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Parallel Universes


James Laube
Posted: June 15, 2000


Parallel Universes

By James Laube, senior editor


It's been a captivating bonanza for news-watchers.

Item: New dot-coms spring to life daily, seemingly out of nowhere, each as eager as the next to woo you to visit their "www.we'll-handle-this-for-you" Web sites.

Item: Proven value, once considered a cornerstone of any investment strategy, is looked down upon for no good reason as investors flock to untried start-ups.

Item: Just one instance of poor results threatens to undermine the prosperous "New Economy."

All three of these items have one thing in common: They rank among the challenges facing today's booming California wine industry. Wine market or stock market, old economy or New Economy; take your pick, but the parallels are revealing.

Everywhere you turn, California wine is on the Internet. Scores of dot-coms, from gigantic retailers to homey mom-and-pop stores, are competing for business. Those of you who live in states where direct shipments of wine are illegal -- and who therefore can't order wine for home delivery via the Internet -- have been spared the bombardment of advertisements. But when the dust settles, how many of these outfits will profit and survive? Coming soon -- a shakeout of the wine dot-coms?

Wine's publicly traded companies may look drab when put alongside the high-flying (and nose-diving) New Economy technology stocks. Wine companies' price-to-earnings ratios are definitely "old economy." They're solid brick-and-grape operations, with P/Es typically in the mid-teens. Yahoo!'s P/E has been well above 1,000 this year. Yet, is an investment in Yahoo! any riskier than spending $100 for a single bottle of some Napa winery's first release?

As I write this, in mid-April, a technology sell-off on Wall Street has flattened the Nasdaq amid worries that the U.S. stock market is overvalued. Is the uneven quality of the 1998 vintage enough to raise similar red flags for consumers of California wine?

Nowhere is the commingling of Wall Street and Wine Street more conspicuously surreal than in the career change of Lewis E. Platt. For 33 years, Platt, 58, worked for Hewlett-Packard, the Silicon Valley computer behemoth. In 1992, he was named as HP's chief executive officer, overseeing a firm that in 1998 employed 124,000 people, with annual revenue of $47 billion and literally thousands of different products.

Today, he's been "downsized" -- he's now the CEO of Kendall-Jackson Wine Estates in Sonoma County. K-J is an aggressive, innovative and diversified company, but one whose size pales in comparison to HP's. K-J counts 1,200 employees, $310 million in revenue and 75 different wines.

Platt's arrival in Sonoma County has once again fueled speculation that K-J will follow the path taken by Robert Mondavi Winery and Beringer Wine Estates and convert at least part of the operation into a publicly traded company. In the past, owner Jess Jackson has insisted that won't ever happen -- that his company will never go public, though Wall Street beckons.

Business types wonder whether the California wine industry is ripe for the kind of merger mania that has gripped so many other industries over the past few years. Is consolidation the next step to greater efficiency for the big firms?

California's vineyards have undergone a billion-dollar replanting as a result of damage caused by the root louse phylloxera. Another chronic problem is "black goo," a fungus that attacks grapevines. Now there's also "green goo" -- the millions of fresh, crisp dollars pouring into new vineyards and wine brands, with an eye toward the lofty $100-a-bottle market.

Finally, there's Pierce's disease, a grapevine-killing virus that's spreading northward through California, carried by an insect known as the glassy-winged sharpshooter. The prognosis is not encouraging. If the bug isn't stopped, the roaring party that began in the 1990s may end with a wicked hangover.

The California wine business has never been stronger, more profitable, more innovative or more flexible. Yet, at the same time, it has never been more vulnerable, as consumer expectations rise to dizzying heights. Both perspectives are measures of market reality.

Editor's note: See how the dot-com industry is influencing the wine auction world at the Napa Valley Wine Auction 2000.



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This column, Unfiltered, Unfined, features the opinionated inside scoop on the latest and greatest in the world of wine, brought to you each Tuesday by a different Wine Spectator editor. To read past Unfiltered, Unfined columns, go to the archives.

(And for an archive of senior editor James Laube's columns written just for the Web, visit Laube on Wine.)

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