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Napa's big challenge: succession planning

From Wednesday's Globe and Mail

ST. HELENA, CALIF. — First-time visitors to Napa Valley sometimes are struck by the bustle of the place. In contrast to the bucolic vista of so many postcards, the view through a windshield on Highway 29, the region's main artery, can be a blur of signs. Signs for tasting rooms, fancy restaurants, gourmet groceries, even burger joints and a factory-outlet mall.

But the most portentous placard hanging over the famous wine valley is one you won't see with the naked eye. It's figurative, and it reads: "For sale."

Throughout Napa, and to an extent all across the West Coast, the big topic of fence-post conversation is the coming wave of property-ownership changes. According to a recent U.S. study, the majority of established wineries in California, Oregon and Washington state - more than 1,000 - are expected to change hands by 2018.

Some people fear the shift could usher in a new era of big-business control that will transform an industry known mainly for individualistic, craft wines into an ocean of McCabernets. Nowhere is the concern more palpable than in Napa, where prime land sells for as much as $400,000 an acre and corporate buyouts in recent years have begun to unsettle a landscape where traditionally 95 per cent of wineries have been family owned.

"It is sad that the family-owned winery is kind of going away," said Andrew Groth, 37, a second-generation executive with family-owned Groth Vineyards & Winery in Napa's central Oakville district. Mr. Groth and his sister Suzanne own 22 per cent each of their parent's winery and plan eventually to take control. "What's interesting to me too is, just because you have the family name on it doesn't necessarily mean that the family owns it."

Prompting the ownership sea change is a blunt demographic reality. Many first-generation producers, such as Mr. Groth's father, Dennis, 67, who helped launched the wine boom of the 1970s and 1980s, have reached or exceeded normal retirement age. Suddenly, for many owners in Napa, succession planning has taken on even greater urgency than erecting overwrought architectural statements and chasing 95-point scores from influential critic Robert Parker.

"The No. 1 challenge is starting early enough," said Deborah Steinthal, founding partner of Napa-based Scion Advisors, which consults to family businesses in the wine industry and conducted the ownership study last year with Silicon Valley Bank. "We've had so many calls from 80-year-olds in the last two months [because of the report] and it's too late for them." Effective succession and estate planning, she said, takes five to 10 years.

While many winery owners prefer to transfer their businesses to children, onerous U.S. estate taxes and significant debt could make all-in-the-family deals impossible in some cases, Ms. Steinthal said, and will force no small number to sell to outsiders.

The study calculated that the typical tax hit from a change in ownership can run into the millions.

"With the financial leverage most wineries operate under, it is unlikely that this can be raised strictly from savings, cash flow, or from the sale of winery assets less crucial to the winery's success," the report states. "The more likely outcome in this circumstance is the quick 'estate sale.' "

Fuelling the spectre of a corporate feeding frenzy is the fact that 45 per cent of respondents lack heirs or have children who - believe it or not - have no desire to live and work among vineyards in the California sun. Almost a quarter of respondents, 23 per cent, also said they've been captivated by large cash prices paid in recent years for wineries, which makes an outright cash sale tough to ignore.

Noteworthy examples include two of Napa's most illustrious wine properties. Screaming Eagle, the iconic cabernet estate started in the 1990s by ex-real-estate agent Jean Phillips, was scooped up three years ago, when Ms. Phillips was 60, by Charles Banks, a California money manager, and Stanley Kroenke, an entrepreneur who, among other things, owns the Colorado Avalanche hockey franchise. At the time, Wine Spectator magazine estimated the tiny 500-case-a-year ranch, which did not disclose terms, would likely have fetched $20-million to $30-million.

More recently, in 2007, Stag's Leap Wine Cellars, the estate that took top prize against some of Bordeaux's best in the sensational 1976 tasting known as the Judgment of Paris, was purchased from 79-year-old founder Warren Winiarski by a partnership between Italy's famed Piero Antinori and Ste. Michelle Wine Estates, the largest wine company in Washington State. Industry estimates pegged that deal at about $185-million. At the time, Mr. Winiarski reportedly said family members were not in a position to take over the business.

Still, such buyouts were perceived in Napa as relatively benign, even welcome in the case of Stag's Leap. The Antinori firm in particular has been family-owned for 26 generations. That's at least 23 generations more than virtually every winemaking family in California. Mr. Antinori's three daughters now partly run the Florence-based company.

"What I am amazed at is the fact that I sometimes see the sons or daughters not interested in continuing with the business," Mr. Antinori told me in a recent interview in Napa, where he owns another large estate called Antica (a blend of Antinori and California). "I think it's such a wonderful business. At least for me it's not been very difficult to convince my daughters." In fairness, sane Italian inheritance laws tend to encourage, rather than penalize, family-business continuity.

Not all Napa estate sales have been so seamless. I think it's fair to say a certain gloom set over the valley in 2004 with the sale of Robert Mondavi Winery to global giant Constellation Brands. The dynamic Mr. Mondavi, who essentially ignited the West Coast boom in his 50s by launching an ambitious, technologically advanced winery in 1966, had taken the company public on the stock market in the early 1990s, eventually losing control and paving the way for an unfriendly takeover. He died last year at 94.

The pinstripe-versus-plaid tension tugs at the soul of the wine business - or at least its marketing mythology. Family ownership carries cachet with consumers and a price premium. It's sort of the equivalent to a chef who actually works in the restaurant kitchen rather than jetting off to consult for cookie-cutter outposts in Las Vegas and Dubai.

Let's face it, public companies are slaves to nameless shareholders, who are insatiable for profit gains with every three-month financial report. Many top wine producers will tell you such indiscriminate pressure is no way to run a wine business. Wine is not like beer, for which you plant barley in spring and harvest in fall. Newly planted vineyards literally bear no fruit until their third year and may not provide a substantial, quality crop until many years later.

"I think it needs personal attention, great passion for what you are doing," Mr. Antinori said. "I think that the best type of solution to manage a quality wine business is really the family."

Some Napa watchers remain upbeat about the future, though. And they make a good case. Jim Gordon, editor of Wines & Vines, a 90-year-old magazine that covers the North American industry, says California is fertile ground for new ventures. "It seems like for every one winery that gets consolidated into a corporation, 10 more spring up." True, that. You can see it in new attention-grabbing labels such as Ovid, Kapcsandy, Sloan, Drinkward Peschon, Scarecrow and Aubert, all cult Napa wines that got their start in the past decade.

The start-ups tend to be tiny, Mr. Gordon adds, but boutique wineries often aim for high quality and have a disproportionate influence on a region's style and overall standards. Exacting consumers may just have to navigate through a small forest of McCabernets to find them.

bcrosariol@globeandmail.com

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