Vintage Reds vs. Red Ink: Winery Bankruptcies Rise
Spring Mountain Vineyards, whose Napa Valley mansion was seen weekly in the opening shots of the nighttime soap opera “Falcon Crest,” is a high-profile symbol of the wine industry’s deepening troubles.
Founded in 1968 by Los Angeles developer Mike Robbins, Spring Mountain made exemplary wine in its early days but faltered in the late 1970s. In 1990, after trying to sell the property for nearly a decade, Robbins filed for bankruptcy protection.
Robbins asked $18 million for the operation at one point. Tire kickers came and went.
In early August, Western Farm Credit Bank seized the property. On Tuesday, the bank announced that it had been sold for an undisclosed amount. One source said the 262-acre property--winery, mansion, 24-acre vineyard and 22,000 cases of wine--went for $5.5 million.
Anti-drug campaigns, health concerns, government-mandated warning labels and consolidation in the wholesale market have slowed wine sales, pushing many wineries into near-financial ruin.
Too-rapid expansion, tighter banking rules and the industry’s high-flying lifestyle have compounded winemakers’ problems during the current recession. U.S. per-capita wine consumption, which peaked at 2.4 gallons annually in 1986, dropped to 1.85 gallons in 1991.
A dozen California wineries have filed for bankruptcy court protection the last two years, and more filings are anticipated. Other wineries have been sold at what a Napa Valley real estate broker calls “fire sale prices.”
The reason so many wineries are in trouble is a too-rapid expansion of the industry, said George Schofield, president of George M. Schofield Inc., a Napa Valley firm that consults on real estate and financing.
“I think the industry is growing at a healthy rate,” he said.. “But in the last few years we’ve had an avalanche of production swamping an otherwise healthy premium wine industry.”
The industry has other problems too, including tighter banking rules that make borrowing more difficult; infestation of vineyards by a root louse--phylloxera--that has forced costly replanting, and simply living too well.
“The lifestyle is seducing,” said Gary Sbona, president of Regent Pacific Management Co. of Saratoga, which helps struggling wineries restructure. “You shouldn’t be driving a new Jaguar when you have marketing problems.
“Banking regulations have changed too. In the past the banks lent against the fixed assets, and when these loans were made, there was a perception that the wine industry would continue on a growth curve. Some properties got to ‘be worth’ $55,000 an acre. Today those same pieces of property are in the high $30,000s per acre, and the banks are lending less money on them.”
Another high-profile collapse is Grand Cru Winery, where Ramon Salcido began his 1989 killing spree. Owners Walt and Bettina Dreyer made excellent wine until a year ago, when Bank of America came up with loan demands the Dreyers were unprepared to accept.
The Dreyers placed the winery in bankruptcy. Two months ago the brand became the second that Bronco Wine Co. has acquired. Bronco, of Ceres, Calif., markets wines under the brands JFJ Bronco, Estrella River and CC Vineyard.
Perhaps the saddest of the current winery collapses is that of Hanns Kornell Champagne Cellars, seized three weeks ago by Napa Valley Bank. Kornell, a German concentration camp survivor, introduced French-method sparkling wine to the Napa Valley when he founded his winery in 1952. He ran the winery with family members until financial problems hit a year ago.
An insider said spending exceeded income and, although debt reached $6 million, some family members still were buying new cars. In early August the winery was closed. The bank also has threatened to seize the home of the elder Kornells because it was used to secure the company’s line of credit.
In addition, to cut costs, Heublein Corp. said it was restructuring its Napa Valley and other California-based offices. Some activities were transferred to the firm’s Connecticut offices, and numerous jobs in California were eliminated. The company declined to say how many employees would lose their jobs in the economy move. Heublein also said that it would sell some vineyards and at least one of its winery buildings.
Meanwhile, other wineries are on the ropes, including Charles F. Shaw Winery in Napa Valley, Nunn’s Canyon in Sonoma County and Lambert Bridge, also in Sonoma County.
Sbona said financial problems can hit even the oldest wineries, those with a low debt load. He cited the Louis Martini Winery in the Napa Valley, founded in 1933, as an example. A year ago, Martini faced massive financial problems and bankers who were unprepared to extend loans unless it cut expenditures, he said.
“The Martinis looked at their costs, and they realized decisions had to be made,” said Sbona. He said family members took no salaries for months, fired an 11-person sales force and signed a national marketing agreement with A. Racke, the German company that owns Buena Vista Winery in Sonoma County.
“We saved $1.2 million overnight,” said winemaker Mike Martini, adding that the Racke deal has worked out better than anticipated.
“The Martini story is a pure success story,” said Sbona. “We’ve had 12 different winery clients, and no one has done it better than the Martinis.
And there are other success stories, such as Lockwood Vineyard. In 1989, vineyard owners Phil Johnson, Butch Lindley and Paul Toeppen hoped to start a winery in Monterey County. But when they looked at the business, they did not like what they saw.
“We analyzed the marketplace and the distribution system, and we were disappointed with the way it worked throughout the country,” Johnson said. “The number of wine distributors was declining. Fewer and fewer people were marketing an increasing number of brands. We knew a small, unknown winery from Monterey wouldn’t have a chance.”
So Lockwood Vineyard decided to sell wine direct to consumers through a mailing list, bypassing the traditional marketing system of wholesalers and retailers. From a first-year production of 1,000 cases, Lockwood will make 50,000 cases this year. Johnson says Lockwood could be profitable by 1994, years ahead of other start-up wineries.
Schofield said Lockwood’s apparent success at direct marketing is one way to achieve profitability faster than going through traditional marketing channels. “If you could sell your wine directly to the public, you may become profitable in a shorter period of time, because there is no dependence on wholesalers to sell your brand,” he said.
