These are interesting times for many investments but 'interesting' isn't necessarily a euphemism for 'worrying'. The wine industry is one area where global trends and developments are showing marked promise for the savvy buyer. Wine as a business is an investment that combines a number of unique features, and it has a long-term history of both good returns and greater stability than many asset classes.
Stephen Kuhn, General Manager and Managing Director of Vinum Capital Management, LLC, a company specialising in the wine industry, says now is the right time to be thinking about buying wineries. And he should know. Vinum Capital Management was formed in 2007 by Kuhn and a veteran team from both the wine industry and financial services. According to Kuhn, Vinum's team has 100 years of combined winery operations experience at 20 wineries and producers on three continents, and have launched or managed over 150 brands, including Mouton Rothschild, Yquem, Penfolds, and Mondavi. Kuhn offers four key points to back him up.
"First, wine is growing in popularity in the US, where we are investigating investment opportunities," he said. "The US is now the largest wine market the world, with over US $30B in revenue in 2008, and a 10-year revenue CAGR of 6.5%. In the United States, wine sales outstrip both beer and spirits and it is now the most popular alcoholic beverage."
Furthermore, Kuhn says that while the Baby Boomer generation is still the largest consumer of wine, their children – the Millennial Generation, aged 12-30 – are drinking more wine per capita than their parents, hinting that the market's growth is set to continue at a promising pace as the rest of the generation comes of drinking age over the next ten years.
And he's not daunted by the economy. "US consumption continues to increase year-over-year despite the macroeconomic environment," he says. "For many producers in the roughly US $10-30 retail range, the wine industry remains very strong."
The second factor is the increasing demand for buyers of winery businesses. Due to a set of unique factors, many US wineries are coming onto the market. Family succession is the primary driver. There are about 5,500 wineries in the US, of which 2,600 are in California, where Vinum is based.
A recent independent research study from Silicon Valley Bank and Scion Advisors shows that over 50% of those wineries will change ownership within the next five to ten years. Fully 82% of California wineries are still owned by their founders, who are now of retirement age and looking for liquidity. "This is creating huge opportunities for active buyers that know what they're doing and how to manage the business," he says.
"The third point is that there aren't many buyers in the market. This is because the large players in the wine industry are too big to economically acquire and manage small- to mid-size wineries. As a result, with more sellers than buyers, valuations are decreasing, so it's a great time to buy these businesses with their hard assets and real estate."
"This is a unique point in the US wine industry," he added. "Our goal is to consolidate the best of these assets, increase their operating performance and margins, and divest to larger strategic and financial buyers."
"Fourth, this is a good time to buy. Valuations are down, credit is available, and a knowledgeable buyer today will have a better opportunity for growth today than in a boom time." In the present climate, says Kuhn: "The current economic environment is driving down valuations and accelerating deal flow. Some assets are financially distressed and others have simply reached the point of succession at a turbulent time in the economy."
Which makes a compelling argument for buying in the wine industry when the public markets are no longer a safe harbour and alternative assets classes are getting more and more rare to find, says Kuhn: "Wine is always an operating business, sitting on hard real estate assets. And California vineyard values in Napa and Sonoma have increased in value almost 9% CAGR since World War II. What better way to add extra diversification to a portfolio?"