The cult fol­low­ing

En­trepreneurs shun re­tail­ers and re­shape high-end mar­ket as auc­tion prices soar

The Washington Post Sunday - - BUSINESS - BY ED­WARD ROBIN­SON

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.

As­tro­nom­i­cal prices

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.

Two-year wait

“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.

$150,000 bar­rel

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.

High-dol­lar mag­nums

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.

ROBYN TWOMEY

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.

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