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In a move with the potential to reshape the Oregon wine industry, Ste Michelle Wine Estates purchased A to Z Wineworks this week. The deal includes the brand Rex Hill, a large production facility in Newberg, and about 50 acres of vineyards in three parcels in Willamette Valley.
A to Z and Rex Hill currently produce about 400,000 cases of wine per year. Erath, which SMWE bought in 2006, produces about 300,000 a year.
"We are now the largest producer in Oregon," SMWE vice president of communications Ryan Pennington told Wine-Searcher. "We're very excited to play a larger role in the growth of the region."
From outside, the deal was somewhat surprising because after SMWE was bought last year for $1.2 billion by private equity firm Sycamore Partners, it seemed like the company's focus might be on cutting back, a notion reinforced by the fact that the company put its headquarters in Woodinville up for sale. That property is still on the market.
But Pennington said, "To put it simply, the plan is to grow."
Pennington said the idea is to sell the Woodinville property, possibly leasing back the tasting-room portion, and to redeploy the capital for wine investments elsewhere, such as the Oregon purchase this week.
"I think that provides good context through which to see the A to Z acquisition," Pennington said. "We're looking for ways to deploy capital in ways that can best help us grow. With A to Z we have two brands that are a fantastic complement to our own brand. In the Woodinville property, we have unused land that can fund our investment."
The heart of the Pacific NorthwestOregon wine continues to be one of the fastest-growing categories in US wine sales, which must give longtimers at SMWE a sense of regret. Chateau Ste Michelle completely dominated the Washington wine industry from its inception in 1954 until sometime this millennium. The company could have bought up much of Willamette Valley for a song or two, had it been so inclined. But it was always focused on growing and marketing the Washington wine industry. And Pennington said that, even though its owners are now mostly involved in rebuilding fashion brands like Loft and Ann Taylor, it still does.
"Unequivocally, Washington is our home," Pennington said. "It's the core of our business and that hasn't changed. We are as committed today as we were yesterday in growing our business in Washington and helping the Washington wine industry. We think Oregon and Washington complement each other very well in their ability to promote the Pacific Northwest. There's not a lot of Pinot Noir in Washington and not a lot of anything else in Oregon. We're positioned to be a leader in the wine industry in both states."
In retail stores surveyed by Nielsen, Oregon wines average $17.14 a bottle while Washington wines average $10.67. Meanwhile, sales of Washington wines in these stores are down 12.4 percent compared to a year ago. Sales of Oregon wines are down 4.9 percent compared to last year, but that came after a 13 percent rise in 2021. Also, Oregon wines are very often restaurant wines.
One issue will be grape sourcing. But in buying A to Z Wineworks, SMWE got a company that had figured out how to make affordable Pinot Noir almost entirely from purchased grapes. A to Z's Pinots Noirs sell for $20 to $25: an extremely good price range to be in to sell wine, yet it's difficult to make estate Willamette Valley Pinot for that price.
"Supply is a challenge for everyone in Oregon," Pennington said. "You have incredible demand in the marketplace. At least recently, there have been some challenges from mother nature constricting the supply. We want to continue making the wines in the best way to support wine quality and sustainable cost-effective production. The majority of the fruit will be from growers, many of whom will be long-term partners."
Mike Veseth, the Wine Economist who is based in Washington, brought up an interesting point: it's possible SMWE made the deal because combining A to Z with Erath makes a potential Oregon subsidiary more attractive to a future buyer.
"If you believe, as I do, that Sycamore intends to exit its SMWE investment at some point in the medium term, then the ability to sell or spin off the Oregon assets could be a good move both because of their obvious premium value and in order to make the remaining Washington and California assets more manageable," Veseth told Wine-Searcher.
Rob McMillan, executive vice president of Silicon Valley Bank's wine division, said that the deal signals a continuing move away from lower-priced wines for SMWE. Chateau Ste Michelle always made some of the best under-$10 wines in the US, but sales in that category have been declining for several years, and that dropoff was the source of some of SMWE's troubles.
"The move by Sycamore is expressive of their commitment to the premium wine segment," McMillan said. "At the same time, they are shaving down the volume mix of wines in lower price categories in Washington, they are loading up on wines in higher-growth and higher-priced categories elsewhere in the Pacific Northwest. While I'm sure the sale by Bill Hatcher and his investors was made with mixed feelings, the buyer will bring new energy to both labels, and add a new element to the Oregon wine scene. It's a good outcome for the seller, buyer and the Pacific Northwest.
