Wealth Matters: Winemaking Lures the Wealthy, but Not With Profits

IF there is one investment that has more to do with the heart than the head, it’s vineyards. It is also one that lends itself to jokes whose punch lines are always about losing money.

But that risk has never deterred wealthy people. Nor has the current economic malaise damped their spirits. These are people who made fortunes in profitable industries like shower doors and title insurance but define success in the winemaking business as breaking even. And most seem to accept the prospect of losing a manageable amount of money over many years.

Don Ross, founder and chairman of Cardinal Shower Enclosures, offers a particularly telling example. He bought 2.5 acres in the Napa Valley in 2003. It came with rows of cabernet sauvignon vines. A lifelong wine lover — he has 7,000 bottles in his cellar — he started making wine under the label Shibumi Knoll. Then, he bought some chardonnay grapes from another vineyard and made that, too.

The business was going along modestly until 2005, when Mr. Ross gave a bottle of the chardonnay to his golf pro who passed it on to his next client, an influential wine critic. That critic later rated the wine a 97 out of 100 in a blind tasting, and Mr. Ross’s phone started to ring.

Today, his wine is served at the French Laundry and other fine restaurants in Napa Valley and one in Tennessee, and he sells the rest through his wine club. You would think Mr. Ross has a profitable side business. Alas, no.

“This wine business, we don’t make any money,” Mr. Ross said. “I do it for love. I sell shower doors for money.”

He said the costs of making a high-quality but small-production wine make it difficult to turn a profit. There are the salaries of the vineyard manager and the winemaker and also the costs of the bottles, labels and corks, which, he said, are $2 each.

Yet Mr. Ross’s story is far from a cautionary tale in the wine-growing regions of California. It is more of a model.

Larry Hayes, whose company Mulberry Trample specializes in discreetly selling a producer’s excess wine so the prices of labeled bottles do not drop, said aspiring winemakers would be better off buying a piece of land they like and letting that dictate what wine gets made.

He said the big risk for most wealthy enthusiasts is buying too much land too quickly at too high a price and then thinking that they will be able to get whatever wine they make distributed to wine stores.

“These people really don’t have the access or the ability to get distribution through the wine distribution network,” Mr. Hayes said. “It’s a tough, tough deal. Everyone wants brands that they know. If you’re a small producer, that distribution is not available to you. And if you get in, you’re not the biggest fish in that pond.”

Many people think if they can get a high score, as Mr. Ross did, then everything will be set. But a good review is not something that can be bought.

Aaron Pott, a winemaker and consultant in Napa said he received calls all the time from people saying they wanted to make a 100-point wine and were willing to pay to do it.

“My first warning is, don’t go into the business looking for a certain score,” he said. “If you’re unrealistic, you’re going to be disappointed.”

Mr. Pott, who charges a monthly consulting fee of $8,000, said he weeded out people who did not have their own vineyards but figured they could buy the grapes they needed to make their wine. “You’re giving them false hopes,” he said. “If they’re just buying fruit from someone else, it’s not very long-lasting. The contracts could end or the prices could go up.”

Even winemakers who seem to be doing everything right struggle with distribution. Bill Foley, who made his fortune in title insurance and other real estate businesses, owns nine wineries in California, one in Washington State and two in New Zealand, and he hopes to buy five more on the West Coast. This year, his Foley Family Wines will sell 1.3 million cases.

His distribution, he said, “rides along with Sebastiani,” a lower-end brand. His high-end Chalk Hill wines, with 40,000 cases a year, would be a blip on a distributor’s screen without the Sebastiani association.

Still, he said he was running his wine business as he did Fidelity National Financial, a holding company he helped build. When he buys a vineyard — he is known in wine circles for his acquisitiveness — he consolidates all the back-office operations, like accounting and wine club management, to free up resources to promote and improve the wines.

Having spent tens, if not hundreds of millions, of dollars buying wineries since 2007, he has yet to turn a profit, but the wineries are at least covering their costs. Still, he said he was glad he had done it. “When you’re out in the vineyards, drinking your own wines, with your kids, it’s fun,” Mr. Foley said.

Of all the winemakers and vineyard owners I spoke to, the one who has the least risky and most sustainable model of building his business was Fred Schweiger. The only catch was it took him 51 years to get Schweiger Vineyards where it is today.

Mr. Schweiger, who owned a construction company until two years ago, bought the original eight acres in 1961 for $250,000; he said that parcel alone is now worth $3.2 million.

In the intervening years, he cleared the land, planted the vineyards and built all the structures himself on what is now a 55-acre property. Before the vineyard started making its own wine in 1994, he sold the grapes to other wineries at a profit.

All along, he paid cash for every expansion until 2002, when he borrowed $2.5 million to upgrade equipment in the winery. By then, he said, that loan was only 10 percent of the value of the vineyard.

“From an economic point of view, it takes 16 to 20 years to make a profit,” Mr. Schweiger said. “I didn’t hear that until we were in the winery business for five or six years. It wasn’t until last year that we made a profit.”

For those with less patience, there are other ways to try to reduce the risk and financial outlay. Some people eschew the romance of roaming through their own fields and just set up a winery to make and sell wine.

John Sweazey, who made his money in the mortgage business, said he wanted a winery only after he sold his company in 2003. He bought one in Sonoma and called it Anaba.

“Vineyards didn’t appeal to me because I never really wanted to be a farmer,” he said. “Farmers are never happy.”

But he found a different set of challenges in having a stand-alone winery.

“Making high-quality wine was easier to do than selling high-quality wine,” he said. “This brand came out with an unknown name in mid-2008 and we struggled.”

Six years into the venture, though, he said the winery was approaching the break-even mark, but it took twice as long as he planned.

One thing these businessmen-vintners share is an amateur’s enthusiasm. They have enough money to hire experts and the business sense to watch profits and losses. It would be easy to criticize investing in vineyards as a rich man’s vanity. But it has always taken a lot of money to make wine and, on occasion, that investment pays off.

André Mentzelopoulos, who made his fortune in real estate and grocery stores, made a good bet. He bought Château Margaux, one of the most important French vineyards, in 1977. At the time, there had been a string of bad vintages in Bordeaux, and the chateau had lingered on the market for two years.

His daughter Corinne said he paid about $15 million for Château Margaux and spent the last three years of his life and many millions of dollars on renovations and reviving a great wine. In 1982, two years after he died and Ms. Mentzelopoulos took over, the vintage was called superb by the critic Robert Parker, and the lust for Bordeaux was on.

Ms. Mentzelopoulos said that despite all her family’s success — a 2003 transaction valued the chateau at $587 million — she still worried.

“You can’t predict anything,” Ms Mentzelopoulos said. “I don’t know the quantity or the quality of the 2012 vintage. I don’t know my sales or my profit. And if it rained from now until October, there would be no wine to speak of, yet the investment I have to make is still the same.”

It is no wonder that she said that the only time she relaxed was when “the grapes are nice and safe in the cellar.”