04.23.2015  
 

What Makes Napa Valley Valuable?

Analysts discuss ways to boost value of wineries and vineyards

 
by Paul Franson
 
vineyard valuation
 
Source: Maher Associates

Napa, Calif.—The Napa Valley Grapegrowers held its 2015 Ahead of the Curve seminar designed to inform growers about upcoming issues of importance on April 21. About 100 growers filled the hall at Carneros Inn to hear experts discuss the value of Napa Valley and what makes it special.

Most of the discussion revolved around numbers and dollars, but attendee Warren Winiarski, whose 1973 Cabernet Sauvignon helped change the world’s perceptions about Napa wine at the famed “Judgment of Paris” in 1976, commented later, “They all seemed to skirt around the real issue: Napa Valley is valuable because it makes some of the best wine in the world!”

The first speaker, Mike Sweeney, California state director of The Nature Conservancy, brought some perspective about preservation to the gathering by pointing out that 75% of the world’s land has been modified by humans. Protecting wild areas isn’t enough. “We must depend on agriculture to help preserve the habitat.” He added, “Ag preservation may be as important as land preserves.”

He also noted that we need to try new things, and because wine grapes are valuable, they provide a great place to experiment.

The issue of using land trusts and conservatories to protect and increase value of land permeated the whole seminar.

Running the numbers
Sean Maher, principal of Maher Advisors, then presented a concentrated summary of facts, figures and trends in wine production and sales leading up to land values.

In the process, he pointed out that grape values vary widely, even in Napa Valley. For example, while the median price for grapes in Napa County in 2014 was a healthy $5,920, grapes selling in the 10th percentile fetched only $3,750 per ton, and the 90th percentile went for $8,000 or more. By comparison, Lodi averaged $653.

Winery valuation
Many attendees at the seminar were likely interested in the valuation of their vineyards, particularly in light of recent sales. Maher highlighted the factors that drive winery valuation:

Investors value fast-growing companies more than their slow-growth counterparts, and all else being equal, smaller companies have less economies of scale, less marketing muscle and less efficiency—all factors that affect valuation.

Scalability, economies of scale and the capacity and resources to grow tend to produce strong earnings, while strength of cash flow and earnings gain higher valuations.

The values of wineries depends on perceived value of the brand as well as hard assets like vineyard property and production facilities, and even the perception of the appellation it’s in. Sellers as well as buyers need to understand and value the underlying asset base as well as brands.

Greater access to capital is a strong competitive advantage and lowers a company’s cost of capital. Higher risk results in higher reward required but also lower valuation.

Meanwhile, direct-to-consumer sales will continue as the largest growth channel for smaller wineries. “There’s never been a tougher time to start a brand and get distribution,” he said.

Consequently, most new wineries will be dependent on visitors to winery tasting rooms that generate sales and wine club members. However, Napa County and other jurisdictions are taking steps that will likely lead to tightened regulations on facilities and visitors.

Vineyard valuation
Factors that drive vineyard valuation differ from those of wineries in many ways. Wineries can obviously pay a higher price for premium vineyards.

The location has always been important; with recent acceptance of considering the appellation’s value a depreciable asset, this becomes even more important. (See an upcoming article in the May Wines & Vines on this topic).

For example, Howell Mountain grapes and a Howell Mountain designation on the label result in an average price per bottle that is higher than that of a wine labeled simply as Napa Valley. It means that this difference lies in the appellation and can be written off.

Overall, the price that a vineyard’s grapes generate is a good indication of the quality of the vineyard.

Smaller vineyards can attract a larger universe of vineyard buyers and achieve a premium valuation. Many properties are too large for small- and medium-sized high-end wine brands to purchase. If an owner can reduce the size of properties, the owner can reach a broader base of buyers and thus a premium valuation. Sellers can do this by lowering effective size of the properties by subdividing into smaller individual parcels if allowed; that’s very tough in Napa County, however, where minimum parcel splits are 40 or 160 acres.

Sellers can also arrange for a winery buyer to sell excess fruit or help set up syndicates or partnerships of wineries to team up to buy properties.

Non-operating assets such as large homes and home sites aren’t attractive to wineries seeking vineyards. Likewise, if the fruit is contracted long-term, the vineyard is of less value to the winery buyer.

Vineyards that have been maintained and replanted when needed are more desirable than those that are aged or neglected.

Water has always been important, and it’s becoming more so as weather conditions, population, farm growth and increasing legal limitations challenge growers.

Two recent issues affecting vineyard valuation are the presence of red blotch and leafroll viruses.

The bottom line
Maher went on to discuss the realities of farming grapes in an expensive area like Napa Valley. Using land valued at $100,000 per acre, $200,000 per acre and $300,000 per acre, he estimated that the lower example might justify commercial farming of $4,500 per acre per year, while the average would cost $6,200 per acre per year and high-end management costs $12,000 per acre per year.

 

vineyard valuation
 
Source: Maher Associates

Maher concluded that M&A and vineyard acquisitions would continue at a record pace in 2015.

A vintner/grower speaks

The last session was a panel of the previous speakers plus Ted Hall, owner of Long Meadow Ranch Winery and vice-chairman of the new Agricultural Protection Advisory Committee in Napa County, a diversified group of 17 representatives taking a look at the county’s Winery Definition Ordinance that governs winery activities including marketing and sales.

In addition to grapes, Hall grows a diversified agricultural operation with olive orchards, fruit, vegetable gardens and livestock in addition to operating a restaurant and event center in St. Helena.

Hall points out that he uses conservation easements, Williamson Act valuation of agricultural land as well as depreciation of his property’s valuable appellations like Rutherford to economically justify buying land for wine grapes and other agriculture.

He also farms organically and claims that the higher quality of grapes and longer life of such vineyards justifies a higher farming cost, though he says good management can eliminate that higher cost.

Hall also notes that agricultural and other land trusts can permanently protect Napa Valley from development and create “greenbelts” around cities. He warns, “Don’t rely on the political process,” such as the one that created the Napa agricultural preserve in 1968.

At present, 55,000 acres of Napa County are in Land Trust easements. Of that, 9,100 acres are farmland, 6,800 are owned by the Land Trust and 11,520 acres of wild lands are in conservation easements. More than 27,500 acres of open space is in parks and recreational areas.

In Napa County, about 45,000 acres of the county’s 500,000 acres are in vineyards.

 

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