Sandlands Vineyards

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Professor Benjamin C. Esty and Research Associate Gregory Saldutte prepared this case. It was reviewed and approved before publication by a company designate. Some data in the case has been disguised to protect confidentiality. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2018, 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

B E N J A M I N C . E S T Y

G R E G O R Y S A L D U T T E

Sandlands Vineyards

“It’s the dream of many entrepreneurs: Get rich, buy a vineyard, kick back on the porch and relax with a glass of wine. Keep dreaming. Wine is a tough, competitive, and expensive business that’s likely harder than your current day job.” (Forbes Magazine)1

As he wandered through the 100-year-old vines at the Kirschenmann Vineyard in Lodi, California, Tegan Passalacqua reflected on the challenges of starting and running a small winery. “I am constantly thinking about the business—what to produce, how much to produce, how to build the brand, and most of all how to make really good wines.” Passalacqua and his wife Olivia owned both the Kirschenmann Vineyard and a small winery called Sandlands Vineyards which produced “old-vine” wines. Although he had a full-time job as the head winemaker at Turley Wine Cellars, he managed the Kirschenmann Vineyard and made the Sandlands wines in his spare time using Turley’s facilities.

In early December 2017, however, the Passalacqua’s faced an important decision: should they buy a building down the road from the Kirschenmann Vineyard and develop it into a winery and possibly a tasting room for the Sandlands wines at a cost of up to $500,000? This building, known as Eastside Meats, had been a meat processing facility with a history going back to the German and Russian immigrants who settled in Lodi in the 19th century. Although it was not listed for sale, Passalacqua had been in negotiations with the owner who seemed willing to sell. On the other hand, he and his wife could save their limited resources with the goal of buying another vineyard. Unfortunately, old vine vineyards did not come up for sale very often and when they did, they were generating more and more interest from winemakers and selling at higher and higher prices. Knowing they could afford to make only one major investment over the next five years, they had to decide whether to bid for the building or save their resources for another vineyard.

The U.S. Wine Market People have made wines for thousands of years by pressing grapes and fermenting the juice to

produce an alcoholic beverage. The resulting wines came in three primary colors (red, white, and rose) and three main types: still (table wine), sparkling (with bubbles), and dessert (often sweeter and with higher alcohol levels). Although there were thousands of kinds of grapes and more than 150 kinds that were regularly used to make wine, 10 varieties accounted for 80% of the tons crushed in California.2

For the exclusive use of C. Gatling, 2020.

This document is authorized for use only by Camarie Gatling in BUS 498 Summer 2020 Online taught by AVINASH MAINKAR, George Mason University from Jun 2020 to Nov 2020.

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The most common types of red wine grapes were Cabernet Sauvignon, Merlot, and Pinot Noir; the most common types of white wine grapes were Chardonnay, Sauvignon Blanc, and Pinot Gris/Grigio.

People drank wine by itself or paired with food to enhance the taste. Red wines were traditionally paired with high-fat foods such as beef and cheese while white wines were paired with leaner foods such as chicken, seafood, and vegetables. Wine taste derived from a complex combination of the grape, climate, weather, soil, and winemaking process. Winemakers described the taste using six characteristics: acidity, tannin, alcohol, sweetness, fruit, and body (fullness). A balanced wine was one in which all of these characteristics blended together harmoniously rather than having one of them stand out above the others. Taste was a very subjective factor that could vary considerably from person to person. As a result, it was an “experience good”, a product you had to try before you could decide if you liked it or not. As one analyst quipped, finding a good wine was like finding a good barber.3

To help consumers make an initial purchase decision, professional wine critics such as Robert Parker, Jr., Jancis Robinson, and Antonio Galloni reviewed and rated wines particularly more expensive ones.a While some people argued that critics provided objective assessments of wine quality, an assertion the strong positive correlation between ratings and bottle prices seemed to corroborate, others argued they had strong and almost predictable preferences that drove winemakers to produce wines with specific taste characteristics.4

The standard unit of measurement in the wine industry was a (9-liter) “case” which was comprised of twelve 750 milliliter bottles (~ 2.4 U.S. gallons). Total sales in the U.S. wine industry in 2016 were 399 million cases with a retail value of $60 billion.5 Approximately 70% of the wine consumed in the U.S. was produced domestically and 90% of that was produced in California. The most famous wine-producing regions in California were Napa and Sonoma Valleys where millions of tourists flocked each year to see the vineyards and taste the wines. Though not as well known, San Joaquin Valley also had numerous vineyards and wineries. Lodi, in fact, had 85 of wineries.6 The remaining 30% of consumption was imported from Italy, France, Australia, and numerous other countries. Over time, U.S. wine consumption per capita had grown from approximately one gallon per year in 1965, to two gallons by 2000, and was up to almost three gallons by 2016.7

Wine Customer Segments

The beverage market was divided into non-alcoholic (soft drinks, fruit juices, coffee, water, etc.) and alcoholic beverages. The smaller market for alcoholic beverages included beer (50% of total dollar sales); distilled spirits including rum, vodka, and gin (35%); and wine (15%).8 Among adults of legal drinking age (i.e., those over 21 in the United States), 36% abstained from drinking alcohol, 24% drank alcohol but not wine, and 40% drank wine.9 Approximately two thirds of the wine drinkers drank wine occasionally (less than once per week) and one third drank wine more frequently. The high-frequency drinkers accounted for over 80% of wine consumption and purchases.10

According to one industry survey, there were six key customer types ranging from “overwhelmed” customers who bought cheaper wines and felt bewildered by the range of choices to “enthusiastic” customers who bought more expensive wines, and loved learning about and shopping for them (see Exhibit 1). When surveyed, frequent wine drinkers listed price and brand as by far the most important purchasing criteria (see Exhibit 2). Most consumers viewed price as a signal of quality, which was particularly important given the enormous range of options available—a typical wine shop might carry 400 to 800 kinds of wine. Interestingly, however, there was no correlation between price and taste

a Robert Parker, Jr., created the 100-point rating scale in the 1970s. Wines rated above 85, 90, and 95 points were considered good, outstanding, and extraordinary, respectively. Ratings were based on color, appearance, smell, and taste.



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preference for most drinkers in blind taste tests. There was, however, a positive relationship between price and taste for “expert” or knowledgeable wine drinkers.11

Wine Product Segments

Consistent with bottle price being a major purchasing criterion, most analysts segmented the wine industry by price: the value segment for wine costing less than $10 per bottle and the premium segment for wine costing more than $10. The value segment represented approximately 80% of the industry volume and 60% of its revenues.12 Marketing analysts further divided the premium segment into “luxury” wines costing more than $50 per bottle. In fact, at the high end, wine could cost several hundred if not several thousand dollars per bottle. Exhibit 3 shows sales by price point in the off-premise channel (i.e., grocery stores and wine shops), a segment where good data existed for low- to mid-priced wines. More expensive wines were difficult to track because customers bought them directly from wineries rather than through retail outlets, and that sales data was difficult to obtain.

Marketers classified premium wines as “non-essential luxury goods”, meaning that consumers could defer purchases indefinitely (“non-essential”) and tended to buy proportionally more of them as their income rose (“luxury good”). Exhibit 4 shows the fraction of adults who had purchased expensive wines and the reasons why. Over 40% of adults had purchased a wine costing more than $50 per bottle, and the most common reason was to celebrate a special occasion. The second and third most common reasons were to drink or to give as a gift. When purchased to drink, premium wines competed against other kinds of wine; when purchased for a special occasion or as a gift, they competed again other kinds of wine such as champagne, food such as chocolates, and gifts such as flowers. One wine blogger described the way he chose his wines this way:

There are what I call “Everyday Wines.” These are the kind of wines that we’ll pop open with dinner on an average Tuesday night...The second category is what I call “Saturday Night Wines”…for times when you want an outstanding wine—a wine that may be a focal point…of the evening...And then there are “Special Occasion Wines.” These are wines that really are special—that when you open, you’re excited...

And I broadly break them into three categories. The first are what we might call the Rolls-Royce wines…These babies are expensive!...[T]he next category might be the Porsches (or the wines of the experts). They’re often expensive…[and] hard to find...The third category is unique...We might call it “What the Cool Kids are Drinking.” For example, one night a month in New York, a group of 15 or so of the top somms [sommeliers] in the city meet after work and bring exciting new finds to share. Perhaps a Chenin Blanc from Sandlands...If you open a bottle of one of these for your friends, even the wine lovers may say “What the hell is this?” After they taste it, the novices may still be unconvinced—these are not mainstream wines—but the serious wine lovers will likely say “Ummm... this is really interesting!”13

The Structure of the U.S. Wine Industry Producing wine consisted of three main activities: growing grapes (sourcing), making wine

(production), and distributing wine (distribution). Exhibit 5 provides a schematic overview of these three activities. The two key wine segments—the value or commodity segment at the low end and the premium segment at the high end—differed in how they conducted each of the activities. The former relied more on “science” and automation to mass produce consistent and affordable (low-cost) wines; the latter relied on a complex combination of art, science, and nature to produce more unique, higher-quality wines. In both segments, however, the production, distribution, and sale of wine was regulated extensively and taxed heavily at both the federal and state levels.




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Growing Grapes

Winemakers often said that “wine was made in the vineyard.” When growing grapes, farmers made a series of critical decisions such as what to grow (which type of grape); how to farm (plant, prune, and harvest the grapes); whether to irrigate or “dry farm”; and whether to use pesticides or grow organically. In the value segment, the objective was maximum yield with decent quality and low cost. In the premium segment, by contrast, there was considerably more variation in farming techniques and a desire to grow high-quality grapes. Premium winemakers sought a match between the type of grape, the climate, and the “terroir” (the French word for soil or earth)—all three of which affected the ultimate wine’s taste. From year-to-year, weather—temperature and rainfall—also affected the taste.

The most critical decision in any given year was when to pick the grapes, a decision that was based in part on science (acid and sugar levels) and in part on the winemaker’s judgment regarding the desired wine. Control of the harvest also mattered—did you pick all of the grapes or just the best clusters; did you pick in the early morning or later in the day; did you pick certain elevations, etc.—which is why winemakers liked to be involved with the harvesting process to the extent possible. There was no substitute for experience in making good picking decisions, which is why aspiring winemakers sought to work as many harvests as possible.

Wineries sourced grapes in three ways (see Exhibit 5). One option was to own or lease the vineyards (an “estate” or integrated winery) which gave winemakers full control over growing practices and harvesting decisions. A second option was to buy grapes on the spot market or with longer-term contracts. The final option, used by négociants (French for merchant) or “virtual’ winemakers, was to buy wine made by others and resell it under a proprietary brand name. The largest wine makers used a combination of all three structures; the smaller, premium winemakers tended to buy grapes.

One of the greatest challenges for growers was dealing with diseases and pests. Although farmers could control these problems with fungicides and pesticides, others preferred to farm organically. One of the most destructive pests was known as phylloxera, an insect that attacked the roots of grape vines and eventually killed them. An outbreak in the mid-1800s destroyed a majority of the vineyards in California and Europe. More recently, a second outbreak during the 1980s forced Californian growers to replant their vineyards. By grafting different kinds of grape vines onto naturally immune rootstocks, growers could avoid phylloxera damage even though the process came with unavoidable cost: it changed the taste of the resulting wine according to some people. Others argued the change was so minor compared to the winemaking process that it was undetectable. Interestingly, phylloxera had less impact on vines grown in sandy soils because they were inhospitable to the insect. As a result, vineyards with sandy soils tended to have a higher fraction of “own-rooted” rather than grafted vines.

As of 2016, there were 5,900 wine grape growers in California who farmed just over 600,000 acres.14 The largest grower, Bronco Wine Company, had 40,000 acres and revenues of $182 million.15 In contrast, 90% of the growers had fewer than 100 acres and 50% had fewer than 5 acres.16 These smaller vineyards provided grapes used to make premium wines. Vines became productive three years after planting, remained productive for 20 to 40 years, and then were replaced as output fell. An acre of land produced from 2 to 10 tons of grapes, with high-quality wines at the lower end and low-quality wines at the upper end. Each ton of grapes produced roughly 65 cases of wine. The challenge for all growers was the high and rising cost of land: vineyards ranged from $20,000 to $40,000 per acre in San Joaquin Valley and from $50,000 to $370,000 per acre in Napa Valley.17 Restrictive zoning and strict environmental regulations meant new land was difficult and costly to acquire. Rising land prices, however, helped offset the low operating margins most growers earned on their grapes—averaging 9% despite considerable variation over time and across growers. Growers with the most prized




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vineyards, which produced the most expensive wines, could earn higher operating margins, perhaps 20 to 40% or more, but they were relatively rare and few growers disclosed their profitability.18

In addition to grapes, the other major inputs needed to make wine were equipment (processing, pressing, and bottling machines); labor particularly the services of a skilled winemakerb; barrels to store and age the wine; packaging which consisted of bottles, labels, closures (corks or screw caps), boxes for shipping; and buildings to house the equipment and store the wine. With the exception of skilled winemakers, all of these inputs were readily available from multiple suppliers at competitive prices.

Making Wine

Most wineries had a head winemaker who ran the process of transforming grapes into wine, a process that involved four key steps: 1) pressing the grapes, 2) fermenting the juice, 3) aging the wine, and 4) bottling the wine for distribution. Each step in the process could be done in multiple ways and required the winemaker’s judgement to achieve a desired taste. For example, in the pressing stage, you could destem the grapes or press full clusters; in the fermenting stage, you could do one or two fermentations; and in the aging stage, you could store the wine in oak barrels which affected the taste or stainless steel containers which did not. For wines in the value segment, the challenge was to blend grapes from multiple vineyards to produce a consistent taste year after year. One of the most important decisions was how much to intervene in the process. The choice was between letting the wine become what it was destined to become—fermentation was after all a natural process that would occur on its own—or manipulating the wine by adding sugar, acid, enzymes, or water. While making wine depended in part on the science of chemistry and growing depended in part on the luck of nature, winemaking ultimately depended on the winemaker’s skill, knowledge, and accumulated experience.

As of 2017, there were more than 9,000 wineries in the U.S., and more than 4,000 in California alone. Exhibit 6a shows the distribution of wineries based on size. Most wineries were very small: 80% of the wineries produced fewer than 5,000 cases per year. At the top end, the three largest firms (E&J Gallo, The Wine Group, and Constellation Brands) controlled 60% of total wine production.19 Gallo, in particular, produced 75 million cases across 90 brands and generated sales of $4.7 billion.20 Consolidation at the top end had occurred steadily over the past 20 years and was likely to continue in the coming years. The largest firms produced wine in the value segment, yet some of them also produced a few premium wines. For example, Constellation Brands produced Opus One, a “Bordeaux style” cabernet sauvignon that sold for up to $400 per bottle and had recently acquired the Prisoner brand which sold wines for ranging from $30 to $50 per bottle.21 When broken down by average bottle price, a small fraction of the wineries produced value wines. In contrast, most of the entry and growth was occurring in the premium segment in a trend known as “premiumization” (see Exhibits 3 and 6b).

Each winery produced one or more brands (e.g., Sandlands), and each brand had one or more “labels” (Sandlands Mataro vs. Sandlands Chenin Blanc).c Across multiple vintages (Sandlands 2014 versus 2015 Chenin Blancs), there could be hundreds of thousands of types of wine. Gomberg, Fredrikson & Associates, the leading market research firm in the wine industry, tracked prices of 15,000

b The average salary for a more senior and experienced winemaker at a vineyard producing up to 50,000 cases per year was $127,000 according to the 2017 Salary Survey published by in Wine Business Monthly (October 2017 issue, p. 64).

c As an example of the industry’s extensive regulation, every label had to be pre-approved by the Alcohol and Tobacco Tax and Trade Bureau (TTB, part of the U.S. Treasury Department) as part of the taxation process, and every label had to contain at least nine items including brand name, wine name, bottler name and address, alcohol content, and health warnings.




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wine labels commonly available in the market, yet government taxing authorities tracked over 100,000 different labels per year including imports.22

Although larger wineries had profit as a primary objective, the owners of smaller, premium wineries were interested in some combination of profit, prestige, and fun. In fact, many celebrities and business executives owned wineries as part-time endeavors. For example, Francis Ford Coppola (director), Dave Matthews (musician), Joe Montana (football player), Nancy Pelosi (politician), and TJ Rogers (CEO of Cypress Semiconductor) all owned wineries. According to a survey of California winemakers, 40% said they would be willing to lose money to make better wine and almost 80% said they would be unlikely to sell their winery to get a higher return in the stock market.23 Consistent with this survey evidence, Don Ross, founder of Cardinal Shower Enclosures and owner of Shibumi Knoll Vineyards, a small producer of premium wines, said: “[In the]…wine business, we don’t make any money. I do it for love. I sell shower doors for money.”24

Starting a winery was daunting endeavor because of the large capital commitment. Exhibit 7 shows the theoretical economics of a small-scale (2,000 cases per year) winery producing premium wines. The analysis shows that the $600,000 investment generated relatively low operating margins.

Consistent with the theoretical analysis, Exhibit 8 shows that small wineries lost money on average according to a survey of actual financial results. The survey of approximately 130 wineries showed that larger wineries sold lower-priced (value) wines, used distributors, and generated higher margins. What the exhibit did not show, however, was the wide variability in profit margins that existed at each size level. According to an unrelated study, the gross margins for large wineries (>100K cases) around the world ranged from 27% to 66% with an average of 44%.25 Assuming the wineries in Exhibit 8 were representative, the results implied that approximately 80% of wineries broke even or lost money on an accounting (net profit) basis and 90% or more lost money on an economic basis (i.e., after a charge for the implied cost of equity).d Larger wineries—those with for-profit motives and sufficient scale—were generally more profitable. This finding was consistent with the long-term performance of Willamette Valley Vineyards, one of the few publicly traded wineries in the U.S. (see Exhibit 9).

Distributing Wine

Following the repeal of Prohibitione in 1933, states set up a variety of regulations to control the distribution and sale of alcohol. Some states permitted only government-owned entities to sell alcohol while others imposed a “3-tier distribution system.” Producers had to sell to (and could not own) distributors who, in turn, had to sell to (and could not own) retailers. Only retailers could sell directly to customers. A Supreme Court decision in 2005 changed this system and gave wine producers the ability to sell to retailers and consumers directly. As a result, producers distributed wine in one of three ways: via distributors (90% of total sales), direct-to-retailers (3%), and direct-to-consumers (7%).26 Because wine bottles were large and heavy—a case weighed approximately 40 pounds—and needed to be stored in temperature controlled settings, at least the more expensive wines, it was costly to ship long distances.

d Assumes 90% of the wineries under 5K cases of output (79% of the industry according to Exhibit 6a) and 50% of the wineries under 50K cases (17% of the industry): 80% = (90%*79% + (50%*17%). While this fact could be explained by owners drawing excessive compensation, it was probably not a major factor here because there was not a clear tax advantage to doing so (most wineries were structured as pass through entities) nor did most of the owners need the income.

e The 18th Amendment to the U.S. Constitution was ratified in 1919 and forbade the production and sale of alcoholic beverages. It was repealed by the 21st Amendment in 1933. During this period, many farmers removed their grape vines and winemakers exited the industry. The result was fewer wines and many fewer people with skills and knowledge to produce great wines.




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Selling to a distributor (a wholesaler) simplified the process and reduced selling expenses, but resulted in lower prices. On the other hand, selling direct-to-consumers through tasting rooms, wine clubs, or wine lists (customers who requested annual allocations of wine) generated higher margins, but required incremental marketing, sales, and overhead expenditures. Table A (below) shows prices and typical mark-ups for premium wines sold across the three distribution channels; the mark-ups for value wines were much smaller, perhaps half of those shown for premium wines.

Table A Bottle Prices and Mark-ups for Premium Wines by Distribution Channel (dollars per bottle)

Seller's Seller's Seller's Seller'sSeller Price Mark-up Price Mark-up Price Mark-up Price Mark-up

On-Premise $52 300%Retailer $26 50% $26 50%Distributor $17 33% $17 33%Winery $13 $13 $17 $26

3-Tier Distribution (Using a Distributor)Off-Premise Retail On-Premise Direct-to-Retailer Direct-to-Consumer

Source: Casewriter estimates based on data in American Wine Economics, by J. Thornton, University of California Press (2013, pp. 124-125).

Note: Shaded box shows realized price for the winery (producer) assuming a $26 retail price.

There were approximately 600 distributors in the U.S. down from 3,000 or so in 1995.27 As the

numbers dwindled, concentration increased: the five largest distributors controlled 50% of the market; the top 20 controlled over 75%, and the top 100 controlled well over 95%.28 The largest distributor, Southern Glazer’s Wine & Spirits, sold 75 million cases of wine from 1,200 producers and generated wine sales of $6.6 billion.29 Whereas largest distributors dealt with the largest wineries and pushed volume, the smaller distributors dealt with smaller wineries and pushed selection. Although increasing scale helped improve operating margins for the largest firms over time, distribution remained a difficult business with low operating margins: 2 to 6% for the largest distributors and somewhat higher, say 15 to 18%, for the smaller distributors that sold higher-priced premium and luxury wines30.

Smaller wineries found it difficult to get marketing support from the larger distributors. In a recent survey, one winemaker said, “So much of our route to market is handled by a single company now; it is rather frightening. The clout they have over us is remarkable.” Another said, “[W]e are not seeing a surge in smaller or boutique type distributors. There are a few...[and we] do see larger distributors adding boutique operations.” And a third complained, “You will see smaller distributors opening up but…they will still get clobbered by the big guys.”31 Like the big distributors, even the smaller ones selling premium wines depended on volume to make money, which meant small accounts from unknown wineries had limited appeal.

According to the Wine Institute (an industry trade group), 550,000 retailers sold wine, but consolidation was happening in the retail end of the market, as well. Costco had become the largest wine retailer in the U.S. with $1.7 billion of wine sales in 2016, and was selling an increasing number of low- to mid-priced premium wines.32 At the same time, Amazon and the large supermarket chains like Kroger and Safeway were selling larger volumes of predominantly value wines.




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Sandlands Vineyards

Tegan Passalacqua

Passalacqua grew up in Napa Valley and graduated from Sacramento State University in 2001 with a degree in public health.f His coursework in chemistry helped him get his first job in a wine laboratory at one of Napa Valley’s leading custom crush facilities where he was “bitten by the wine bug.” After taking night courses in viticulture (growing grapes) and enology (wine making) and working in New Zealand, he landed a job at Turley Wine Cellars in 2003. According to industry estimates, Turley produced 35,000 to 60,000 cases of premium and luxury wines—primarily Zinfandels—each year (Turley did not release actual production figures.)33 Critics said Turley made some of if not the best Zinfandels in California.34 Over time, Larry Turley (the founder) gave Passalacqua more and more responsibility, allowed him to take part-time jobs in France and South Africa to learn more about winemaking, and eventually made him the Director of Winemaking in 2013. Passalacqua replaced his friend and mentor, Ehren Jordan, who left Turley to run his own winery that he had started 15 years earlier. At Turley, Passalacqua was responsible for making 34 different wines from 50 different vineyards spread across central and northern California. Most of Turley’s grapes came from organic, “old vine” vineyards.

Old Vine Vineyards and Wines

There was no official definition of what constituted an “old vine” vineyard, but California’s Historical Vineyard Society (HSV, started by Passalacqua and several close friends) defined it as being more than 50 years old. There was something special both culturally and agriculturally about old vines. Their survival illustrated a form of natural selection and implied a productive match between the grape variety, the climate, and the terroir. Compared to newer vines, old vines had deeper roots—up to 40 feet deep compared to 3 to 8 feet—that extended into new and unique soil elements. It also meant the vines could be grown without irrigation and the grapes were less susceptible to the damage caused by too much rainfall.

These gnarled, old vines (see Exhibit 10) produced wines with more unique and more balanced flavors. Passalacqua argued: “My personal belief is they make better wines, but I understand that not everyone agrees with that opinion or can appreciate the taste. As an empirical matter, they produce better wines most of but not all the time because their output is more limited and the flavors are more concentrated.” Chuck Wagoner of Caymus Vineyards (a prominent Napa winemaker) disagreed. He said, “I’ve never been a believer that old vines make the best wines.”35

This disagreement over taste exemplified a much larger battle taking place in the Californian wine industry at the time. As characterized by Jon Bonné, the wine critic for the San Francisco Chronicle, the ascendancy and popularity of California wines, especially the premium wines, was due to their “big flavor.” He argued winemakers were picking over-ripe grapes and manipulating them to produce wines favored by the critics. As Bonné put it, modern California winemaking illustrated “…not so much the artistry of the winemaker as the ministrations of a technocrat.”36 Yet a new generation of winemakers—Passalacqua and his friends Mike Officer from Carlisle Vineyards and Morgan Twain-Peterson of Bedrock Vineyards—were making old vine wines that reflected the place (the terroir) more

f Although Sacramento State University did not have a wine program, several other California schools such as U.C. Davis and Sonoma State had programs in viticulture and enology. U.C. Davis had a large research facility that provided disease free rootstock and laboratory services for the entire wine industry, and used DNA analysis to identify old grape vines.




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than the process (intervention by the winemaker). In essence, the argument came down to whether winemaking was an art or a science. Passalacqua said:

“Grapes aren’t widgets. If you view them that way, then winemaking becomes a form of mass production, which results in a race to the bottom on cost. Or you can view the terroir—the place—as something special, and see winemaking as a craft. As a winemaker, you want your fingerprint to be on the wine, not your footprint. Over time, the wines should be recognizable, but they should not the same. In that way, they tell a story of time. That’s what keeps people interested in them.”

Passalacqua’s experience at Turley—roaming the Californian countryside, finding forgotten vineyards, building relationships with growers, harvesting old-vine grapes, and making old-vine wines—inspired him to buy an old-vine vineyard—the 20-acre Kirschenmann Vineyard which he and his wife Olivia did in 2012, despite not owning a house at the time. Although some of the Kirschenmann Vineyard contained Chenin Blanc which he used at Sandlands, most of it was old vine Zinfandel which he sold to Turley and some of his friends.

In recognition of their talents as old-vine winemakers, Bonné named Twain-Peterson and Passalacqua as “Co-Winemakers of the Year” in 2014. Bonné wrote:

“Each is responsible for some of the most significant, and critically successful, wines in California…Both have exceptional talents in the cellar as well as the vineyard…[and they] recognize the cultural value of the places they work with…Twain-Peterson and Passalacqua are our youngest Winemakers of the Year to date...If the future of California wine rests in hands as capable as these, there’s no concern whatsoever. What comes next will be extraordinary.”37

Despite the appeal of old vine wines, and Bonne’s enthusiasm for them, the obvious challenge was economics. Old vines had significantly lower yields (1 to 2 tons per acre), cost considerably more to grow and harvest because they were not suited for modern farming equipment, and tended to be “forgotten” varieties from yesteryear. As a result, growers were replacing their old vines in favor of more popular and more productive varieties such as Chardonnay and Cabernet Sauvignon leaving a declining number of old vine vineyards and fewer old vines within those vineyards as the vines died.

According to Passalacqua, California had approximately 6,000 acres of old-vine vineyards, at least 80% of which was Zinfandel. At the time, he knew of two old vine vineyards in Contra Costa County that were for sale: one with 10 acres for $2.5 million and the other with 8 acres for $1.9 million. He had also heard a 15-acre vineyard in Lodi (San Joaquin County) might be coming on the market for $1.0 million. The prices differed because of differences in both available infrastructure and vineyard quality.

Sandlands Vineyards

As his interest in old vine wines grew, Passalacqua decided to start his own winery with, of course, the approval of his friend and employer, Larry Turley, and an agreement to limit his production. In short, it was a perk of the Turley job. Passalacqua described his motivation:

“My Turley experience convinced me that I could make good wines, wines that were both affordable and enjoyable to drink. It also taught me that it was possible to make really good wines from places that weren’t known for making premium wines such as Contra Costa and San Joaquin counties. But that’s not what most of the growers in those areas do. They focus on making good, low-priced wines. Once you choose a low price point, it dictates how you grow the grapes and make the wine. With a different approach, you can make really




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good wines that over-deliver in character and quality. I was also attracted to those places because they have unique soils, great farmers, and a direct link back to California’s early wine making history.”

He made his first wines—a Syrah and a Mataro—in 2009 using Turley’s facilities and equipment. Over the next few years, he continued to experiment with different vineyards and grape varieties as a way to learn. For example, he added Carignane (a red wine), Trousseau Noir (a lighter red), and Chenin Blanc (a white wine) to his line-up. These varieties were largely out of favor in the current grape market, but made good wines (see Exhibit 11). Passalacqua described his choice of grapes this way:

“The line-up encompasses forgotten classic California varieties from regions and vineyards that have been farmed for many generations but have remained the outliers of California viticulture…[T}he vineyards we work with harken back to California’s roots of exploration, wonder, and hard work.”

“I’m not searching out esoterica on purpose. I’m passionate about the grapes that have done well in California’s past. I want to work with interesting sites and varieties whose wines taste of the place they come from….[T]hese 50-100-year-old vineyards…are a story in themselves. You don’t have to make one up.”38

Passalacqua released his first batch of wines for sale in 2014. Wine critic Antonio Galloni described the Sandlands 2012 Syrah this way:

“The 2012 Syrah burst from the glass with sweet dark fruit, smoke, tobacco, black pepper, violets and incense. Rich and powerful to the core, the 2012 boasts stunning depth and exceptional balance. The 2012 is dark and inky, yet a classic sense of structure lurks in the background, giving the 2012 much if its balance…This is one of the most intriguing Syrahs being made in the Central Coast…94 points.”39

When tasting another Sandlands wine, Galloni enthusiastically described Passalacqua this way:

“Some people just have ‘it.’ Like a world-class athlete or musician, Tegan Passalacqua is one of those people who is endowed with a combination of superb natural skills, passion and an indominable work ethic. When those three qualities come together, well that’s when lightning can strike. That is exactly the case with these wines…Sandlands is one of the most exciting debuts I have seen in California in some time. I can’t recommend these wines highly enough. For now production is tiny, but if you can get on the list you won’t be sorry.”40

Passalacqua distributed 75% of his wine to customers directly and 25% through two distributors located in the largest wine markets (California and New York) and third one in Colorado. All three were small- to mid-sized distributors that focused on the “new generation of winemakers” and wines that expressed a “sense of place.”41 Passalacqua described the allocation process this way:

“I start by allocating to people who have bought every year, then go to the people that have bought the most, and finally look to the people who are buying for the first time. With a large wine list and limited production, I can’t fill all the requests. As a result, feelings get hurt and prices rise in the gray [secondary] market. Part of my success and my ability to sell direct is due to timing. The rise of social media, the ability to post information on the web, and the creation of new technologies—apps such as VineSpring—allow me to market and distribute my wine in a way that I could never have done even 10 years ago.




11

Although I could allocate 100% of my wine to customer directly, I sell 25% to distributors at a 50% discount [to the retail price]. Yeah, that hurts the economics, but I view it as a marketing expense. Distributors have access to influential people—sommeliers and wine buyers—and other customers that I could never reach on my own. I just don’t have the time given my day job or the access given my size to reach the people I want to reach.”

As his fame grew, so too did his wine list: by late 2017, there were more than 3,500 people on the list and his wines were available at top restaurants such as Le Bernardin in New York City and Chez Panisse in Berkeley, California.42 Patrick Cappiello, a prominent New York sommelier, described his experience as a Sandlands buyer: “This wine was born allocated. The first vintage was released and I was offered three bottles. I was like, ‘What the [expletive] is Sandlands?’ So I googled it, and then I bought the three bottles. I’ve been chasing it ever since.”43

Sandlands Vineyard’s Strategy

When asked to describe his strategy, Passalacqua said: “[W]e don’t really have a strategy. I think our edge is that we work with small, old-vine vineyards throughout the state that most larger companies do not want to deal with because of the quantity or lack thereof.”44 Continuing on, he said, “I wanted to do something different from what other winemakers were doing particularly the ones in Napa and Sonoma. I love those wines, but saw an opportunity to make great wines in other places.”

Towards that end, Passalacqua used different grapes (the “forgotten classics” from old vines), different farming methods (own rooted, dry-farmed, and head-trained vines grown organically rather than grafted, irrigated, and trellised vines grown with pesticides), and almost no intervention in the winemaking process. The key, he said, was having good relationships with the growers:

“I buy all my grapes based on relationships I have built with the growers over the years working at Turley. I don’t use long-term contracts because the growers don’t want them. Instead, I use handshakes. The growers know me and trust me, and that’s a key advantage I have over other wine makers. Having a close connection to the growers and the growing process means I get the best fruit [grapes]. Currently, I buy grapes from ten vineyards, but like to experiment with a new one every year as a way to learn.”

When setting up his winery, Passalacqua gave careful thought to the brand name, label, and price point. Starting with the Sandlands name, it was originally used on a wine made by his good friend Abe Schoener at the Scholium Project who graciously agreed to let Passalacqua use it. Passalacqua liked the name for several reasons: “I wanted something that was easy to pronounce and reflected where my wines came from—the sandy soils east of Napa. I knew I didn’t want something that sounded like a luxury brand or a Napa wine. Instead, I wanted something that sounded a little more mysterious, but not too hipster.” Regarding the label (see Exhibit 12), it was designed by Chuck House, one of California’s best-known designers. Pasalacqua asked him “…for a look that might evoke the mythical California that might have been if Prohibition’s gash hadn’t been so deep.”45 The idea was to create a more traditional label that could have worked in the past and would work equally well in the future. One wine critic described the “back-to-the-future” themed label this way: “The tidy, stark lines [and chosen font] reflected a postwar thirst for visual clarity.”46 To complete the look, he decided to use half-sized capsules (the foil sleeve covering the cork), a somewhat unusual and anachronistic touch that contrasted with the more commonly used full-sized (longer) capsules.

Finally, with regard to the price, Passalacqua knew he wanted to make affordable wines that his friends could drink. This meant targeting a retail price of $24 to $28 per bottle. Despite selling at this price, there was an active and growing secondary market for Sandlands wines. According to Wine-




12

Searcher, an online pricing service, the two Sandlands Carignanes from 2015 were selling at prices ranging from $39 to $79 (see Exhibit 13). The active secondary market caused him to re-think his price:

“Lots of people tell me I should raise my prices, possibly even double them. At $24 to $28, the wines sell themselves and most people are happily surprised by the quality. At $60, I would have to sell the wines, and work even harder than I do now. I just don’t have the time to do that especially since the winemaker is such an important part of the selling process—buyers like to meet winemakers and hear about the wines. At $60 dollars per bottle, people spend a lot more time shopping for wines and have to be convinced to try them which isn’t easy especially in restaurants where the bottles might go for $100 or more.”

With an average bottle price of $26, Passalacqua expected to sell 1,200 cases of wine in 2018 (from grapes harvested in 2016). Compared to other small wineries (see the example of the premium winery in Exhibit 7), he had similar variable costs except in three areas: his cost for grapes, labor, and shipping (which he heavily subsidized while other wineries charged for it) were $15, $15, and $20 higher per case, respectively. The labor cost was an estimate assuming he hired a winemaker to run Sandlands because he, in reality, did all of the work himself. On a standalone basis, Sandlands would have slightly higher fixed costs, perhaps $14 more, for a total cost of $56 per case due to its smaller size. Because Passalacqua made wine using Turley's facilities, yet was buying more and more of his own equipment, his actual fixed costs were closer to $34 per case.

Conclusion Having had early success with his Sandlands Vineyards label, Passalacqua wondered if it was time

to invest more of his family’s limited funds, potentially a lot more, into the business. With a vineyard, a winery, and a demanding day job at Turley, he was busy, very busy. His wife Olivia was also very busy. She had a full-time job in brand management at Folio Fine Wine Partners, a wine importer and marketing agency, and was the primary caregiver for their two young children. As a result, investment decisions like this one had significant personal as well as financial ramifications.

In the short term, they had to decide whether to buy the Eastside Meats building (see Exhibit 10) and develop it into a functioning winery. Up to this point, he had run the two projects—the Kirschenmann Vineyard and the Sandlands winery—independently, but this could be a step toward uniting them. Passalacqua said, “This building fits with everything I do and believe in. It has a link to the past and is an opportunity to make wine in an underappreciated place. Not everyone would see this building or this location as a great opportunity, but I do probably because I value things differently from other people.” In his mind, the building was part of a grander vision:

“Some day I would like to control the entire process from start to finish, to grow my own grapes and produce something like 5,000 cases a year. I already own a vineyard and now have a chance to build a winery. If I had the opportunity to buy another vineyard, I would love to do that, too, but I don’t have that option right now given our resources and what’s currently on the market. I’ve been offered money in the past, but just don’t want to go down that path. I am willing to borrow from a bank, but I don’t want an equity partner.

The one thing I know is that I created Sandlands because I wanted to do my own thing. That’s still true today, but I also recognize that I have to make a profit along the way. After all, we have a family to support and want to send our kids to college one day, which means this decision has to be made with great care. The good news is that no matter what happens, I still have my day job at Turley, which I love.”




13

Exhibit 1 Six Types of Wine Consumers

Wine AverageWine Industry Price per

Customer Segment Drinkers Profits Bottle Description

Price Driven 21% 14% $8 Price is important; good wine cheapEveryday Loyals 20% 22% $10 Stick with my chosen brandOverwhelmed 19% 9% $9 Wine is complex, not essential to meImage Seekers 18% 26% $12 My perception matters; impress othersEngaged Newcomers 12% 14% $13 Want to learn, wine is importantEnthusiasts 10% 15% $13 Love the wine experience

Total 100% 100%

Percent of

Source: Originally from a study called “Project Genome” by Constellation Brands. See Dyril Penn, “Constellation

Segmentation Study Outlines Motivations, Behaviors of Today’s Wine Consumers, available at: https://www.winebusiness.com/news/?go=getArticle&dataid=134683, accessed 10/30/17.

Exhibit 2 Wine Buying Criteria—Survey of “High Frequency” Wine Drinkers, 2015

Source: Wine Buying Criteria, Dr. L. Thach and D. K. Chang, 2015 Survey of American Wine Consumer Preferences, Wine

Business, 11/11/15, available at: https://www.winebusiness.com/news/?dataid=160722&go=getArticle, accessed 10/11/17.



https://www.winebusiness.com/news/?go=getArticle&dataid=134683

https://www.winebusiness.com/news/?dataid=160722&go=getArticle


14

Exhibit 3 Wine Sales and Growth Rates by Price Segment—Off Premise Sales Only, 2016

Retail Price Retail Price 2016 Sales Dollar ChangePer Bottle Per 9L Case ($ millions) Share vs. 2015

$0 - $2.99 $0 - $35.99 $784 5.7% (2.5%)$3 -$5.99 $36 - $71.99 $4,134 30.0% 0.9%$6 - $8.99 $72 - $107.99 $1,615 11.7% (2.3%)$9 - $11.99 $108 - $143.99 $3,222 23.4% 6.7%$12 - $14.99 $144 - $179.99 $1,893 13.7% 9.5%$15 - $19.99 $180 - $239.99 $1,171 8.5% 12.1%> $20 > $240 $971 7.0% 10.3%

Total $13,790 100.0% 4.3%

Domestic Wine $10,076 73.1% 5.0%Imported Wine $3,714 26.9% 2.7%

Source: Wine Business Monthly, February Issue, pp. 34, 143, citing Nielsen Data; available at: https://www.winebusiness.com/wbm/, accessed 10/12/17.

Exhibit 4 Purchases of Luxury Wines

Percent of All AdultsWho Have Spent Top 4 Reasons Why They

Bottle Price This Much on a Bottle Bought an Expensive Bottle > $50 44% 1) for a special occasion (60%) > $100 19% 2) to enjoy (drink) it (53%) > $200 5% 3) as a gift (42%) > $1,000 2% 4) for my cellar (12%)

Source: Wine Business, “Adventure, Tradition, and Semi-Sweet Wines Highlighted in 2016 American Wine Consumer Survey,” by Dr. L. Thach and Dr. K. Chang, 12/6/16, available at: https://www.winebusiness.com/news/?go=getArticle&dataid=177492, accessed 10/12/17.



https://www.winebusiness.com/wbm/

https://www.winebusiness.com/news/?go=getArticle&dataid=177492

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16

Exhibit 6a Distribution of U.S. Wineries by Size (Case Output), 2013 vs. 2017

Production Percentby Number of Total

Winery Size of Cases Jul-13 Jan-17 in 2017 Number Percent

Large > 500K 49 65 1% 16 33%Medium 50K-499.9K 243 261 3% 18 7%Small 5K-49.9K 1,390 1,575 17% 185 13%Very Small 1K-4.9K 3,088 3,671 40% 583 19%Limited Production < 1K 2,803 3,519 39% 716 26%

Total 7,573 9,091 100% 1,518 20%

In California 3,579 4,202 623 17%

from 2013 to 2017Number of WineriesChange in Number

Source: Casewriter analysis using data from Wines Vines Analytics, at Winesandvines.com, accessed 10/10/17.

Note: In 1997, there were 1,988 wineries in the U.S. and 1,011 in California.

Exhibit 6b Distribution of U.S. Wineries by Price Point, 2013 vs. 2017

PercentAverage of TotalBottle Price Jul-13 Jan-17 in 2017 Number Percent

$1-$10.99 313 213 2% -100 (32%)$11-$19.99 2,665 3,001 33% 336 13%$20-$29.99 2,388 2,946 32% 558 23%$30-$39.99 1,052 1,307 14% 255 24%$40-59.99 755 1,065 12% 310 41%$60-$99.99 309 418 5% 109 35%≥ $100 91 141 2% 50 55%

Total 7,573 9,091 100% 1,518 20%

from 2013 to 2017Number of WineriesChange in Number

Source: Casewriter analysis using data from Wines Vines Analytics, at Winesandvines.com, accessed 10/10/17.




17

Exhibit 7 Typical Profitability and Cost Structure of a Small Premium Winery (2,000 cases)

Revenue Direct Wholesale Winery Total

Channel Mix 70% 30%Price per Bottle $16.00 $8.00Wgtd Avg. Price $11.20 $2.40 $13.60Price per Case $163.20# of Cases 2,000

Total Revenue $326,400

Operating Costs Winery Total Per Case

Variable CostsLabor $70,000 $35.00Packaging $50,000 $25.00Grapes $40,000 $20.00Barrels/Equipment $38,000 $19.00Excise Taxes $12,000 $6.00Marketing $10,000 $5.00Mobile Bottling $8,000 $4.00Other Costs $6,000 $3.00Total Variable Cost $234,000 $117.00

Fixed CostsProperty Taxes $8,000 $4.00Insurance & Maint. $4,000 $2.00Depreciation $72,000 $36.00

Total Fixed Cost $84,000 $42.00

Total Operating Costs $318,000 $159.00Percent Fixed 26%

Operating Profit $8,400 $4.20Operating Margin 2.6%

Notes:Grape Cost per Ton (@65 cases/ton) $1,300Capital Investment $600,000 $300.00

Distribution Channel

Source: Casewriter estimates based on updates to the analysis in “Small Winery Investment and Operating Costs,” by L.A.

Fickle, R.J. Folwell, T. Ball, and C. Clary, Washington State University Extension, EB196, 2005, Available at: http://ses.wsu.edu/wp-content/uploads/2015/02/eb1996_05.pdf, accessed 11/9/17.

Notes: The pre-tax weighted average cost of capital for small wineries ranged from 7% to 9%. This example ignores the complicated inventory accounting issues related to wine storage (i.e., production costs were treated as inventory until the wines were sold). It also ignores shipping costs, which customers paid separately.



http://ses.wsu.edu/wp-content/uploads/2015/02/eb1996_05.pdf


18

Exhibit 8 Actual Winery Operations and Profitability by Size, 2013 (~130 wineries)

< 10K 10K - 50K 50K - 100K > 100K

Number of Wineries 49 49 13 18Percent of Sample 38% 38% 10% 14%Est. Industry Share of Wineries 87.0% 9.5% 2.0% 1.5%

ProductionAverage Volume (Cases) 2,873 19,641 71,892 225,562Retail Price ($/Case) $270 $297 $188 $134

Distribution ChannelsDirect-To-Consumer (DTC) 41% 21% 15% 6%Direct-To-Retail (DTR) 19% 35% 30% 4%3-Tier Distribution (Wholesale) 33% 39% 50% 85%Other/Exported 7% 5% 5% 5%

ProfitabilityGross Margin (%) 48% 51% 55% 46%Operating Margin (%) 0% 6% 20% 12%Net Margin (%) (6%) 0% 16% 9%

Annual Sales Volume in Cases

Source: Casewriter analysis and estimates using data (with permission) from Moss-Adams LLP, 2013 Wine Industry Financial Benchmarking Report, pp. 25-27, 29, and 40. Available at: https://www.mossadams.com/winesurvey, accessed 1/18/18.

Exhibit 9 Willamette Valley Vineyards (ticker WVVI) Financial Performance, 1995-2016

Source: Created using data from Standard & Poor’s Capital IQ, accessed 11/13/17.



https://www.mossadams.com/


19

Exhibit 10 Photos of Old Vines Growing in Sand, Tegan Passalacqua, and the Eastside Meats Building

Passalacqua at the Kirschenmann Vineyard

The Eastside Meats Building (Victor, CA). Possible site for a winery.

Sources: Vineyard photos are from the Sandlands web site. Photo of Passalacqua is from Matt Stamp’s blog on GuildSomm.com, dated 5/6/14 (with permission granted on 1/7/18). Photo of the Eastside Meats building was taken by the casewriter.




20

Exhibit 11 California Grape Crush Report—Tons Crushed and Prices per Ton, 1985–2016

31-Year 16-YearType of Grape 1985 2000 2016 1985-2016 2000-2016

White Wine GrapesChardonnay 82,204 650,525 675,885 7.0% 0.2%Chenin Blanc 298,650 152,097 42,761 (6.1%) (7.6%)Other White Types 826,815 700,074 1,033,908 0.7% 2.5%

Total White Grapes 1,207,669 1,502,696 1,752,554 1.2% 1.0%

Red Wine GrapesCabernet Sauvignon 72,002 357,684 566,574 6.9% 2.9%Pinot Noir 31,681 53,050 253,995 6.9% 10.3%Zinfandel 123,370 404,167 416,615 4.0% 0.2%Carignane 119,170 58,351 14,394 (6.6%) (8.4%)Mataro 295 1,685 4,609 9.3% 6.5%Trousseau Noir n/a 20 75 n/a 8.6%Other Red Types 513,314 546,801 1,022,331 2.2% 4.0%

Total Red Grapes 859,832 1,421,758 2,278,593 3.2% 3.0%

31-Year 16-YearType of Grape 1985 2000 2016 1985-2016 2000-2016

White Wine GrapesChardonnay $904 $895 $886 (0.1%) (0.1%)Chenin Blanc $150 $216 $383 3.1% 3.7%

All White Grapes $192 $500 $598 3.7% 1.1%

Red Wine GrapesCabernet Sauvignon $533 $1,048 $1,468 3.3% 2.1%Pinot Noir $533 $1,780 $1,636 3.7% (0.5%)Zinfandel $269 $464 $605 2.7% 1.7%Carignane (Note A) $98 $294 $473 5.2% 3.0%Mataro $102 $1,512 $1,618 9.3% 0.4%Trousseau Noir n/a $1,468 $1,080 n/a (1.9%)

All Red Grapes $175 $628 $918 5.5% 2.4%

Other InformationUS Population (millions) 237.9 282.2 323.1 1.0% 0.9%Producer Price Index 103.4 136.2 188.2 2.0% 2.0%Consumer Price Index 107.6 172.2 240.0 2.6% 2.1%

Growth RatesTotal Tons of Grapes Crushed

Weighted Average Price Per Ton

Compound Annual

Source: California Dept. of Food and Agriculture, various years, available at: https://www.nass.usda.gov/Statistics_by_State/California/Publications/Grape_Crush/Reports/, accessed 10/10/17. U.S. Bureau of Labor Statistics, and U.S. Census Bureau.

Note A: Prices varied enormously both within and across wine districts. For example, Carignane grapes ranged in price from $100 to $5,500 per ton with an average of $473 in 2016, and Cabernet Sauvignon could be up to $59,000 per ton in Napa Valley. The grape purchases by large producers of value wines caused the average prices to appear relatively low.



https://www.nass.usda.gov/Statistics_by_State/California/Publications/Grape_Crush/Reports/


21

Exhibit 12 Sandlands Wine Labels and Wine Production (2017 Release from the 2015 Harvest)

Type of Wine Location Barrels Cases

White WhitesChenin Blanc Amador County 8.0 200Chenin Blanc Lodi--Kirschenmann 6.0 150

Red WinesCarignane Contra Costa County 4.0 100Carignane California 8.0 200Mataro Contra Costa County 5.0 125Mataro San Benito County 7.0 175Trousseau Noir Sonoma County 3.5 88

Total 41.5 1,037.5Total White 14.0 34%

2015 Production

Source: Company data.




22

Exhibit 13 Wine Ratings and Prices for Bottles of 2015 Carignane Wine (in dollars), October 2017

User WineInventory Rating

Old Vine (# bottles) (# of Points)Winery/Producer Brand/Label State Vineyard (Note A) (Note B) Min Max

Holly's Hill Carignane Estate CA No 25 92.0 $25.00Bonny Doon Carignane Cunning CA Yes 29 91.7 $26.00Neyers Carignane Evangelho CA Yes 14 91.5 $35.00Sandlands California CA Yes 233 91.3 $39.00 $79.00Sandlands Contra Costa County CA Yes 212 90.6 $69.00 $79.00Populis Reversee CA Yes 8 90.3 $21.00Amplify Santa Ynez Camp 4 CA No 0 89.0 $22.99Ridge Buchignani Ranch CA Yes 476 88.1 $30.00Lioco Sativa CA Yes 34 88.0 $27.30 $30.45Testa Vineyard Donkey & Goat CA Yes 19 87.0 $24.99 $29.96KivelStadt Cellars Old Wyve's Cooley Ranch CA Yes 13 79.0 $30.00Testa Vineyard Ryme CA Yes 14 79.0 $29.99Newsome-Harlow Carignane-Calaveras CA No 7 n/a $32.00Windsor Vineyards Private Reserve CA No 8 n/a $20.00David Coffaro Dry Creek Valley Estate CA Yes 6 n/a $30.00 $32.00Cline Ancient Vines Carignane CA Yes 29 n/a $17.99Dashe Cellars Les Enfants Terribles CA Yes 12 n/a $23.23 $27.60

Median $27.30 $31.23

Pricing

Source: Casewriter analysis using data from the Wine-Searcher database appearing on the CellerTracker website. Data is from of 10/8/17. Casewriter research on vineyard type (old vine or not).

Note A: CellerTracker provided an online management tool that allowed users to track and value their wine collections. With user permission, it disclosed aggregate inventories held by users.

Note B: The wine rating or score was based on ratings from users not professional wine critics, and ranged from 50 (low) to 100 (high) points.




23

Endnotes

1 E. Arnold, “Tips For Success in the Wine Business,” Forbes Magazine, 7/1/08.

2 See Table 1, California Grape Crush Report—Final 2016, California Department of Food and Agriculture, 3/10/17, available at: https://www.nass.usda.gov/Statistics_by_State/California/Publications/Grape_Crush/Final/2016/201603gcbtb00.pdf, accessed 11/3/17.

3 Anthony DiBenedetto, “Willamette Valley Vineyards: An Undervalued Company Found Under the Grapes, Seeking Alpha, 7/20/15, available at: https://seekingalpha.com/article/3338185-willamette-valley-vineyards-an-undervalued-company-found-under-the-grapes, accessed 11/13/17.

4 J. Bonné, The New California Wine: A Guide to the Producers and Wines Behind a Revolution in Taste, Ten Speed Press (Berkeley, CA), 2013, p. 32.

5 The data in the prior two sentences comes from The Wine Institute, “2016 California Wine Sales in U.S. Hit New Record,” 5/1/17, available at: http://www.wineinstitute.org/resources/pressroom/05012017, accessed 10/11/17.

6 See the Lodi Wine Trail Map, Lodi Visitor Center, available at: https://www.visitlodi.com/wineries/lodi-wine-trail-map/, accessed 1/19/18.

7 The Wine Institute, Wine Consumption in the U.S., available at: https://www.wineinstitute.org/resources/statistics/article86, accessed 10/30/17.

8 These are approximate percentages based on a presentation by J. Beaudette at the Beverage Alcohol Community Symposium on 11/12/15, citing data from the Beverage Information Group (Slide #17) available at: https://www.shipcompliant.com/wp-content/uploads/2015/11/JohnBeaudette_BACS.pdf, accessed 11/6/17.

9 According to the Wine Market Council in 2014, available at: https://www.winesandvines.com/news/article/145997/Wine-Consumers-Thirsty-for-Other-Beverages, accessed 11/3/17.

10 Thach, L., and J. Olsen, 2015, “Profiling the High Frequency Wine Consumer by Price Segmentation in the U.S. Market,” Wine Economics and Policy, Vol. 4, Issue 1, June, pp. 53-59.

11 R. Goldstein, J. Almenberg, A. Dreber, J.W., Emerson, A. Herschkowitsch, and J. Katz, 2008, “Do more expensive wines taste better? Evidence from a large sample of blind tastings,” Journal of Wine Economics, Vol. 3, No. 1, Spring, pp. 1-9.

12 The Wine Institute, 2016 California Wine Sales in U.S. Hit New Record, 5/1/17, Available at: http://www.wineinstitute.org/resources/pressroom/05012017, accessed 3/7/18.

13 John Brooks, “Thinking About Wine” from The WineO blog, 9/20/16, available at: http://www.thewineo.net/single-post/2016/09/20/Thinking-About-Wine, accessed 11/1/17.

14 The Wine Institute, 2016 California Wine Industry Statistical Highlights, Available at: http://www.wineinstitute.org/files/Wine%20Institute%20Economic%20Impact%20Highlights%202016.pdf, accessed 11/3/17.

15 The acreage figure is from Growing Produce, American and Western Fruit Grower’s 2014 Top Grape Growers, available at: http://www.growingproduce.com/fruits/grapes/2014-top-grape-growers/. The revenue figure is from D&B Hoovers, available at: http://www.hoovers.com/company-information/cs/revenue-financial.bronco_wine_company.ce9f663fb27c9fd5.html. Both accessed 1/18/19.

16 Thornton, James. (2013). American Wine Economics: An Exploration of the U.S. Wine Industry. Berkeley, CA: University of California Press, p. 61.

17 2016 Trends, American Society of Farm Managers and Rural Appraisers, Available at: http://www.calasfmra.com/db_trends/CaASFMRA-Trends2016-web.pdf, accessed 11/15/17.

18 Average is based on financial statements from publicly traded growers such as Golden State Vintners and Scheid Vineyards.

19 Based on data in data from Wine Business Monthly, February 2017 Issue, Available at: https://www.winebusiness.com/wbm/?go=getDigitalIssue&issueId=9023, accessed 10/10/17.

20 The production figure is from Wine Business Monthly (See footnote 15). The number of brands is from the E&J Gallo Winery Company Fact Sheet, available at: http://www.gallo.com/files/Gallo-Company-Fact-Sheet-2016.pdf. The revenue number is



https://www.nass.usda.gov/Statistics_by_State/California/Publications/Grape_Crush/Final/2016/201603gcbtb00.pdf

https://seekingalpha.com/article/3338185-willamette-valley-vineyards-an-undervalued-company-found-under-the-grapes

https://seekingalpha.com/article/3338185-willamette-valley-vineyards-an-undervalued-company-found-under-the-grapes

http://www.wineinstitute.org/resources/pressroom/05012017

https://www.visitlodi.com/wineries/lodi-wine-trail-map/

https://www.wineinstitute.org/resources/statistics/article86

https://www.shipcompliant.com/wp-content/uploads/2015/11/JohnBeaudette_BACS.pdf

https://www.shipcompliant.com/wp-content/uploads/2015/11/JohnBeaudette_BACS.pdf

https://www.winesandvines.com/news/article/145997/Wine-Consumers-Thirsty-for-Other-Beverages

https://www.winesandvines.com/news/article/145997/Wine-Consumers-Thirsty-for-Other-Beverages


http://www.thewineo.net/single-post/2016/09/20/Thinking-About-Wine

http://www.thewineo.net/single-post/2016/09/20/Thinking-About-Wine

http://www.wineinstitute.org/files/Wine%20Institute%20Economic%20Impact%20Highlights%202016.pdf

http://www.growingproduce.com/fruits/grapes/2014-top-grape-growers/

http://www.hoovers.com/company-information/cs/revenue-financial.bronco_wine_company.ce9f663fb27c9fd5.html

http://www.hoovers.com/company-information/cs/revenue-financial.bronco_wine_company.ce9f663fb27c9fd5.html

http://www.calasfmra.com/db_trends/CaASFMRA-Trends2016-web.pdf

https://www.winebusiness.com/wbm/?go=getDigitalIssue&issueId=9023

http://www.gallo.com/files/Gallo-Company-Fact-Sheet-2016.pdf


24

from the Forbes List of America’s Largest Private Companies, available at: https://www.forbes.com/companies/ej-gallo-winery/. All accessed 1/10/18.

21 Prices for Opus One come from The Wine Searcher Website (see, for example, the 2010 vintage), available at: https://www.wine-searcher.com/find/opus+one+napa+valley+county+north+coast+california+usa/2010, accessed 3/1/18. The acquisition of Prisoner is discussed in the article, “Constellation Buys the Prisoner Wine Company for $285 million,”The Wine Spectator, 4/6/16, available at: http://www.winespectator.com/webfeature/show/id/52992, accessed 3/1/18.

22 See Gomberg, Fredrikson & Associates, WineData Report, available at: https://www.gfawine.com/products/winedata/, accessed 11/10/11. See also the Alcohol and Tobacco Tax and Trade Bureau (TTB) web site. The TTB was a division of the U.S. Treasury: https://www.ttb.gov/wine/wine-labeling.shtml.

23 F.M. Scott Morton and J. Podolny, 2002, “Love or Money? The Effects of Owner Motivation in the California Wine Industry,” Journal of Industrial Economics, Vol. 50, Issue #4, December, pp. 431-456.

24 P. Sullivan, “Winemaking Lures the Wealthy, but Not With Profits,” The New York Times, 5/25/12, available at: http://www.nytimes.com/2012/05/26/your-money/winemaking-lures-the-wealthy-but-not-with-profits.html, accessed 11/7/17.

25 S. Cordero di Montezemolo, 2006, “Profitability, Growth, and Corporate Value of the Wine Companies,” Universita degli Studi di Firenze, International Wine Marketing Symposium, July 6-8, available at: http://academyofwinebusiness.com/wp-content/uploads/2010/05/Cordero.pdf, accessed 11/9/17.

26 Casewriter estimates based on data contained in Gomberg, Fredrikson and Associates 2016 Annual Wine Industry Review.

27 Bill Leigon, et al., “How to Bring to Market Wines in the $20-$40 SRP Range in Today’s Dynamic Marketplace,” 26th Annual Wine Industry Financial Symposium, 9/25/17, available at: http://wineindustryfinancial.com/wp-content/uploads/2017/10/08_SYMP17_Tuesday_EvolutionDistributionSystem.pdf, accessed 1/18/18.

28 Thornton, James. (2013). American Wine Economics: An Exploration of the U.S. Wine Industry. Berkeley, CA: University of California Press, p. 175.

29 See “Top 10 U.S. Wine Distributors,” Wines & Vines, September 2017, available at: https://www.winesandvines.com/features/article/189047/Top-10-U.S.-Wine-Distributors. See also K. Bieler, “Southern Glazer’s at One,” Beverage Media Group, 7/24/17, available at: https://www.beveragemedia.com/2017/07/24/southern-glazers-one/, accessed 1/18/18.

30 The average margins are based on confidential interviews with two leading distributors.

31 R. Smiley and N. Simmons, “What Wine Industry Leaders Think is Important for the Future,” UC Davis Graduate School of Management, available at: http://gsm.ucdavis.edu/sites/main/files/file-attachments/winesymposium2016_web.pdf, accessed 11/15/17.

32 The Wine Institute, 2016 California and U.S. Wine Sales, available at: http://www.wineinstitute.org/resources/pressroom/05012017. The figure for Costco comes from “Costco wine and its retail domination,” Wine Curmudgeon blog by Jeff Siegel, 4/11/16, available at: https://www.winecurmudgeon.com/costco-wine-and-its-retail-domination/, both accessed 1/18/19.

33 The 35,000 case estimate is from Jon Bonné, “Vineyard Wanderer Tegan Passalacqua Makes His Own Mark,” SFGate, 3/21/14, available at: http://www.sfgate.com/wine/thirst/article/Vineyard-wanderer-Tegan-Passalacqua-makes-his-own-5339304.php, accessed 1/28/18. The 60,000 case estimate is from the Gomberg, Fredrikson & Associates, 2016 Annual Wine Industry Review, Vol 35, No. 12, dated 2/28/17.

34 This assertion appears frequently on the internet. See, for example, the Zinfandel Chronicles blog by Tom Lee dated 12/18/17: “With all due respect to Carlisle and Bedrock, Turley is arguable the best Zinfandel producer in California.” Available at: http://www.zinfandelchronicles.com/tag/turley/, accessed 1/14/18.



37 Jon Bonné, “Winemakers of the Year Connect California’s Past and Future,” SFGate, 1/2/15, available at: http://www.sfgate.com/wine/thirst/article/Winemakers-of-the-Year-connect-California-s-5991008.php, accessed 11/1/17.



https://www.forbes.com/companies/ej-gallo-winery/

https://www.forbes.com/companies/ej-gallo-winery/

https://www.wine-searcher.com/find/opus+one+napa+valley+county+north+coast+california+usa/2010

http://www.winespectator.com/webfeature/show/id/52992

https://www.gfawine.com/products/winedata/

https://www.ttb.gov/wine/wine-labeling.shtml

http://www.nytimes.com/2012/05/26/your-money/winemaking-lures-the-wealthy-but-not-with-profits.html

http://academyofwinebusiness.com/wp-content/uploads/2010/05/Cordero.pdf

http://academyofwinebusiness.com/wp-content/uploads/2010/05/Cordero.pdf

http://wineindustryfinancial.com/wp-content/uploads/2017/10/08_SYMP17_Tuesday_EvolutionDistributionSystem.pdf

http://wineindustryfinancial.com/wp-content/uploads/2017/10/08_SYMP17_Tuesday_EvolutionDistributionSystem.pdf

https://www.winesandvines.com/features/article/189047/Top-10-U.S.-Wine-Distributors

https://www.beveragemedia.com/2017/07/24/southern-glazers-one/

https://www.beveragemedia.com/2017/07/24/southern-glazers-one/

http://gsm.ucdavis.edu/sites/main/files/file-attachments/winesymposium2016_web.pdf


https://www.winecurmudgeon.com/costco-wine-and-its-retail-domination/

https://www.winecurmudgeon.com/costco-wine-and-its-retail-domination/

http://www.sfgate.com/wine/thirst/article/Vineyard-wanderer-Tegan-Passalacqua-makes-his-own-5339304.php


http://www.zinfandelchronicles.com/tag/turley/

http://www.sfgate.com/wine/thirst/article/Winemakers-of-the-Year-connect-California-s-5991008.php


25

38 Elin McCoy, “Old Vines Grown in Sand Make California’s New Must-Have Bottles,” Bloomberg News, available at: https://www.bloomberg.com/news/2014-09-24/old-vines-grown-in-sand-make-california-s-new-must-have-bottles.html, accessed 10/10/17.

39 Antonio Galloni as quoted in the tasting notes for the Sandlands 2012 Santa Lucia Highlands Syrah at K&L Wine Merchants, available at: http://www.klwines.com/Auction/Bidding/AuctionBidDetail.aspx?sku=1316385, accessed 11/1/17.

40 Antonio Galloni as quoted in the tasting notes for the Sandlands 2010 Amador Syrah at K&L Wine Merchants, available at: http://www.klwines.com/Auction/Bidding/AuctionBidDetail.aspx?sku=1316385, accessed 10/10/17.

41 Skurnik Wines, the New York distributor, seeks wines that express a “sense of place” (i.e., terroir). See the web site: https://www.skurnik.com/who-we-are/. Revel Wine, the California distributor, seeks to represent a new generation of winemakers. See the web site: http://www.revelwine.biz/about/, both accessed 3/1/18.

42 C. Rovzar, “The California Winemaker Rescuing Old European Grapes From Obscurity,” Bloomberg Businessweek, 7/31/17, available at: https://www.bloomberg.com/news/articles/2017-07-31/the-california-winemaker-rescuing-old-european-grapes-from-obscurity, accessed 1/31/18.

43 Levi Dalton, “What is A Unicorn Wine?” Eater, 9/22/15, available at: https://www.eater.com/drinks/2015/9/22/9370787/what-is-a-unicorn-wine, accessed 11/10/17.

44 James Lawrence, “California’s Affordable Cult Wines,” Wine Searcher, 6/21/16, available at: https://www.wine-searcher.com/m/2016/06/california-s-affordable-cult-wines, accessed 10/10/17.

45 Jon Bonné, “Vineyard wanderer Tegan Passalacqua makes his own mark,” 3/21/14, SFGate.com, available at: http://www.sfgate.com/wine/thirst/article/Vineyard-wanderer-Tegan-Passalacqua-makes-his-own-5339304.php, accessed 10/10/17.

46 Jon Bonné, “Vineyard wanderer Tegan Passalacqua makes his own mark,” 3/21/14, SFGate.com, available at: http://www.sfgate.com/wine/thirst/article/Vineyard-wanderer-Tegan-Passalacqua-makes-his-own-5339304.php, accessed 10/10/17.



https://www.bloomberg.com/news/2014-09-24/old-vines-grown-in-sand-make-california-s-new-must-have-bottles.html

http://www.klwines.com/Auction/Bidding/AuctionBidDetail.aspx?sku=1316385

http://www.klwines.com/Auction/Bidding/AuctionBidDetail.aspx?sku=1316385

https://www.skurnik.com/who-we-are/

http://www.revelwine.biz/about/

https://www.bloomberg.com/news/articles/2017-07-31/the-california-winemaker-rescuing-old-european-grapes-from-obscurity

https://www.bloomberg.com/news/articles/2017-07-31/the-california-winemaker-rescuing-old-european-grapes-from-obscurity

https://www.eater.com/drinks/2015/9/22/9370787/what-is-a-unicorn-wine

https://www.wine-searcher.com/m/2016/06/california-s-affordable-cult-wines

https://www.wine-searcher.com/m/2016/06/california-s-affordable-cult-wines



Documents

Sandlands Vineyards