Monday, August 15, 2016

Some thoughts on the Vietti sale

My first encounter with Luca and Elena Currado was at the Galloni Vietti Rocche di Castiglione Retrospective on May 10, 2016, where I had the honor of sitting next to Luca. I found him to be warm, personable, knowledgeable, and committed to his craft. My next encounter with the family was a visit to the estate in June of this year as a part of the launch of Suzanne Hoffman's Labor of Love. Elena led our group on that tour and tasting.

With Luca and Elena at Galloni Vietti
Retrospective earlier this year
Elena Currado and Suzanne Hoffman on our
visit to Vietti on June 3 of this year
After this level of interaction with the principals, and having been singularly impressed with the quality of the wines, I drank the Kool-Aid. I bought into the story of the artisanal family farmer whose positioning was perennial -- even though I had published posts on my site about the Burgundization of Barolo and the implicit risk for its way of life. So, like many other lovers of the concept #piemonteispiemonte, I was shocked when I saw a tweet from Suzanne which linked to the Wine Spectator article announcing the sale of Vietti to Krause Holdings for, according to estimates, upwards of €50 million.

In a Levi Dalton podcast following the sale announcement, Luca defended the deal against vocal criticism. In that session Luca was sometimes defiant, sometimes sheepish; open, but guarded; and was short on some details. He posited the arrangement as a partnership rather than a sale, saying that it provided the opportunity for the Vietti and Krause families to pursue other projects together in the future.

The problem, as Luca sees it, is the families of current farmers not wanting to renew contracts as they come to an end. As the price of the land continues to rise, the farmers, or their heirs, see more benefit in cashing out rather than renewing contracts. And with intense competition for the land, because of the current standing of the region's wine in the world, the prices are being bid up to stratospheric levels. He mentioned something on the order of €1 million per ha.

The risk to the winemaker is a potential reduction in the quality and quantity of his/her wines. If a key supplier of grapes to one of your key wines is bought out, and you no longer have access to those grapes, and can't replace it with grapes of a similar quality, then your wine will suffer a quality deficit. If you are unable to replace the grapes period, then you suffer both a quantity and quality falloff.

So the question can be asked, ok, if these plots are coming on to the market, why don't the vintners buy them? While Barolo is doing very nicely today, the cost of the land will require that the vintner take on unsustainable levels of debt in order to make acquisitions. And would need to keep going back to the well time and again in order to stanch the bleeding.

By entering into this deal, according to Luca, he has taken steps to ensure that the quality of the Vietti brand is protected going forward and there is potential for even increased quality. This happens in a number of ways. First, he now has access to the fruit from the prior high-quality Serrafino acquisitions that the Krause's have previously made. This, coupled with the fact that the deal says that the number of bottles produced by the estate will remain constant, means that he can substitute the high-quality fruit from those acquisitions for some lesser quality fruit in some of his offerings. Also, with a bigger capital pool, Vietti/Krause will be able to bid successfully for some of the properties from which they source fruit if/when those properties come on the market.

One of the things that Galloni fretted about in his thoughtful and lengthy assessment of the deal, was the fact that the Vietti family retained no ownership.  Luca, in his Levi Dalton interview, stressed that "the family" made the decision to enter into the deal with the Krauses. They had lengthy discussions and, while everyone did not necessarily agree with the direction, at the end of the day it was a family decision. One of the things that he kept saying was that the deal would allow The Krause and Vietti families to pursue additional projects in the future. But the structure of any such "future deals" is not readily apparent.  As Galloni points out, the current deal has the no ownsership stake in the new entity for the Vietti family. And with the escalating price of land, I find it hard to see a reason for Vietti to take the money earned from the sale of their property and invest it into higher priced land in the future. All evidence points to an employee-only relationship between the Currados and Krause holdings on a go-forward basis.

Now what are the implications of all this for the broader Barolo. There is potential for this being the tip of the spear. In a tight market, Vietti now has a competitive advantage over its neighbors. It's sources of supply are guaranteed and it is sitting on capital with which to make future acquisitions. In the podcast Luca described a property that was coming on the market but he would not bid on it because the vintner who sourced grapes from that property was a friend. With the Krauses as partners, that property could have come into his portfolio through a Krause acquisition, allowing him to hide behind the "they did it" mantle. No self-respecting market player can allow a participant to acquire and retain this type of competitive advantage without a response at some time down the road. Within that environment, the Vietti purchase is just the tip of the iceberg for Barolo: (i) All of the other vintners are facing the same pressures that Vietti was facing and drove them to this decision. (ii) Luca says there are a number of potential investors sniffing around the valley; therefore, it is only a matter of time before some of the folks seek to monetize their investments while preserving the fundamentals of the business.

The issue becomes how does the character of the Vietti business change as a result of the change of ownership. Will Luca spend as much time in the vineyard (or on the road) with all this cash burning a hole in his pockets? Will the management challenges of running a portfolio of assets diminish the level of his personal focus on vineyard and marketing activities? Only time will tell.

Luca should not be surprised at some of the negative reaction that the deal has generated. Some avid Vietti fans feel as though the deal amounted to a bait and switch. They bought into the advertising and the "story" of the artisan against the corporate juggernaut and, suddenly, one of the key players turns up on the "other side."  And people do not react well when they feel betrayed. In that regards, the dissemination of information about this major change in strategy was handled poorly. Vietti had a number of stakeholders: family members, distributors, retailers, restaurants, consuming public, and the Piemontese. Only one stakeholder component was prepared for this news: the family. For everyone else it was a shock. And people react negatively to shocks. Luca did admit that the news got out earlier than they would have liked.

This is potentially the beginning of a new phase in the story of the Langhe Hills. In his article Galloni speaks to a new concept: The Bordeauxification of Piemonte. One can only pray that such a fate does not befall this region. The families, the wines, and the place have combined to carve out a special place in the heart for Piemonte lovers, be they region-resident or not. We hope that the dam holds.

©Wine -- Mise en abyme

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