French Insider Podcast Ep. 14
French Investments in the U.S. Wine Industry
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Listen to the original podcast released June 9, 2022 here: https://www.sheppardmullin.com/multimedia-402
For this episode of French Insider, Jean Hoefliger, noted wine consultant, entrepreneur, and founder of JH Wine Consultants, joins us to discuss French investments in the U.S. wine industry, including the many factors drawing French winemakers to the Napa Valley and how the rise of venture-backed startups has altered the winemaking landscape.
About Jean Hoefliger
Born and raised in Switzerland, Jean has decades of winemaking experience and has worked in vineyards worldwide, including California, Bordeaux, Texas, and South Africa. As a wine consultant, he has helped build client wineries across the globe, including Montevereo in Tuscany and Grapeheart in Suisun Valley, as well as AXR and The Debate in Napa Valley, to name a few. His many accolades include two 100-point scores awarded by Jebb Dunnuck and Robert Parker for his Napa-based The Debate Cabernet Sauvignon.
Jean's consulting business encompasses everything he loves, from managing farming and crafting world-class wines to advising on business strategies and even building and implementing the sales structure for clients.
Transcript:
Sarah Ben-Moussa:
Joining us today is noted wine consultant, entrepreneur and founder of GH Wine Consulting, Jean Hoefliger. Born and raised in Switzerland, Jean Hoefliger has decades of wine industry experience, having worked in wineries all over the world, including California, Italy, Texas, and South Africa. As a wine consultant, Jean has built a great number of client wineries over the world, including Monteverro in Tuscany, GrapeHeart in Suisun Valley, as well as AXR and The Debate in Napa Valley, to name a few. Jean's consulting business includes everything he loves from managing farming, to crafting world class wines, to advising on business strategies and even building and implementing the sales structure for clients. Some of his many accolades include two 100 point scores awarded by Jeb Dunnuck and Robert Parker for his Napa-based, The Debate Cabernet Sauvignon.
Sarah Ben-Moussa:
Jean, welcome to the show.
Jean Hoefliger:
Thanks for having me.
Sarah Ben-Moussa:
All right, I want to speak a little bit about the market in Napa Valley. For our listeners who may not be as familiar with the market, what is drawing investors to this area?
Jean Hoefliger:
First, I think Napa Valley is definitely the most well branded, most well-known wine appellation in the US. It is the “san coupe'' of the wine world, if you want. I call it the Disney World of adults because over the last 30 years, what has happened in the Napa Valley is people were not only able to build vineyards and make great wines, but in addition to that create an entire experience for people to enjoy. And that means amazing restaurants, it's the highest concentration of three stars restaurants in a fairly small community. It has amazing hotels and spas now. So I call it the Disneyland of adults because people come here just to forget their day-to-day life.
Sarah Ben-Moussa:
I love that. It sounds like a lot of fun, to be quite honest.
Jean Hoefliger:
Well, hopefully it is. I think that's also the social role that wine has today. I think that wine is actually in the US a luxury product that is made for people to enjoy and forget time and forget their problems. I think that the social role of wine has become more important the faster society goes, the more they need to slow down and to be able to take time for themselves. And I think that overall, wine is filling that gap.
Sarah Ben-Moussa:
Okay, and I couldn't agree more. Just to hone in on French winemakers specifically, what's drawing them to the Napa Valley?
Jean Hoefliger:
Well, I think first it's obviously the historical side. I think the Americans look to catch up often on the lack of history that they have. The wine industry obviously has been present in the Old World, as we call it, starting in Georgia 12,000 years ago. In the US, it's, at maximum, a couple of hundred, and so they're looking for a gap in that lack of experience that they have and so they love to import that European knowledge, that French knowledge. Because when people think about wine, of course, they speak about and think right away about France. That's one of the things.
Jean Hoefliger:
And I think what attracts French people is that American entrepreneurial mindset. Not only of course the diversity of the soil of Napa, it's consistency of climate, but behind that, there's constantly a very steady entrepreneurial mindset to build things. I always say that, in the wine world in Europe, if you have a new idea, people will answer, "We've never done like that." In the US it is always, "Let's try," and I think that's really engaging, especially for the younger generation.
Sarah Ben-Moussa:
All right. In terms of who's on site, who are some of the big players in the industry that are already in Napa Valley?
Jean Hoefliger:
Well, it's really like any industry. I think you have to divide almost all the industry in a couple of different segments. Of course, you have the very large volume segments and you have the high end segments. The financial situation of these companies are completely different, the margins are completely different. But it goes everywhere from the owner of LVMH to Pinot, so there's a big French presence. There's a big French presence in Napa Valley at all different segments of the industry. That is quite interesting because in general, the French wine industry, the French business industry has looked over Napa Valley, kept it in a corner of their eyes constantly over the last 25, 30 years, because they were really looking at it. Tried to ensure over time that what was going on was the right thing.
Jean Hoefliger:
Now we've seen over the last 15 years, a massive amount of acquisition, a merger, and so and so on because it is more and more known in the wine world that as far as bogged over idles are concerned. It's really Bordeaux and Napa Valley. And these are the two Appalachians dominating the world. And so we've seen a fairly high flow of French capital being invested in Napa Valley over the last five years.
Sarah Ben-Moussa:
All right. And because you have such an experience in so many different regions of the world, I really wanted to kind of hone in on, what's different about doing business in the Valley versus doing business in France as a winemaker?
Jean Hoefliger:
Well, if we specifically talk about the winemaking side, I think there's two things. First in Europe, in France, I think that the star is always the owner of the site of the vineyard. Not as much as the winemaker. In the US, there's a “starification” of winemakers. Winemakers are seen as artists, as poets in a way. And so it's constantly their face as the brand image, so you always put upfront, so your communication skills are absolutely key in the US, if you are a winemaker, because you will be required, asked constantly to talk, to communicate, to get in touch with press, with dinners, with meetings, with conferences.
Jean Hoefliger:
And so I think that's one of the big things. And of course, the other thing is the DTC. You constantly are reminded in Napa Valley, especially that the direct to consumer is a huge part of your market, historically in France, in Bordeaux especially you go through the negotiation, right? So it's a three tier system, it's distributed. The winemaker almost doesn't have much to do with the selling, the brand image part of the thing. In the US, because it's so direct to consumer driven for better margin, because of access of consumers, because of visitation, the winemaker has to be a part of that brand image to the consumer all the way to the consumer as well. And I think that's a big difference.
Sarah Ben-Moussa:
Yeah. And you can definitely feel that artistry influence, I'd say in the US wine market.
Jean Hoefliger:
Yeah, it's really interesting because I think one of the big differences also is that in the US, we still see wine today, especially in Napa Valley because it's usually a higher price point as a luxury good. And in Europe you see it as a daily consumption good. And so, your price point is dramatically different, but the message that comes with it is also different.
Sarah Ben-Moussa:
It is interesting, because it's fair. I think I was so astonished by the price of wine when I got to Europe, but you see it so much more in a consumption mindset. And it's interesting to think about it as an American.
Jean Hoefliger:
Yeah. You have to come back to also understanding the price of land with the plants of a ton of grapes. The average of Bordeaux, a ton of Cabernet is going to cost you $3,000, $2,000, something like that. In Napa Valley, I pay up to $52,000 a ton of Cabernet Sauvignon because the demand for certain sites, for certain brands is so high that you can really position your wine as an exclusive, hard to get product that people are willing to buy and pay to have access to.
Sarah Ben-Moussa:
Wow. That is a difference.
Jean Hoefliger:
Yeah, it is indeed.
Sarah Ben-Moussa:
Yeah, so because we're talking about the investment in the US and so we all know about Napa Valley, that name has become ubiquitous. Can you talk to me about some of the other agents in the US that are becoming a little more significant in the market?
Jean Hoefliger:
Yeah, I mean obviously you have to start with the West Coast because the most established ones are, of course, Sonoma, Oregon, and Washington. But more than that, every single state of the US now produces wine. And North Carolina, the finger lakes, upstate New York and I'm working now a lot with Texas. The Texas region, you have two major, you have the Texas Hills, which is Fredericksburg an hour and a half out of Austin. Of course, you have the high plains where a lot of the grapes are produced, but around Fredericksburg where most of the wineries are located in what they call the hill country is really interesting because it's really Napa Valley 30 years ago. It is a region that is dramatically changing with a massive amount of access to customers. And the reason for this is within a three hour drive, which I know in Europe and France, it sounds very far, but in the US people drive a lot.
Jean Hoefliger:
And so three hours is actually nothing. Everybody drives three hours a day to go wine tasting. For example, if you look at Napa Valley in San Francisco, if you live in San Francisco in the South Bay, you'll be doing two, two and a half hours to go to Napa. So it's not that much of a difference. Well, within a three hour driving range of Fredericksburg, you have 32 million potential consumers. And that means what? That means that this DTC, that direct to consumer model, that hospitality driven model is completely there to expand. And we are seeing a massive increase with wineries seeing 50, 60, 70,000 visitors per year already, knowing that in their production, not for all obviously, but knowing that in their production, they're still producing really low price wines at a moderate quality. So if you increase these margins to allow you to purchase better equipment and ultimately produce higher end products, you know that it will work. So this is definitely one of the upcoming regions of the US.
Sarah Ben-Moussa:
Yeah. And you got me thinking, Texas specifically in terms of people's willingness to drive, you can drive five hours in Texas and still be in Texas.
Jean Hoefliger:
Yeah. It is a massive state as far as space is concerned. And, it's also a state that has a very strong identity. Texans are Texan first, before they're almost American. Therefore, they will drink Texas wine before anything else. That's also the sense of identity that will protect that wine industry for years and decades to come.
Sarah Ben-Moussa:
Oh, without a doubt. As a New Yorker, I wasn't going to say anything, but the lone star state is very, very proud and I love the idea of that sort of hospitality element. Because I think that, especially in the south, is just such an appeal to a lot of these places.
Jean Hoefliger:
Yeah, for sure. And I always say that, I think it's quite important to realize that the same bottle of wine drunk with your worst enemy or with your lover is going to taste dramatically different. Therefore, hospitality, because of the subjectivity of wine, has a really important role. That means that it is really key to host people in an environment that they feel comfortable in, in order to complete a sale and mark the memories of that consumer into a really safe, good place. So they stay a consumer of your product forever.
Sarah Ben-Moussa:
Yeah. I can definitely see that, I guess, with the growing number of wineries, how's that affecting the overall wine market?
Jean Hoefliger:
Well, the American consumption market is growing, so more brand more wine is actually a great thing. Plus, the wine world is constantly evolving like any other part of the world and you have a lot of merger and acquisition. So every time you have these mergers and acquisitions to create a bigger unit, you have smaller brands that create themselves. So the only limitation to that is when you get to a place where you cannot grow more. Napa Valley is almost there, where you don't almost have space anymore to plant more vineyards. So the value of what is existing is obviously going up, but you still have people that can buy grapes instead of owning land. They just buy the grapes, the fruit themselves, and so create concepts. And I think that's a big difference, also. A lot of wines in the US are actually created after a concept, after the idea of the brand itself. And I think that generates a certain innovation, a certain turnover, a natural turnover in the brands between the ones that merge or that are acquired and the new ones that are created.
Sarah Ben-Moussa:
I guess, to that point, the rise of venture backed startups in the wine industry, has that shifted the dynamic for producers?
Jean Hoefliger:
Yeah, absolutely. The old saying is if you start with a large fortune in the wine industry, you'll end up with a small one over time because the wine industry is actually used to be a long term investment. Something that people thought about a legacy, a generational investment, because it's something that would gain value along with the real estate increase, right at a valuation. But today because of the venture capitalists coming in and taking either companies that are not performing as well as they should, or companies that see a massive potential growth, it has shifted the wine world into a much more business driven mindset. These companies want a return on investment that is shorter. They want faster results, and therefore they need to professionalize almost their business at a much faster pace. That has changed. One thing that will never change, is the fact that the wine world follows a vegetative cycle and we cannot go at a faster pace than one harvest per year.
Jean Hoefliger:
So there's only so much you can do within a year. You can only produce that much. You can only grow that much. You can only acquire as much, one per year. And so I think that's probably the limitation, but also the safety net. I was just in Tuscany talking to a fashion owner, Mr. Ferragamo, and he and I were exchanging the fact that in the fashion world trends go up faster, but go down faster. In the wine world, they build up a little bit slower, but they go down much slower. And so it's a different model.
Sarah Ben-Moussa:
Right, and I love that you said it's also a safety net because at the end of the day, the product is the wine and I'm almost feeling the way you're talking about the artistry of it. It is almost nostalgic for the wine itself. But I feel like the limitation there is, to protect the quality in some sense as well.
Jean Hoefliger:
Absolutely. You can only cheat a consumer once in the wine world, if you sell them a beautiful package, but the product inside is not up to standards, then they won't come back to your product. And also wine, because of the subjectivity, relates to an emotion. And so we winemakers have to make sure that we create that emotion that will be transferred from the product to the consumer. Because if you don't, it's a lost cause and you have lost a consumer forever.
Sarah Ben-Moussa:
Right? And so for French companies who do want to enter the US wine market, what are some things they should keep in mind?
Jean Hoefliger:
Well, I think, first there's no doubt that it is a very safe investment. A lot of people are investing in the wine world because on a balance sheet, it is a pretty steady and valuable asset. And that has an amazing ability to leverage a borrowing base. Right? And so that's one thing. The second thing that is very specific to the US is the ability of growth. It is a consumer market that is still growing. It is a wine consumption market that is still growing and very dynamic. So, it is really a market that is interesting to get in because there's plenty to be done, because trends are still part of the wine industry. So the wine will still be a luxury good, as I mentioned before, more than a daily consumption good, but with marketing and brand positioning, of course, a product, and we have to include education.
Jean Hoefliger:
You really have a good sense of positioning a brand. And if you go to these regions that are emerging, right? That is not pre-established or more competitive. I always say that in Napa Valley, it is probably harder today to sell the wine, than it is to make a great wine. If you go to Texas, we're mentioning Texas, it's probably much easier to sell a product than to make a great product, right? So the difference is exactly there. You can either go in Napa Valley and establish and buy a reputation or you can go to Texas and buy easy sale and low competition. But of course it's a dynamic equation and all this will change over time.
Sarah Ben-Moussa:
Right. And, just to transition, speaking of change, I think the one thing we can't avoid talking about here is climate change. And I'm interested, how are winemakers dealing with that? Have things changed and what are they learning as we move forward?
Jean Hoefliger:
Yeah, things are changing, or not. I think what we see most importantly is undeniable is the extremes are becoming more extreme. The droughts are harder, the rains are deeper, the heats are hotter, et cetera. So we have to mitigate all this. And there's two things. Again, the wine industry follows the vegetative cycle. So you have one shot per year at really looking into technology or practices that will mitigate some of these risks. Of course in today's world, science is something that evolves and changes so fast that we constantly have new technology.
Jean Hoefliger:
Let me give you an example. We now have clay that we can apply on the leaf that some people nickname, the sunscreen of vineyards, that limits the evapotranspiration of the plant and the effect of the sun and the plant. So that's one, we have shade cloth that we put along the cluster zone to regulate the inside temperature of the berry to make sure that the enzymatic activity of the berry is maintained at the better things.
Jean Hoefliger:
We have misters that throw microparticles of water to lower the temperature within the canopy. But we also have just pure farming practices that are coming back to what we used to do, like head prune, where pretty much the vine just grows with no wires and all the leaves kind of fall back to create a kind of a bell that protects the inside and regulates the temperature all by itself. And it was abandoned to be favored on a highly mechanization system. But today people are looking to come back to that because it's really a system where the plant regulates itself within warmer climates. So, yes it is changing, but it is to us, the winemakers, to find a solution. And I don't think you abandon a ship when it's in a storm, quite the opposite. You try to find ways to adapt, to be better at what you do. So you leave a better world to the next generation.
Sarah Ben-Moussa:
Yeah. I love that. First of all, I love the idea of sunscreen on the plants, but we don't think about it. I think from a consumer perspective, we don't think about the amount of sort of ingenuity and scientific analysis that needs to go into ensuring that this works long term.
Jean Hoefliger:
Yeah. Wine has always been, especially over the last 50 years, a balance between art and science, between chemistry and biochemistry and emotion and touch. And so it's constantly for winemakers fighting between the two to keep the integrity and quality of a product, but adapt to any changes, to guarantee a level of quality that is fairly consistent.
Sarah Ben-Moussa:
Yeah. And what is so fascinating about the wine industry is between the wildfires and COVID, it's been a difficult year and a half to two years for the West Coast, but despite that, we've seen an increase in online wine sales. And so I'm wondering, can you speak to the reasons why wineries, despite all these challenges, are still growing?
Jean Hoefliger:
Yeah. With pleasure, because I think that wine is a lifestyle. And as we said earlier, between the fact that people, when they drink a bottle of wine, if I ask you today, when was the last time you had a wonderful Heineken or a beautiful Coca-Cola, an amazing bottle of Perrier, you're not going to remember. Wine has this magic of centering people on now and here. And because of that through all trouble and more trouble, people need comfort and feel goods. And so when we were all sheltered in place and all at home, because of COVID, people rediscovered the pleasure of cooking, the pleasure of wine at home, and the pleasure of enjoying the moment with real people.
Jean Hoefliger:
In addition to that, it was extremely beneficial to the wine industry because one generation that we had a problem engaging, were the millennials that are more experience driven than anything else, but through new technology and the wine industry being so old and traditional, they had problems capturing that. Well, because the wine industry at the beginning of the pandemic adapted really fast, they were able to create virtual experiences, virtual tasting, where you ship wine to people. And then you do a tasting through a zoom through a video conference. And we were able all through the pandemic to completely engage now the millennium to not only understand what wine is as a product, but the pleasure that it can bring. And that was absolutely huge.
Sarah Ben-Moussa:
Yeah. I still recall the amount of virtual tastings that were going on. It was insane.
Jean Hoefliger:
We spent two years in front of the screen, everybody. So might as well make some part of it fun.
Sarah Ben-Moussa:
Right. And still you got such a good experience out of it as well. That's something that I particularly enjoyed is how well-crafted some of these virtual tastings were.
Jean Hoefliger:
Again, it's part of making that virtual reality join with the real reality. You have the wine that is a reality in your glass, at your house. And the wineries are bringing people into their world, just like a movie, just like entertainment. It was really asked from us to do that quite a bit. And in a lot of different models. I worked for a brand where it is literally a debate between three single vineyards. We had so many of these tasting because it became a game. And so people wanted to experience that game because it was distracting them from the quite sad reality of life.
Sarah Ben-Moussa:
Right. And so I guess to kindly wrap up here, French wineries are seeing their own difficulties as of late regarding weather. What are some of the long term effects that you perceive for wineries in France and around the European region and how can new technology help alleviate some of these consequences?
Jean Hoefliger:
Well, I think that yes, by climate change, it will automatically draw some change. So there can be massive changes, like we are only going to grow grapes in certain regions. And if it keeps on warming, we'll move up North. If technology is sufficient to mitigate that, they will stay in place, but be held differently. Look, for example, as we were saying, one of the things that is changing are the extremes, France, and burgundy had big frosts the last two years. Right? And so they were highly impacted by frost. We're coming out with a system that is a little solar panel that can be mounted on your trellising system that has a battery that accumulates energy during the day. And re-releases that energy through a heating system to the vine to mitigate frost. Right? We talked about that clay, that sunscreen of the vine, all these new rootstocks, the new varieties, we might be able to just mitigate and have certain regions change slightly the clone or the varietal that they grow to accommodate a new situation.
Jean Hoefliger:
Either with thicker skin varietal that is more resistant to heat with thinner skin varietal, because people always think it's going to become warmer and hotter. Well, if we take the case of Napa, if the climate changes and goes harder, is Napa going to become warmer or colder? Well, because of the influence of the ocean, if it gets warmer, the ocean's going to create more fog. So Napa actually might become colder. So that's why it's really, for me, not a good idea to jump both feet automatically in a change and commit to a direction. It is our job to anticipate and to mitigate these changes as they go, because we really don't know where it's going.
Sarah Ben-Moussa:
Right. And so I guess, is there an additional draw for French investors as a result to kind of tap into the US market because of the variety of places that they have access to?
Jean Hoefliger:
Yes you are absolutely right. There's a massive draw of French foreign investment into the US market because A, the US market is ahead of the curve. We are in a warmer climate, especially in California. So with the new technology to mitigate that, we are ahead of the rest of the world. Now, of course it's a business. So where is the US market standing? Well, the US market stands first in its own consumption and a market pool that is ginormous, right? It's 300 million people. It's the consumption rate that is going up with a big impact of marketing and a big impact of the volatility of brands. And that volatility also creates more opportunity. So there's no doubt that the US market is one of the markets to be in if you want to be in that segment.
Sarah Ben-Moussa:
Yeah. I will say, I think you have given us a new perspective, not just on the US wine market, but even just the complexity and sort of marriage between the science and artistry of the wine market, generally. I want to thank you so much. This has been such an eye opening conversation.
Jean Hoefliger:
Thank you so much for having me. And if you have any questions, I'm sure you know where to find me and Sarah and don't hesitate to reach out.
Sarah Ben-Moussa:
All right. Thanks so much, Jean.
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