The recent high-profile deal has introduced a strong capitalistic note into an industry where grape growers are evaluated more for the quality of their crop than the returns they generate. Here’s the business model: Hill and his business partner, Richard Wollack, an exec at commercial-property broker CB Richard Ellis, plan to locate and buy promising unfarmed land in California, Oregon and Washington, plant grapes that will yield high-quality wines and then sell off the fully functioning vineyards after five years. Their venture, called Premier Pacific Vineyards, has promised CalPERS a 15 percent annual return on its investment, and wine-industry watchers think that, at the very least, the cost of land it buys will appreciate at that level.
It’s a model more suited to Silicon Valley venture capitalists than hard-core wine lovers. And with the wine industry currently in a funk, CalPERS’s timing doesn’t appear auspicious. Throughout the booming ’90s, wealthy epicureans snapped up expensive bottles faster than they could grab shares of dot-com start-ups. Booming demand for wine drove prices up, created acute shortages in varietals like Cabernet and pinot noir–and drew more farmers into grapes, particularly in California’s Central Valley. But the increased supply ran into the sagging economy, and now many restaurants are fully stocked with cases of expensive wines. Bill Greenough, a wine maker from Arroyo Grande Valley, says it’s harder than ever to sell his 2,500 cases of zinfandel each year, and he questions whether it’s the best time to plow $100 million into grapes. “Everything is heavily overplanted right now. I’m glad I’m not a state employee,” he says of the CalPERS deal.
But CalPERS made the investment expecting it will take a few years to mature. With baby boomers moving into their peak wine-consumption years, and the cult of wines moving into Asia and other regions of the world, Wollack argues that there will be an “inexorable demand” for the very best vintages that existing vineyards won’t be able to meet. A report by research firm Motto Kryla Fisher backs this up, estimating that more than 37,000 new vineyard acres are needed to meet projected worldwide demand for the best wines. “That is the equivalent of adding another Napa Valley. However, no one has identified that many additional acres,” the report says. At the same time, Wollack notes, big beverage companies like Foster’s and Seagram’s have been buying up wineries across the state, and will be increasingly desperate to buy the premium grapes for their wines. “We’re developing a scarce resource,” he says. The industry will be watching to see if Premier Pacific Vineyards can develop another resource that’s been scarce in the wine world–big profits.
