The cult following
Entrepreneurs shun retailers and reshape high-end market as auction prices soar
Investors devote themselves to a fine wine market ripened by exclusivity and limited supply.
On a warm autumn afternoon, a steelframed concrete warehouse north of San Francisco is inundated with grapes. Forklifts bearing fruit from the nearby Russian River Valley deliver their loads to a slow-moving conveyor belt.
Flanking both sides, winemaking interns pick out stems and sunburned grapes as they groove to hip-hop music thumping from loudspeakers.
It’s the crush at Kosta Browne Winery, a Sonoma County maker of pinot noir that’s become one of the hottest wineries among investment bankers, venture capitalists and enthusiasts. Michael Browne, Kosta Browne’s co-founder and winemaker, grabs a cluster from a tub and eats some of the grapes. They burst with berry flavor, and the seeds are nutty, not bitter.
“ They’re popping; they’re ripe,” shouts Browne, 42, a ruddy-faced man with Elvis-style sideburns. “ They’re beautiful.”
William Price, a co-founder of buyout firm TPG Capital in FortWorth, would be happy to hear that. Price, whose Vincraft Group owns a majority stake in Kosta Browne, is betting on the next generation of California cult-wine makers.
These ultra-premium wineries shun retailers and make it hard to buy their wines, building a following through word of mouth. Cult pioneers— Colgin Cellars, Harlan Estate and Screaming Eagle — have reshaped the economics of the high-end market by fetching Bordeauxcaliber prices at auction.
The new crop of wineries is reaching for cult status in an industry in which it can take decades to turn a profit. For years, Browne and his partner, Dan Kosta, scraped together money every harvest to buy grapes and lease space and equipment at nearby wineries to make pinot.
They toiled at night as waiters and bartenders so they could devote their days to the exploitation of the grape. Bedeviled by rogue yeasts and other oenological disasters, the two men at times thought they might lose their sanity and their business, Browne says.
“ The wine business is like a step up from a dot-com,” he says. “It’s very shaky, and it takes so much longer to make money than other businesses.”
Even so, for all of the angst about the economy in the real world, the good times are rolling in the rarefied domain of high-end wine. Buoyed by rising demand from flush Asian and Latin collectors, the Liv-ex Fine Wine 100 Index, which tracks the price movement of the world’s most-sought-after wines, soared 39 percent in 12 months that ended Nov. 30.
The world’s top auction houses sold an all-time high of $252 million in wines in 2010 through mid-December, with California reds drawing record prices.
Six bottles of Harlan Estate’s 1997 vintage from the Napa Valley sold for $7,170 — 30 percent higher than the top estimate of their value — at an October auction.
“Even in a down economy, prices are astronomical,” says Jack Daniels, cofounder of Wilson Daniels, a wine marketing firm in St. Helena, Calif. “But wine is like art. It takes a place in people’s hearts and minds, and the next thing you know, they have to have every vintage.”
Or in Price’s case, his own wineries. In 1996, he co-led TPG Capital’s $350 million acquisition of Napa Valley-based Beringer Vineyards from Swiss food giant Nestle.
Four years later, TPG, then known as Texas Pacific Group, sold Beringer to Australian beverage maker Fosters Group for $1.5 billion, a fourfold return.
Price, 54, owns 129 planted acres in Durell Vineyard, a farm in the Sonoma Valley that sells top-quality grapes to more than two dozen labels. He also started his own Sonoma-based winery, Three Sticks, and invested an undisclosed sum in Kistler Vineyards, a famed maker of chardonnay and pinot noir, and Buccella, a cult Napa cabernet label.
Now Price has set out to earn profit for outside investors by bringing together a raft of exclusive wines in Vincraft. A wine lover, Price in 2008 formed Sonomabased Vincraft as a portfolio company in the $2.5 billion TPG Growth Fund.
In Vincraft’s debut deal the next year, it took control of Kosta Browne and restructured its debt in a transaction worth $40 million. Price is backing vintners who have honed the art of building more demand for their wine than the available supply — no small task in a marketplace flooded with thousands of labels.
“I’m looking for people who are passionate and who have a brand that stands for something individualistic,” says Price, who scaled back his role at TPG in 2006. “Obviously, they have to make good wine.”
Browne and his partners have stoked their wine’s allure by refusing to sell it in stores or ramp up production even as their wine becomes more popular.
Wine lovers must wait two to six years to land a spot on Kosta Browne’s mailing list and receive allocations of three to six bottles a year at up to $72 each.
Those not in the club can purchase a bottle at independent online merchants such as Snooth.com, but the price jumps to $179. Upscale restaurants such as Spago Beverly Hills in California or Craft inManhattan also sell Kosta Browne.
Converting grapes into what Homer called the “gate of the heart” is a daunting task. You’re at the mercy of the climate and under threat from pests, mold and botanical diseases. And you have to commit capital, often borrowed, for years to nurture vines that may never yield superior fruit, let alone earnings.
Kosta Browne doesn’t own vineyards and buys its grapes from growers. Vintners weathered a hard 2010 in Sonoma and Napa counties, the heart of California wine country: Low temperatures prompted many to prune leaves and expose the grapes to more sunlight.
Then two sudden heatwaves fried a lot of fruit, and some vineyards lost nearly their entire crop. The state’s 2010 harvest was on course to hit 3.3 million tons, down 12 percent from the prior year.
“No one in his right mind would do this for the economics,” says H. William Harlan of Harlan Estate. “You have to have a strong reason to do this other than return on investment. And for me, it was carving something out of raw land.”
Harlan says it took him 20 years to reap profits after he planted 40 acres of cabernet sauvignon, merlot and other Bordeaux grapes in the rocky hillsides of the Oakville section of the Napa Valley.
After making a fortune in real estate, he set out in 1975 to create a Napa winery that could go head-to-head with Chateau Lafite Rothschild and the other prestigious “first-growth” houses of Bordeaux.
It was a grand ambition for a man who grew up in East Los Angeles as the son of a slaughterhouse worker. Today, Harlan’s reds are prized by wine lovers for a nose that evokes the forest floor and dense flavors of fruit that unfold in waves.
“I wanted to make wine that would be recognized in every key market in the world,” says Harlan, 70, whose winery in October threw a series of lavish dinners and tastings in Singapore, Macau and Vietnam to win over Asian collectors. “If you do that, the economics will follow.”
He enters an aging cellar the length of a basketball court stacked with French oak barrels that hold the 2009 vintage. Each barrel’s contents, he notes with a smile, are worth $150,000.
Browne and Kosta, both Harlan admirers, have been toiling for 13 years to achieve cult status of their own.
A tinkerer obsessed with making things with his hands, Browne became infatuated with the stainless-steel tanks and plumbing contraptions of winemaking. So at the age of 27, he volunteered to become an unpaid cellar rat at the Deerfield Ranch Winery in nearby Kenwood.
There, he found a mentor in vintner Robert Rex, a chemist who had begun making wine in his Berkeley garage in the 1970s. Browne was hooked.
In 1997, he joined forces with Kosta. They took to pinot noir, a finicky and fragile grape. They bought a half-ton of grapes and made a barrel of wine.
The grape is so delicate even Burgundian vintners struggle to convert it into superb wine after centuries of practice. “It turned out pretty good,” Browne says. Kosta Browne Winery was born.
By 2001, the two men were still struggling every year to finance the bottling of another vintage. So they brought in Chris Costello, a recent economics graduate, as a partner. With the help of Costello’s father, Jim, they raised $350,000, primarily from friends and family.
Then, in 2003, they were distributing their 2001 vintage when they discovered the bottles were infected with a yeast that makes wine fizzy and off-putting. They had to recall 50 cases from customers, refund their money and shelve 150 cases.
The rare 96 score
Browne and his partners pressed on. They plumbed wine blogs and chat rooms for influential enthusiasts and invited them to the winery to barreltaste. The partners also threw catered tasting parties to spread the word.
Then in 2005, Wine Spectator critic James Laube bestowed a rare 96 score out of 100 to Kosta Browne’s 2003 Kanzler Vineyard pinot. Buzz spread online.
More demand was spurred by the 2004 comedy “Sideways,” which championed pinot noir as “ haunting, brilliant and thrilling.” California wineries crushed 156,000 tons of pinot noir grapes in 2009, more than double the 70,000 tons in 2004, according to the Wine Institute.
Even as Kosta Browne’s annual production reached 11,000 cases, which is high for a mail-order outfit, the partners resisted the temptation to go retail.
They told customers they’d have to wait a year or so to receive an allotment of bottles. “You have to maintain the buzz and the scarcity,” Browne says.
When they decided in 2009 to seek a buyer to recapitalize the company, the winery’s viral marketing and discipline caught the eye of Price. As Vincraft and TPG lawyers began due diligence in June 2009, Kosta and Browne recoiled at the dissection of their business. The acquirers analyzed whether they had too much turnover in their mailing list and balked at how Kosta Browne bought half its fruit on handshake deals with growers.
They also set rules for how the company would be governed. The partners almost quit the deal three times. Yet Price’s commitment to making exclusive, handcrafted wine trumped their anxieties, and they closed the deal.
Investors William Hill and Richard Wollack take a different tack by betting on the vineyards that supply fruit to wineries such as Kosta Browne.
The duo heads Premier Pacific Vineyards, which is backed by $200 million from the California Public Employees’ Retirement System, the nation’s largest public pension fund.
Since 2002, Hill and Wollack have acquired 23 farms in the California coastal ranges, Oregon’s Willamette Valley and Washington. Hill built a model for analyzing soils, airflow, humidity and even the angle of the sun to assess vineyards to buy. He shuns properties on valley floors, where rich soil fuels large but flaccid fruit.
Instead, he prefers rocky hillsides where distressed vines, in a push to reproduce, pump energy into blueberrysize grapes that concentrate flavor and ultimately yield more-complex wines.
“You have to question why a certain property has the potential to make great wine,” saysHill, kicking at the stony earth of his Broken Rock Ranch south of the Stags Leaps section ofNapa. “ That’s what guides our investment methodology, and that’s what enables you to produce a higher profit margin on the grapes.”
Now, the pair has released its own would-be cult wine, a meritage blend called Tetra that draws cabernet sauvignon, merlot, cabernet franc and petit verdot grapes from four Napa vineyards.
In 2009, wine critic Robert Parker praised the 2007 vintage’s “40-second finish” and gave the wine, which sells for $110 a bottle, a 94 on his 100-point scale.
Vintner Ann Colgin, whose wines sell for about $290 a bottle a mailing list, has achieved the kind of success to which younger producers aspire. Colgin, 52, a former Sotheby’s art auctioneer, has been making cult reds since 1992.
Eight years later, she planted 20 acres of cabernet, syrah and other grapes on a sun-drenched parcel in the hills.
“It took giant earth-movers and dynamite to clear the rocks from here,” Colgin says, pointing to the precise rows of vines running down the hillside. “But the land dictates what our wine will taste like.”
Colgin Cellars produces a sultry cabernet that balances purity and earthiness. At the Auction Napa Valley, an annual charitable event, a set of eight magnums of Colgin’s Cariad red sold for $250,000.
Colgin’s estate conveys a sense of the California good life to her customers, many of whom are hedge-fund managers. On an October afternoon, Colgin and her husband, Joseph Wender, a onetime mergers and acquisitions banker atGoldman Sachs, escort guests into a dim cellar.
One chamber is filled with Colgin’s own wines. Another room is filled with thousands of rare bottles collected over three decades. Imperials, salmanazars and other oversize bottles stand in the center of the room like artillery shells.
“ This would make for quite a party,” Colgin says with a smile, tapping a torpedo-size bottle of champagne. While Colgin’s luxurious aerie is worlds apart from Kosta Browne’s warehouse, both are pursuing the same goal: perfection. Hunched over a barrel, Browne siphons ruby-colored pinot into a glass.
“It concentrates in the center of the palate, and then it will show the fruit and bleed down the side of the palate,” he says. After a burst of cherries, plum and blackberry flavors unfold in a long finish.
It’s hard to say what makes a wine perfect, and some would call this pinot a bit flashy. Yet Browne’s handiwork leaves the mouth watering. That, plus savvy viral marketing and the discipline to limit production, is how cults are born. A version of this article appears the February issue of Bloomberg Markets magazine.
Michael Browne, co-founder and winemaker of Kosta Browne Winery in Sonoma, Calif. Kosta Browne, which makes pinot noir, has become one of the hottest wineries among investment bankers, venture capitalists and enthusiasts.