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Q&A: Ste. Michelle CEO on Growth and New Ownership

by Cyril Penn
July 15, 2021

Ste. Michelle Wine Estates owner Altria announced last week that it reached an agreement to sell the wine company to private equity firm by Sycamore Partners for approximately $1.2 billion. The transaction is expected to close later this year. WBM caught up with Ste. Michelle President and CEO David Dearie to discuss the deal and his vision for the company. Excepts follow.

WBM: You started in your current role with Ste. Michelle late last year. What have you been up to?

We've been busy driving the business and doing all the fun stuff, focusing on a longer term vision, and more recently, preparing the business for the sales process.

WBM: As CEO, you’ve been focused on a strategic reset. How’s that going?

We've got new packaging for 14 Hands and Ste. Michelle starting to come to the shelves now. Early feedback from distributors and retailers has been incredibly positive and we're cautiously optimistic. Ultimately, the proof will be in consumers pulling it off the shelf. We're excited by our sales to distributors and by distributor sales into retail. We’re excited that we’ve got the majority of our brand investment coming in the second half to support these brands on the shelf. We’ve been holding back a little bit to dovetail activity with the product being on shelf. So far, it's all feeling pretty good.

WBM: Let’s talk about Covid-19 and the wine market. We know there was pantry loading at retail and an off premise shutdown last year but what are you seeing in the market now?

We see our cellar doors opening to full capacity again. We're seeing a lot of interest with patrons coming through and enjoying themselves. We've got our concert series kicking off in August. We're starting to see on premise really ramping up.  Trying to find reservations around Washington is becoming challenging, partly because everyone wants to get out and enjoy themselves with a fine glass of wine and a nice meal, and partly, because on premise is struggling to get staff and get them, trained. All indications are pretty good. Some states are leading the charge. In Texas, more on premise accounts were open in the month of April 2021 than were open in April 2019. We all want to get back to doing the things we've enjoyed, including eating good food and drinking great wine.

WBM: How are sales this year?

We’re confident we'll be up for the year but it is dependent on all of the excitement around our brand building efforts resonating with a loyal consumer. All the building blocks are there.

WBM: Ste. Michelle is the cornerstone of the Washington Wine industry but there’s apprehension about the pending sale to Sycamore Partners. What do you say to growers?

We are a Washington wine company at heart, even though we've got great brands in Napa, Sonoma, and Oregon. Our heart beats in Washington and it will always be in Washington - certainly for the foreseeable future unless we were to go out and make some big acquisitions elsewhere. We need a healthy Washington wine category. We’ve been doing some work with the Washington Wine Commission sharing brand building and marketing ideas. We need to get that Washington wine story perfected and told not just by us, but by everyone in Washington, on why you should be buying Washington wine over wine from other parts of the globe. Washington has this wonderful advantage that we make great wine. We've got perfect growing conditions. When you consider climate change and global warming, we're in a great position to continue to produce great quality wines.

WBM: Much of Ste. Michelle portfolio is priced under $10 but that’s a tough category. Yet if you put a Washington wine for $10 against a $10 Central Valley, California Wine, there's often no comparison. How do you solve this disconnect? Do you just raise the price?

Some of it is raising the price. Some of our wines have been undervalued because we had the excess wine situation, and we're trying to make sure we're pushing wines through our system. We lost a little bit of pricing courage. We've got a plan now to look at our pricing. It’s not just pricing, it's how you're perceived in the market, where the consumers see you and where the retailer puts you on shelf.

We're actually seeing the shelf price go up for many of our brands. We're also weighing that up with availability. Some of our older, more trusted SKUs, like Ste. Michelle Harvest Reiseling, have been on an incredible tear recently. The consumer has gone back to it as a wine they trust, a brand they trust, and a flavor they enjoy. My fear is we're running short on that product now because it's had such a dramatic increase in sales.

WBM: What’s going to happen with the acquisition? Some people have said it might not be good news that a private equity firm is coming in because when private equity firms come in, they sell things off piecemeal, or try to milk the business for cash. But it sounds like this maybe is driven by Duckhorn and Vintage Wine Estates going public. What do you think?

I came in last November to write the vision for the business going forward with an extended marketing team and our winemakers. We’ve written what we think is a compelling, long-term plan for growth. It’s about reallocating resources to support where we should go; where the consumer is going; and availability of grapes. We've got a compelling long-term plan. Altria agreed with us and they thought that to execute that plan it might be better to have different owners who could really work with us on that. We’re delighted Sycamore came in and said, ‘We like that plan. Let's go and give you the support you need to execute against the plan.’

For the vast majority of folks, there'll be no change.

We’re looking to grow. That path includes needing to be more efficient in some areas. We need to find some cost savings to reinvest more behind some of our key brands. It's like running any business: reallocating resources to best support the opportunities that drive more value.

We’ve got a new partner coming in who has said, ‘We want to own this business and we want to support the management team to go and grow in this exciting growth category." Of course, they've looked out and said, ‘Wow, look at the success of some of these other brands out there,’ whether it's Duckhorn or looking internationally some of the growth. There’s growth if it's done well. Obviously they believe in what we can do and put their money behind supporting the plan.

WBM: Was this already in the works last year?

I came in last October to write out the plan. We immediately got into it and got it finished in the first quarter of 2021. We started speaking to potential suitors then and it manifested itself into the announcement of last week. It's been a quick turnaround. It took a few months to write what we thought was a compelling vision, which was then pressure tested. You can write down all the growth targets, then you've got to go and say, do I have sources of supply? Can that supply be maintained? Can it be sustainable? How do we write contracts for the supply? Have we got the right production facilities? Piecing this together has been a tremendous amount of work and is a huge credit to the team because we've been writing a plan and running the business and looking at a potential sales process all at the same time. We’re comfortable with our results for the year - they’ve been an improvement on the last year.

WBM: When do you think things are going to be really humming?

I wanted them humming yesterday. A lot of a lot of the work we're putting in place now we won’t see through the P&L for a while. One of the things we're really focused on is the 2021 harvest, making sure we're crafting the right wines that are going to give us growth for the future.  Improvement starts now but I'm hoping we're really firing on all cylinders in 18 to 24 months.

WBM: Right now you’re a public company. You’ve worked for Brown-Forman and Treasury Wine Estates. There's this sentiment that the wine business is a long-term business so doesn’t lend itself well to the short-term profit expectations of being public. What's better?

Better is running the business efficiently. You’ve just got to be good at running the business, then it makes no difference to me, private or public.

You need to take a long-term view, however you're looking at this. When I launched Treasury, it was about finding shareholders with a long-term view. There’s no point in taking short-term views in a business where you need a long-term view. When you’re looking at acquiring land and vineyards, if that land is unplanted and you’re going to plant premium grapes, we’re talking six, seven, up to ten years before you’ve got the wine on the shelf. You’ve got to take a longer-term view and find the balance. Look outside of the U.S., at companies like Delegat in New Zealand, a listed company consistently performing incredibly well. There are pros and cons on all of this. Our job is to focus on building our brands and getting them in front of consumers while getting consumers repurchasing them, and falling in love with them all over again. You’ve got to be surrounded by really quality people and then execute against the plan.

Hopefully you picked up that we’re enthusiastic here. We’re really keen to get started with our new partners. It’s an exciting time. WBM

Editor's Note: Wine Business Monthly (WBM) will host its annual Wine Industry Financial Symposium as a two-day event this fall. The Wine Industry Financial Symposium, the premier event covering the financial, business and strategic issues of the wine industry is set for Tuesday, Nov. 9 and Wednesday, Nov. 10, 2021 at the CIA at Copia in Napa, California. 

 


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