After hearing from Far Niente, a PE-owned winery, it led me to wonder how much PE investment there is in this space -- especially after hearing about how difficult it is to turn a profit in this industry repeatedly this quarter.
I quickly scanned at a database of ~40 private equity funds and ~1300 portfolio companies. This data is by no means exhaustive (GI is not on the list), but there were zero wine-related businesses. So, it seems like the answer is that there is not a lot of PE investment in this space. Generally the wine business is not very fitting with the PE model -- as we have focused on all quarter, it's all about long-term horizons, where as @Janine pointed out in class today, the PE model often necessitates proving out the value prop for the next buyer in 3-5 years.
This begs the question -- why would a PE fund invest in wine?
This article proposes that the Duckhorn deal is "evidence of consolidation in a sector that has for long remained the remit of family-owned businesses motivated by lifestyle and prestige" -- so perhaps PE interest in the sector will increase?
I personally have a hard time seeing this as the eventuality given the flat growth in the industry overall and limited ability to expand margins.
Curious to hear others' thoughts on the subject!
Thanks for sharing the article and statistics of the portfolio companies! As a former PE investor, I think there are a few reasons why a firm would invest in wine: (1) portfolio diversification, (2) growth opportunity, and (3) cost opportunity.
ReplyDeleteFor diversification, several firms in the market focus on retail investments and this has historically been focused on direct-to-consumer retail goods or buying brick and mortar retailers. While some of these investments were in the food and beverage space, I think many of these were seen as high growth consumer plays where there was no real limit to growth or production potential. With the wine industry, there is a much more inelastic supply of product so it can be harder to grow consistently. However, wine does tend to be seen as more of a luxury item than most food companies so I think the interest in a wine investment could be to target a different consumer type than a mass-market consumer brand. With wine, it ads that diversification in customer base which can offset some of the growth constraints and potentially be a good cash flowing investment.
The second potential reason for an investment is the PE firms see an opportunity to grow a wine brand for broader distribution. This can be done organically by increasing production distributing. However, if the winery does not have the capacity to increase production then the PE firm maybe looking to buy multiple brands and build a house of brands that they can then pull together the resources of in order to both decrease G&A costs and market more effectively. This relates to the third reason for investing in which there are economies of scale to be recognized by having a central G&A and Sales & Marketing function that can market a portfolio of wines and reduce overall costs to drive profitability.
These are just a few potential reasons I could think about but there are many others and I would expect this PE activity to increase especially as family-held brands look for ways to cash out or lack a future family generation interested in running the business and there continue to be opportunities to acquire brands.
Thanks Jordan and Anna for your comments. Following Far Niente’s presentation, I was curious to learn about private equity's involvement in the wine industry as well. Similar to Jordan, I have a background in PE investing and was surprised to learn about so many PE-backed wineries.
ReplyDeleteJordan highlights many reasons for why a winery might be attractive to a financial buyer and I wanted to add a few more. An important factor to always consider is the underlying growth of the industry. Historically, the wine industry in the U.S. has benefited from favorable secular tailwinds. Since 1994 up until 2019, the United States has experienced steady, continued upward growth in wine consumption. 2019 represented the first year in 25 years in which consumption would decline. It is difficult to find many other markets that have had that period of sustained, predictable growth. Additionally, there are several sub-trends that are occurring (e.g., premiumization, varietal trends) that can drive even faster growth. Factoring in the size of the U.S. wine market, the historical industry backdrop can be attractive to investors.
As Jordan mentioned above, there are also multiple ways a firm can drive growth. This can come through increased distribution capabilities, brand extensions, go-to-market and/or pricing optimizations, operational improvements, M&A, capacity investments etc. It is attractive to have an investment that has multiple ways to drive both top and bottom line growth and wine is no exception.
Finally, as we saw in the Mondavi case, the land of any California winery is valuable and stable. This will surely factor in to any purchase price and investment decision.