The featured essay in the current issue of The Economist newspaper focuses on family businesses and makes the case that they are a surprisingly robust feature of post-industrial capitalism.
This struck a note with me because the next two scheduled Wine Economist columns deal with different aspects of family wine businesses. The Economist survey, which is written by Adrian Wooldridge, would make great background reading to what’s coming up here.
All in the [Wine] Family
The conventional wisdom, as The Economist explains, is that family businesses were a natural fit with early capitalism, when trust was at a premium and finance mainly came from within the family or the firm itself. The principal-agent problem can be mitigated somewhat if principal and agent are part of the same family unit. And family members can be more reliable (and patient) sources of finance than others.
There are problems with family firms, however, which are said to limit their scale, scope and longevity. One problem is generational transitions, which are often difficult (in business as is other aspects of life). The British have a saying that it is “clogs to clogs in three generations” as the dynamism that built the family firm is dissipated and the business eventually shrinks, fails, or falls into the hands of outsiders. You can probably think of examples of this from your own experience. I have heard it said that it is “shirtsleeves to shirtsleeves in three generations” here in the U.S. and it amounts to the same thing.
The conventional wisdom, descended from management guru Alfred Chandler and others, is that the modern company is increasingly rationalized and best run by highly-trained hired professional managers not hereditary top dogs. The irrational, unprofessional family necessarily plays a smaller and smaller role.
Talkin’ ‘Bout My Generations
The Economist makes the point that successful family companies have adapted in many ways. In some regions (Asia is highlighted) and some sectors, they have achieved conventional wisdom-busting dominance. Under the right circumstances, it seems, family companies more than hold their own again publicly-traded competition.
Would it surprise you if I said that several of The Economist‘s examples of successful family firms come from the wine industry? I hope not, because that’s one of the themes I aim to explore in the next two columns. What wine companies get spotlighted? The first is very old indeed. The family behind Marchesi Antinori has been in the wine business for 26 generations. Giovanni di Piero Antinori entered the Florentine winemakers’s guild in 1385. That’s a lot of family wine history!
The second example is very different. The Economist cites Bernaud Arnault’s family ownership of Möet Hennessy Louis Vuitton. LVMH is a world class luxury goods conglomerate with substantial investment in wine and spirits brands, but I’m not sure if it is as much a multi-generation family company as a closely-held company (especially compared to the Antinori). But the success is still important and, as you will see, privately-held firms play a role in my analysis, too, and stand in general opposition to Chandler’s orthodoxy.
Another informative example of this type is the Rupert family of South Africa. The Ruperts have built a considerable luxury goods empire through their Richemont holding company. Richemont controls many familiar brands including Cartier and Alfred Dunhill. Anton Rupert was an important force in the development of the contemporary South African wine industry and the family is today well-known for its South African fine wine projects including Rupert & Rothschild, Antonij Rupert and La Motte.
Beyond the South Sea Bubble
The last example given is Berry Bros. & Rudd, the London fine wine merchant that has been in business since 1698. The discussion of BB&R focuses on the ability of families to ride out short term crises while keeping an eye on the horizon. Once your business has lived through the South Sea Bubble, seventh generation company chief Simon Berry quips, you are ready for whatever the modern economy throws at you.
Berry’s comment actually understates the situation because all business have to deal with the disruptive consequences of financial crises and macroeconomic cycles. The situation for wine businesses is even worse because wine is fundamentally an agricultural product and so is subject to natural harvest variations as well as boom-bust “cob-web” cycles of high prices, over-planting and decline or collapse. Any wine business — public, private or family — must navigate an unusually treacherous sea.
What’s the key to the success of family wine businesses? And what happens when family firms turn corporate? It’s impossible to generalize because there are so many diverse factors, but I think we can learn something from case studies. Come back next week for the family boom to corporate bust story of the Taylor Wine Company. Cheers!
This week’s Economist also includes a very short article about investing in wine.
Creative destruction? The Who ta-ta-ta-talk about their genereation.