It doesn’t take a finance savant like Geordie to see that the wine industry usually doesn’t make for great investments. It’s like we learned on the first day of class: “the best way to make a small fortune in the wine industry is to start with a large fortune.”
Then why invest? One of my key takeaways from this class is the importance of “non-economic” or “non-market” objectives of firms in the wine industry, informed both by class discussion and Chapter 9 in “American Wine Economics”, about “The Wine Firm”.
As the book discusses, wine firms that are "legally organized as a public corporation, such as Constellation, Treasury Wine Estates, and Diageo” can reasonably assumed to have a profit maximizing objective. For all others, though, they get utility through non-profit motives like nepotism, pure quality of the wine, artistic expression, status and prestige, wine philosophy and style, and lifestyle (list culled from American Wine Economics). At the very least, the evidence shows that most winery owners make tradeoffs between these incentives and the profit incentive (my favorite statistic was that 80% of owners wouldn’t sell their wineries if they could make more investing in the stock market).
Another theory is that owners might care less about profits in part because they don’t need the money. It’s no secret that wineries are run by very wealthy and privileged families. While owners of other businesses and real estate in the US are also generally wealthy, it’s more democratized (the US was built by small business owners and small-time land owners). Wineries seem to be less democratized – the families that own wineries, of course, typically have enough to have a good lifestyle without making a killing on the winery.
Regardless, if successful, the life of a winery can be long, and pass through many stages and generations. Mondavi was a great example of this. It started as a small family operation, expanded over many years, and eventually went public. One day Mondavi was a family winery, and the next it was publicly owned, and one of the “leagally organized public corporations” that American Wine Economics describes. The real challenge with its transition is understanding what its values are at every stage. Could it really retain its originally values and objectives as a public company versus when it was a small family winery? Probably not. But it’s hard to know when to clearly shift directions, especially in family businesses where the “changing of the guards” is a very slow and influenced process.
Maybe I’ll be wealthy enough to one day (a) not worry about profit and therefore (b) start a winery. However, making a big profit elsewhere and using it to buy whatever wine (and vacations to wineries) you want seems like a pretty good deal, too.
The head of my former company office was a serious oenophile and even owned part of a vineyard in France (http://www.closdubreuil.fr). He definitely falls into the category of owners that you mention who don't need the money. To him, making and drinking fine wine was simply a joy, though it is worth noting that the wine is quite luxury, retailing for $40 and up.
ReplyDeleteThis post got me thinking about the nature of hobby vineyards and how to acquire/maintain one, specifically here in the Bay Area. I did a bit of Googling, and here is what I found:
- Relatively pain-free: No legal permits required if you have a hobby vineyard of 0.5 acres or less. You also don't need to comply with the many city or state ordinances that apply to working vineyards.
- Cost-effective: Hobby vineyards are much cheaper to manage than full vineyards. It will mature in two years, after which the maintenance cost is just the cost of water and labor.
- Free or discounted wine: You can hire a local winemaker to tend to the vineyard and produce wine. Then, you can keep a portion or buy it from the winemaker at a discount. You can also grow and harvest the grapes yourself on a part-time basis, either for your own consumption or to sell in small batches.
- Can be rented out: You can rent out your home on websites like Airbnb to subsidize the maintenance cost.
- Increased property value: The vineyard can increase your property value, making your property especially attractive on the market.
Source: https://www.vineyardforsale.com/hobby-vineyard-right/
Great points by you both. I wonder if this is an American/new world wine reality and that wine produced in Italy, France, Germany, and other old world wine countries see the same thing taking place. West Egg vs East Egg type situation.
ReplyDeleteThe purchase of a vineyard/winery strikes me as a very Nouveau riche thing to do for wealthy people in the US, a statement that you "have made it". Whether you make any money or not on the enterprise seems to be besides the point, as it can be viewed almost as an accessory rather than an investment.
I tried to do some digging but could not find out whether rich people in the old world do the same thing with their money. Lots of the producers from the old world have owned and maintained their operations for hundreds of years, and smaller producers have been making wine for their friends and themselves for similar amounts of time.
My guess would be that less people buy a vineyard in the old world as a vanity purchase, but I'm probably wrong!