Mondavi at the Crossroads

Napa's famous winery struggles to regain luster and to grow amid turbulent times

James Laube
Posted: October 21, 2003

Still outspoken as the company's chairman emeritus, Robert Mondavi is no fan of the ultrarich wines that now dominate the landscape.     Robert Mondavi Revenue and Profits       Mondavi Stock Performance       Mondavi Production, Revenue and Income       Mondavi Brand Portfolio

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Mondavi's Global Reach

Woodbridge is Mondavi's largest brand and the fifth largest sold in the United States, with more than 7 million cases of wine made last year. Its wines, made from grapes grown mostly in the Lodi appellation, sell for around $8. Another key brand is the Robert Mondavi Private Selection label, which was known as Robert Mondavi Coastal until recently. Its wines sell in the $9 to $15 range and sales reached 1.14 million cases last year. Together these brands account for more than 80 percent of RMC's annual production.

Until recently, Mondavi had done a good job keeping these labels competitive. However, the wine glut and wines such as "Two-Buck Chuck" -- the $1.99 a bottle Charles F. Shaw varietals -- cut the legs out from under many companies in this values price range, including Mondavi. Until the current surplus disappears, in perhaps two years, volume producers' profits will be pinched, which isn't the kind of forecast Wall Street investors like to hear.

There have also been vintages when Woodbridge and Private Selection (and before that, Coastal) dropped noticeably in quality. When Coastal began in the 1994 vintage, it used Napa Valley grapes to anchor its Cabernet. As volume grew, however, more grapes from outside Napa Valley were brought into the blend. Once the percentage of Napa grapes went down, quality declined.

RMC's efforts to expand globally may have hampered the company's ability to focus on its Napa Valley wines. Since Opus, the company has added joint ventures around the world, including wineries in Chile (Vi—a Caliterra and Se—a), Italy (Luce della Vite and Danzante), and Australia (Kirralaa). Mondavi also recently acquired Tenuta dell'Ornellaia in Tuscany, maker of what is arguably one of Italy's greatest reds. There also have been two failed ventures in France (Vichon Mediterranean and an upscale Languedoc project).

Inside California, Mondavi has also tried to broaden its base. A foray into Italian-style wines, such as Barbera and Sangiovese, under the La Famiglia de Robert Mondavi label, met with mixed results. The wines have scored in the good range (82 to 86 points), but have never had the cachet of other Mondavi projects.

Efforts to reach new consumers in the lucrative Southern California market also stumbled. The Robert Mondavi Wine & Food Center in Orange County was scaled back and was on the verge of closing this past summer, while a wine center at Disneyland in Anaheim, Calif. -- once thought of as a way to introduce wine to a broader audience -- was also closed. mondavi had invested $13 million in the Disneyland project.

There have also been success stories. Mondavi acquired well-known California wineries Arrowood (in 2000) and Byron (in 1990). Both of these wineries have been solid acquisitions. Arrowood, based in Sonoma Valley, is a respected producer of Cabernet and Chardonnay, under the direction of one of California's best-known winemakers, Richard Arrowood. It also makes excellent dessert wines, along with impressive Merlots and Syrahs.

Byron, in Santa Maria Valley, is run by its founder, Byron "Ken" Brown. His winery excels with Santa Barbara County Chardonnay and Pinot Noir, and also produces Syrah under the Io label.

These ventures, most of which were launched during the economic boom of the 1990s, symbolize Mondavi's ambitious goals, and stand in marked contrast to the humbling reality the company now faces.

The Mondavi Plan

Key to the fate of the Mondavi empire is the Mondavi family. Throughout the company's 37-year history, the Mondavi inner circle -- Robert, Michael, Marcia and Tim -- has been part of the management team. Whatever the company's successes or failures, the responsibilty lies squarely on the family's shoulders. "We're passionate about wine," says Marcia, "but maybe we're not the best management."

The Mondavis are fighters and thrive on competition. The current economic downturn and negative publicity has forced them to circle the wagons and defend the company's decisions -- except for Robert, who remains a vocal critic. Yet even he has misstepped at times. In the mid-1990s, Robert's efforts to be fair to Michael and Tim -- and not let one or the other have a stronger position within the company -- once led to them being co-CEOs, an arrangement that didn't work out.

The Mondavi management style has come under increasing scrutiny since the family took the company public in 1993. Critics say the company has never been fiscally disciplined and that the Mondavis are known to spend freely. That, coupled with the fact that high-end winemaking is expensive, has made it difficult to keep the company on sound financial footing for sustained periods of time.

For example, as recently as 2000, the winery in Oakville underwent a major redevelopment, the $25 million To Kalon project, which replaced temperature-controlled stainless steel tanks with expensive, high-maintenance oak fermenting casks inside a new chai. In the end, no one knows for sure whether the oak tanks will be better than the stainless steel.

In an extensive interview at the Napa Valley winery, Michael offered a defense of the current state of RMC and spoke about the company's plans for the future.

Concerns about Opus and Woodbridge can be addressed in a fairly straightforward manner, he says. Yes, it's possible Opus, with its aura of exclusivity, has eclipsed Mondavi Reserve in the minds of some connoisseurs. But at the same time, the joint venture has raised Mondavi's visibility and stature and given RMC a unique global perspective on wine, viticulture and winemaking, putting it years ahead of most other California wineries -- or for that matter wineries anywhere.

And yes, it's possible that the Woodbridge and Private Selection labels have slowly chipped away at the greater image of the Napa Valley wines. Yet Michael still believes that the family name has tremendous elasticity, and that Woodbridge drinkers are also Reserve drinkers. He also defends the large size of the Woodbridge and Private Selection brands by insisting that RMC has the vineyards and winemaking know-how to make high quality and affordable wines on a large scale.

Indeed, growth remains vital to the company's success, he explains. Because RMC needs to be competitive at all price points, new brands are in the offing, including a line of vineyard-designated wines from Woodbridge priced at $11 a bottle.

There are also high hopes that the Oakville winemaking operation is on the upswing. It is being overseen by a new winemaker, Genevieve Janssens, who joined the company in 1999 after working at Opus. She is now focusing on improving the house style. And the excellent 2001 vintage should be the perfect lift-off to showcase the red wines.

As for going public in 1993, Michael insists it was inevitable. On one hand, the company needed the money -- and had run short of options for new capital. Some say the expansion of Woodbridge scared bankers who feared that the Mondavis might not be able to repay loans and in effect pushed Mondavi into going public.

The family has long maintained that another consideration -- inheritance taxes once Robert dies -- played a role, though others dispute that. Taking the company public made financial sense in order to raise cash and protect its assets. It also made the Mondavis -- who still own roughly 41 percent of stock and nearly 87 percent of the vote -- quite wealthy.

Mondavi stock has had its ups and downs. One of its most dramatic run-ups came in the mid-1990s during a two and a half year period when the stock soared from $6 to $56 a share. In the past year it has traded in the high teens to the mid-$20s, at times winning "buy" recommendations from Wall Street, yet at other times being put on the "sell" lists. Earlier this year, after the company laid off 10 percent of its 1,000 employees, and said it was selling off vineyard land, one Wall Street analyst said it believed Mondavi was poised for improvement. The company's strongest performance in terms of sales was fiscal year 2001, with $481 million and a net profit of $43.3 million. But in 2003, the profits slumped to $17.3 million, on $452.7 million in sales.

The new management team is set and many will be watching as it moves ahead. Some of the next generation of Mondavis -- Michael's son and Tim's children -- are showing an interest in the family business, working at the winery, and that could influence future management decisions.

What Comes Next for Robert Mondavi

Speculation is rampant that the company is ripe for a takeover. Some analysts believe the current price for RMC stock on Wall Street already reflects a built-in premium in anticipation of a sale. Would-be suitors include Constellation, Beringer Blass, Brown-Forman, Diageo, or even a long shot from outside the wine business, such as Anheuser-Busch, the nation's biggest brewer.

On the other hand, Mondavi could return to being a private company by selling off its assets, such as Woodbridge, and seeking ways to finance its future other than through Wall Street. Yet no one in the family seems to think that's a likely scenario. "Even if we won the world's biggest lottery, we wouldn't buy it back," Michael says. He cites inheritance tax issues and the fact that the company would still need large amounts of money to sustain growth. The company is in effect using investors' money to fuel growth instead of the funds of traditional lenders, such as banks.

These days, Robert Mondavi remains on the board as chairman emeritus, and though he is no longer calling the shots, he remains outspoken. This characteristic sometimes leads to outbursts that come back to haunt the company. His comments that his sons had let the Oakville wines slide in quality created lots of unwanted publicity at a time when the winery was already suffering. He also takes pleasure in criticizing the dense, high-extract wines favored by some critics and many consumers. In one interview just days before his birthday, he showed plenty of grit when he compared those wines to "high-end call girls with a lot of glitter."

Critics, he says, have their own tastes and by championing ultrarich wines are leading consumers down the wrong path. Eventually, he and his family insist, the trends will swing the other way, and their more elegantly styled wines will become more fashionable.

In the meantime, Robert has turned most of his attention to philanthropic endeavors. His major projects include getting Copia: The American Center for Wine, Food & the Arts in Napa off the ground and helping the University of California, Davis, with the Mondavi Center, a new performing arts facility. He's also busy trying to help Davis' Department of Enology and Viticulture build a much-needed modern facility to replace its old, out-of-date buildings.

Ironically, it's not unlike what his sons are trying to do with Robert Mondavi Winery -- rebuild it and return it to its glory days. But they also have to deal with meeting the demands of Woodbridge and Wall Street. And coping with these pressures, in the end, may prove far more challenging than reinventing the Napa Valley wines.

The energy and vision that Mondavi once bought to the industry "has shifted to the smaller producers," says Winiarski, leaving Mondavi in a void. The little wineries "absorbed all that energy and have taken it in many different directions," he says.

What does the future hold for Mondavi? "Who knows?" says Winiarski. "It would be difficult to hold Bob to the aspirations for quality and style [that he had] when he started. But the energy still exists. They just need to find a way to channel it."

With its back to the wall, and Wall Street watching, Mondavi will likely receive the careful scrutiny it says it welcomes. If the wines, particularly those of the Napa line, are as good as the Mondavis believe, consumers should embrace them, and sales should lift the company to better profitability. But can Mondavi's Napa Valley wines save Mondavi Corp.? That's questionable. The company is too big and unwieldy and too dependent on Woodbridge for cash. In a strange way, Mondavi could be a victim of its own success. If it can't please Wall Street, that could lead to its sale. If it continues to grow and make better wines, that would make it an even more attractive acquisition.

If Mondavi stumbles, it will do so for all to see -- no other wine company in America has had so high a profile. Robert Mondavi and his family have led the California wine industry from obscurity to worldwide recognition. Now their challenge is to maintain their success in today's tough times. Mondavi is at a crossroads and the wine world is watching to see what the future holds.

Senior editor James Laube is Wine Spectator's lead taster on California wines.

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