US wine group The Duckhorn Portfolio is a few weeks into its new ownership, with PE firm Butterfly Equity closing its $1.95bn acquisition of the Decoy and Sonoma-Cutrer owner just before Christmas.
The deal was Butterfly Equity’s first in wine and the buy-out house has appointed former Constellation Brands executive Robert Hanson as The Duckhorn Portfolio’s new chief executive.
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Hanson led Constellation Brands’ wine and spirit division from 2019 to early last year and, having worked on the transaction with Butterfly Equity, owns a stake in the California-based wine group.
The acquisition took the publicly listed The Duckhorn Portfolio private. In the company’s last full financial year as a listed business, a 12-month period that ran to the end of July, its net income fell more than 19%. Net sales inched up 0.7% thanks to the group’s acquisition of Sonoma-Cutrer in late 2023 but were down on an underlying basis.
Just Drinks sat down with Hanson and with Butterfly Equity co-CEO Adam Waglay to hear the rationale for the takeover of The Duckhorn Portfolio, how they plan to grow the business and their thoughts on the overall market for US wine.
Dean Best (DB): Robert, what convinced you to invest and also take the helm at The Duckhorn Portfolio?
Robert Hanson (RH): Clearly, there’s no denying the total wine category’s been facing dislocation recently but the drags have been driven by the lower end. What we love about this portfolio is it’s high end. It’s premium, fine and prestige wines that compete at $15 a bottle and higher. The $15 to $50 category has grown over the last 12 years at a 7% compound average growth rate. This portfolio is responsible for about 30% of the total growth, so not only competing in the right segment of the business but taking share.
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By GlobalDataWe’re competing in the right segment of the market. People are drinking better but lower quantity. The drags in the category are coming from under $10 table wines. The teams also lean quite aggressively into the better-for-you trends that are out there for the consumer: lower alcohol, lower calorie content and just higher-quality wines.
DB: What gives you confidence The Duckhorn Portfolio can grow sales and profits over the next 12, 24 months?
Adam Waglay (AW): If I could add from an investor perspective, I think Robert said it well: this is the right sector in wine to play – the $15 to $50 a bottle – but also the right business model. Ninety per cent of the grapes are third-party sourced, which means you have full flexibility to buy the best possible grapes but also to drive the highest possible margin, so over 40% EBITDA margins and super high returns on capital and a lot of flexibility.
On the comment on performance, not only is this the right asset on the right street with the right leader but it was also the right time. I think a lot of the dislocation you’re referencing allowed us to buy this business at a massive discount to where these wine assets typically trade. This is not a turnaround or anything. This is the best business in the best place in wine and we were able to buy it multiple turns below where wine typically trades. We feel like we protected ourselves from that perspective.
This is not a turnaround or anything. This is the best business in the best place in wine
Adam Waglay, Butterfly Equity
RH: The numbers from a shipping, revenue and profit standpoint are what they are up to this point in the year. It is important to focus on the fact that we’re winning with the consumer. If you look at Circana and Nielsen data, if you look at any of the other sources that track consumer takeaway performance, this portfolio continues to outperform the category.
There’s no denying that coming out of the pandemic there has been a need to get supply and demand in balance. That’s one of the issues that the team has been dealing with, making sure that the end-to-end supply chain, our days on hand, internally with our distributors and our customers, are what they should be. There was a slight destocking trend.
The other thing to consider, obviously, when you go through a distributor transition – and this team recently transitioned from their prior distribution contracts to predominantly concentrating the business with RNDC and the Breakthru Beverage Group – there’s always going to be a softer start to the shipping revenue and the impact in profitability on the business. We feel confident that, in addition to the robust performance of Sonoma-Cutrer, we expect the full portfolio to deliver against our underwriting thesis in terms of organic revenue growth and profitability this year and beyond.
DB: I guess now you’re privately owned you don’t need to say whether you’re forecasting whether net sales and profits would improve this new financial year?
AW: Good try.
DB: Thinking about your commercial strategy, would it be fair to say that you’ll be putting more investment dollars behind the more premium parts of the range, given the trends you’re seeing in the category?
RH: It’s a portfolio of 11 brands but, if we segment it, it’s a combination of two go-to-market segments. There is a fine and luxury portfolio that’s anchored by Duckhorn Vineyards and Kosta Browne at the high end, among other brands like Goldeneye and Calera, which we call the little ducks. Then on the premium segment of the market, that business is anchored by Decoy and Sonoma-Cutrer and we have other little ducks, such as a great, high-growth, Washington Cabernet brand called Greenwing.
If you go one step deeper, there are core four brands. If you look at the fine wine brands of Duckhorn Vineyards and Kosta Browne, combined with Sonoma-Cutrer now in the portfolio and Decoy, they represent about 90% of the business. Clearly, we’re going to focus on sustaining the organic growth of those four brands.
We’re slightly under-penetrated in the on-premise. One of the reasons we like the Sonoma-Cutrer acquisition is they’re well-penetrated in on-premise. We can take advantage of the mash-up of the portfolio to get the mix of the business further integrated with opportunities on the on-premise.
In the off-premise, it’s true there are significant distribution gaps. Distribution runway is significant for all four of those brands, not to mention the little ducks that are under-penetrated and need some focus.
RH: The DTC business is only 12%. It should be bigger than that for a portfolio of this quality. Our international business is small. It’s not a material part of the short-term underwriting thesis but it’s 6% and, if you go to the top 60, 80 cities around the world where people consume wine at this level, they love California wines, particularly Napa and Sonoma County but also the Central Coast and Paso Robles where we do play. We feel good about those opportunities.
Our portfolio is clean. It only competes at $15 and above, whereas a lot of the other larger portfolio companies have a drag of lower-end brands that are underperforming in tough categories. We don’t. People are consuming better quality, a bit lower quantity, so that leans into a premiumisation trend, which this portfolio obviously is driving benefit from.
DB: There’s so much debate about whether the recent declines we’ve seen in US wine consumption are structural. What do you think about that?
RH: From an industry perspective, we see there are structural trends occurring that we intend to address but we don’t see sustained structural declines. Let’s be honest about the wine category. It’s been around for over 2,000 years and it’s gone through tough periods in the past. I mean, it survived Prohibition, for a very dramatic example. Our view is that there has clearly been a slowdown. It’s been driven by the lower end, the under $15 category from a pricing standpoint but the high end, $15 and above, has sustained growth.
The trends that we are leaning heavily into are more conscious consumption, consuming higher-value wines, better quality wines, a bit less quantity. At the same time to track that younger, multicultural consumer into the category, meeting them on their field means putting out better-quality, lower-alcohol, lower-calorie lines.
The other opportunity we see is engaging younger consumers on their terms. The wine category has been, I would say, traditional in its approach to consumer engagement. It’s not just about media channels. It’s not about mid to bottom of funnel, social, digital media. It’s about what’s the narrative of the category and the brands within it. We have amazing brands with incredible stories. Decoy, for example, is like an everyday luxury but how do you communicate that to consumers that engage them on their terms? We’re excited. We’re not intimidated by it. We don’t see a permanent structural decline, especially at the higher end of the category.
AW: From an investor perspective, this was the number one issue in diligence, trying to understand ‘Hey, is there something going on more broadly in wine and are people drinking less?’ When you dig in, it’s a lot more nuanced than that. I think this idea that people are drinking less litres but higher quality litres really positions portfolios like Duckhorn extremely well because they’re going to continue taking share from the sector at large. We feel like there’s a lot of low-hanging fruit here on things that haven’t been done yet that we’re excited to go work on.
DB: All of these trends are logical to raise but your competitors would have identified some of those, if not all of them, as well.
AW: From the investor angle here, Duckhorn has this advantage of being the cleanest portfolio where it’s already really only in the segments that matter. I think about a number of our competitors, they’re in more areas and I think have to be careful because you might even cannibalise things to a degree. That’s the one advantage that I think we definitely have.
RH: Everything starts and stops with the amazing sensory [attributes] of the wines. This team is very committed to the craft of exceptional winemaking at the premium level, all the way up to the prestige level. I’ve mentioned already that there’s distribution and innovation opportunities. Leaning into innovation, not only in product and varietal extensions, but consumer trends, like the better and more conscious consumption trend that we’ve mentioned, is a part of it. But the reality is innovation in distribution channel, innovation in consumer engagement, meeting the consumer on their field, is really important. I think we believe we could create the most admired premium-to-luxury still-wine portfolio in the world.
We believe we could create the most admired premium-to-luxury still-wine portfolio in the world
Robert Hanson, The Duckhorn Portfolio
Frankly, our phone has been ringing quite a lot with other really admired, premium-to-luxury wineries that are intrigued by the operating model that Adam mentioned. It’s asset-light. The team sources 90% of their grapes through grower partners and that delivers a really nice return on invested capital, which is unusual for the wine category because it’s so capital-intensive.
It also provides a lot of agility. We’ve got great relationships with our customers. We go direct to the trade in California. It gives us a front-row seat to what consumer trends are out there and enables us to test ideas from an innovation standpoint quickly. Our grower partners are super agile in helping us shift our mix of business to address the consumer trends and, most importantly, we have beautiful brands with really rich narratives.
DB: What further plans does The Duckhorn Portfolio have for low-and-no?
RH: In low-alcohol, low-calorie wines, we just introduced on our Decoy brand, the Featherweight collection, with the Decoy Sauvignon Blanc. We are about to launch to market the Decoy featherweight Chardonnay. The team is being extremely demanding and getting the sensory right takes a lot more technically to put out a lower-alc red. We don’t have that yet because it needs to be developed and pass the sensory tests. It’s our intention to be the disruptor in the lower-alc category.
As it relates to no-alcohol, the reality is there’s a lot of technical work that needs to be done. We have yet to taste a great-quality, still, no-alcohol wine. There are obviously a lot of recent entries, even in luxury. I respect that LVMH made a minority investment in Taittinger’s zero-alcohol sparkling. Sparkling is an area that we in no-alc are watching carefully but we are going to take a step back and just look at the broader [category]. The beer category has done a good job of meeting the consumer on their field, on their terms, and having the right product for each occasion. That’s what our intention is in the wine category but we would never compromise liquid across lips. You’ve got to win the game making sure everything tastes exceptional and it meets the consumer requirements out there.
DB: How do you view the prospects for DTC wine in the US? The channel has slowed, obviously, from that pandemic high.
RH: If you take a step back and look at the category, it’s been underdeveloped in its focus on direct-to-consumer. If you look at most consumer categories, once you get to about 15% of total distribution, then you see capital shift to really accelerate the growth of the DTC marketplace.
Lots of reasons in the US, in particular I think the governance of the three-tier system, have prevented that level of aggressive focus on the category. During the pandemic, consumers realised that they could get high-quality wines on their terms on an omnichannel basis, so [there was] ten years of progress in about a year. People did load their pantries and load their fridges and there’s been a rebalancing of the demand and supply.
As we’re coming out of that demand and supply rebalancing, what we’re seeing is the business settle into a nice growth rate that is still driven by the trend toward better quality. We’re seeing average order value go up, even if average order transactions or even conversion might be in slight decline. The increases are driven by average order value, which leans back into the premiumisation trends. People are fortunately reaching for our wines competitively and so we want to double down on that business. It will take some time. We think traffic is going to recover as well. It won’t just be value driving the growth of this segment.
DB: International markets account for 6% of sales. Have you got a target in mind? What kinds of markets might you be looking to target?
RH: I don’t want to put a number out there. We didn’t include robust growth in international in our underwriting thesis but we spent a good deal of time talking about how to win in the global marketplace and with wines of this quality in this high-end premium and luxury segment.
You’re talking about key cities. The economic buying power is around 60 to 80 cities around the world and there is a bias towards West Coast lines from the United States, particularly California, particularly Napa and Sonoma, which is where the majority of our portfolio is based. We have that structural benefit on the portfolio.
Rather than just spreading our efforts like peanut butter globally, we want to identify a few cities in each region around the world where there’s a younger population, an emerging middle class, and an appetite for luxury wine that tastes amazing.
DB: On M&A, four brands represent 90% of sales. Are there smaller brands you might look to sell?
RH: It’s early days. What we love about this portfolio is it competes in the right segment of the market and it’s got core four brands driving really strong organic growth.
We’re looking at the role for each of the little ducks. There’s seven other brands and we haven’t made any determination. There are brands that are secret weapons in the portfolio. There’s a beautiful North Coast Pinot Noir and sparkling brand called GoldenEye. There’s an exceptional brand called Calera, which is a Central Coast California wine, a beautiful Pinot Noir brand as well.
Washington has been a difficult geography, appellation, AVA region recently but we have a high-growth brand that competes in similar price points to Sonoma-Cutrer and Decoy called Greenwing.
What I would tell you, though, is there are gaps in the portfolio. We won’t get super direct into the areas but Adam’s phone has been ringing, my phone has been ringing with amazing wineries that compete in those segments where we don’t. The idea, once we get the organic growth built and get after the growth that could come from the little ducks, is to be very thoughtful but very additive from an M&A standpoint.
DB: You’re not going to hint at the gaps.
RH: I’m not going to hint at the gaps in a moment.
DB: We shouldn’t expect acquisitions this calendar year, I guess, if you’re looking to focus on organic growth first?
RH: That’s our primary focus but there’s a secret weapon in the team and in Butterfly, which is being agile and taking advantage of opportunities. The market’s dislocated, so, certainly, if the right opportunities came along, we would be foolish not to – if it’s incremental and supports the investment thesis – look at those opportunities.
