylor’s downfall began when they made the initial move from family ownership to public corporation.
The conventional wisdom holds that family-owned and privately held firms can be very successful, but their scale and scope are necessarily limited. Corporations, it is said, can have better access to capital and may be able to negotiate risk more successfully because of limited liability structure. You might expect the largest firms in any given industry to be corporations and this is true in some industries, but not in others.
Wine Exceptionalism
Wine is one exception to the dominant corporation rule. Here (above) is a table of the ten largest wine businesses in the U.S. market (measured by estimated or reported volume not value of sales) for 2014 and 2003. The data are from Wine Business Monthly, which publishes an analysis of the 30 biggest U.S. wine firms each February. I’m looking at just the top ten to keep the analysis simple, although I should note that these ten firms collectively account for about three-quarters of all wine sold in the U.S. You can find a link to the whole list at the end of this column.
Looking at the 2014 data, you will note that only four of the top ten firms (those in italics) are public corporations or subsidiaries of public corporations. The other six are family-owned or, like The Wine Group, privately-held and together they produce more than half of all the wine sold in America. The bias towards private- and family-ownership is even stronger if we look at the next 20 wineries where only a few corporate names like Pernod Ricard make the list.
The picture becomes even more interesting if you look at the list for 2003, the first year that Wine Business Monthly released its Top 30 report. Many of the players remain the same, but the names of three public companies (shown in boldface) that were in the top ten a dozen years ago have disappeared by 2014: Beringer Blass Wine (now part of Treasury Wine Estates), Robert Mondavi Winery (now part of Constellation Brands), and Brown-Forman Wines, which sold its big Fetzer wine business to Concha Y Toro in 2011 so that it could focus on spirits. Concha Y Toro is #11 on the 2014 list.
Looking closely at the 2014 numbers it is hard not to be impressed by the growth of family firms Delicato and Jackson Family Estates and also the success of Ste Michelle Wine Estates, which seems to behave like a privately-held firm even though it is a subsidiary of a public one, albeit in a different line of business (Altria specializes in tobacco products, not drinks).
All in the Family
Family- and private-owned wine companies are if anything more important today than they were before the Great Recession. Why are family-owned wineries so vibrant despite their structural economic limitations?
The conventional answer to this question — and there is in fact a substantial academic literature dealing with family businesses and even family wine businesses — stresses the ways that family businesses take a multi-generational approach and are able to negotiate the trade-off between short run returns and long run value. Corporations, it is said, are sometimes driven too much by quarterly returns and end up sacrificing the long term to achieve immediate financial goals.
When business requires a long run vision, it is said, families gain an advantage. Wine is certainly a business where it is necessary to look into the future if only because vines are perennials not annuals like corn or soybeans and successful brands are perennials, too.
Another school of thought examines issues of trust and transactions costs within the firm and the ways that family ties can reduce internal barriers and make interactions more effective. It is commonplace to say that wine is a relationship business and family firms may have advantages in this regard. I have knows some family wine businesses that even go out of their way to work with family-owned distributors and so forth. I think one author saw family-to-family links (the Casella family and the Deutsch family) as keys to the success of Yellow Tail brand wine.
Maybe the Real Question Is …
There are good explanations for the success of family-owned wine businesses, but sometimes they feel a bit ad hoc, tailored to explain a particular case and less capable of generalization. And they often fail to fully account for the fact that many family businesses (and family-owned wine businesses) either fail or, like the Taylor family, end going over to the dark corporate side. Family relationships can be good, bad or ugly — you cannot think of the Mondavi family story without channeling an episode of Family Feud) and not every new generation wants to stay in the business. So there must be something more here than simple families think long-term. But maybe we are actually asking the wrong question.
Maybe the question isn’t why family-owned wine businesses are so strong and instead why corporate owned wine businesses are sometimes so ineffective. Is there something about wine that turns smart corporate brains to mush (not all of them, of course, but maybe some of them)? Come back next week for some thoughts on this provocative question.
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You can view the February 2015 issue of Wine Business Monthly here. The story on the Top 30 wine U.S. wine businesses begins on page 40.
I imagine it has something to do with an ability to invest for several decades ahead, and not focus only on the next quarter’s cashflow expectation
Food for thought!
now if we can have mutli-generational funding to sustain short term economic cycles, we have more family businesses.
You sell stock to the public only because you need to raise more money at lower cost than you can get from private sources, which are personal family resources, private individuals, bank loans or selling stock privately to Private Equity firms. The wide variances in weather year to year, the long time horizons and the personal visions all act against going to the public stock markets. Bankers make loans fitted to the particular needs that you present to them when you want to raise money to grow. Stock exchanges don’t. They offer low cost money but not tailored to development times and product risk. So yes, my view is that an ag based product with long run times doesn’t need public stock sales because they don’t match the cash flows of a vineyard.
Ron, there are other issues with family business such as nepotism, generational change, conservative investments (that last point might be actually very critical in the wine industry). But overall I think you ask the right question which is why corporation can’t do better – they do better in many industries but not in the wine business. Perhaps it has to do with impatience and the desire to grow faster than the wine industry itself – how can any business grow 10% when the overall market grows 2%? I have had once had a conversation with Jean Trimbach that told me that for 200 years they have tried to grow 1% – I can’t imagine that going too well at a shareholder meeting. Perhaps corporations are just pushing too hard and make costly mistakes?