Friday, July 28, 2017

I don't get "The Commodification of To Kalon"

Tim Carl recently wrote a piece, called The Commodification of To Kalon, which painted a picture of Constellation Brands ("the third-largest wine and beer company in the United States with some 50 million cases of wine sold a year and first-quarter revenue at $1.9 billion ...") initiating a process to gain control of the Beckstoffer portion of the To Kalon vineyard by: (i) acquiring the brands that currently purchase Andy's grapes;  (ii) producing low quality wines from those grapes, and (iii) selling the wines at a low price. The case was not made.

This article caught my attention because I am invested in the To Kalon vineyard: I have written the second-best history of the vineyard; I have spent time with vineyard owners (MacDonald Family and Andy Beckstoffer); and one of the producers (Tor Kenward of Kenward Family Wines) is a good friend.

With Tor Kenward (center) 

Andy Beckstoffer taking us on a vineyard walk
In the article Tim pointed out that Schrader Vineyards had recently sold its business to Constellation Brands for a little less than $50 million dollars even though they owned no vineyard or winery. Schrader was, he said, a brand built on the marketing prowess of Schrader, the winemaking reputation and skills of Thomas Brown, and the quality of fruit and name recognition of the Beckstoffer Vineyard.

When I first heard that Constellation was buying Schrader, I wondered about it because, in my vineyard walk-through with Andy, he indicated that he was launching a multi-year replanting effort in the vineyard. An effort which would require that winemakers share their fruit with affected growers in a reciprocal fashion. This means that fruit-quantity levels would decline for multiple years for all of the producers.

This would seem the wrong time to launch a commodification effort (assuming that that is the intent of the purchase; an assumption that I have a problem with). With reduced grape quantities, the producers are probably looking to increase wine prices to maintain sales levels. Further, there are quite a few entities making To Kalon wine; it would cost a pretty penny to buy enough of them to make this work. And why would Constellation go to all this effort? Just for control?

Constellation had to have known about the upcoming fruit source disruption for Schrader, yet they still went ahead with the deal. This suggests a strategy other than commoditization. They bought a brand and I propose that they viewed the brand components as (i) Schrader and (ii) the vineyard. They have one of those components in spades (see the map below where Constellation owns all the green spaces) and they bought the other -- Schrader.

Map of the historic To-Kalon Vineyard and
 "Stelling Extension" (Drawn by Sarah MacDonald)
I propose that Constellation intends to leverage the the Schrader name into creating new branded products with fruit obtained from its own vineyards. Much as I had proposed in my discussion of the Vietti sale, Constellation could create a number of high-end vineyard designates from fruit that is "underutilized" today based on the prices that Beckstoffer To Kalon wines command.

In this model, Constellation would treat To Kalon as a cru with multiple owners (much as is done in Burgundy and Barolo), each practicing its own discipline but leveraging the reputation of the vineyard into ever-increasing rewards from the marketplace. The current commercial owners of To Kalon land are Andy, the Macdonald Family, the Detert Family, Opus One, and Constellation.

If Constellation focused on delivering premium lines from the property it owns in the historic vineyard -- the two large plots on either side of the Beckstoffer et al block -- it could designate a number of sub-cru plots and label the products as Schrader Alpha To Kalon, Schrader Beta To Kalon, etc., and these would line up seamlessly with the naming convention established with the Schrader Beckstoffer To Kalon wine.

Tim must have had some inside info in order to write the "Commodification" article but I find it difficult to swallow. Especially in light of the contract terms that Andy has with his purchasers and his demonstrated willingness to use the courts to protect his interests (And he said as much in his comment on the article). If a buyer sought to lower the quality standards of the wine made from his grapes, he would probably consider that a breach of contract. And there are always winemakers seeking a spot in his vineyard.

By the way, I spoke to Tor and he has not yet received a call from Constellation.

©Wine -- Mise en abyme

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