UC Davis Agricultural and Resource Economics

2009-10 Liquid Sugars Lecturer Scott Scheid, President and CEO of Scheid Vineyards

Philip Martin and Rachael Goodhue

Scott Scheid, President and CEO of Scheid Vineyards gave a talk on the wine grape industry December 1, 2009 at UC-Davis with the support of the Liquid Sugars Endowment.

Scheid Vineyards is a premium grape grower and wine maker that withdrew from NASDAQ trading because of the compliance costs associated with Sarbanes-Oxley accounting (wine trail). Scheid is an outgrowth of several profitable limited partnership tax shelters created by Al Scheid and E.F. Hutton in 1972 to take advantage of the ability to write off expenses immediately against income at a time of high marginal tax rates. At the time, Bank of America predicted that US wine consumption would soon reach European levels. BA was wrong—Europeans drank an average over 20 gallons of wine a year in the 1970s and Americans one gallon. Since then, US consumption has risen to about three gallons per adult per year.

Scheid bought out its limited partners between the mid-1980s and mid-1990s, and went public in July 1997, offering Class A (one-vote) stock to the public at $12 a share, and retaining 92 percent of the Class B stock (five-votes per share) within the Scheid family, which owns 60 percent of the stock and 90 percent of the voting shares; the IPO raised $26 million. The stock traded above $50 a share in 1997-98, fell to less than $10 a share in 2003, and traded at $15 a share in December 2009.

Scheid farms about 5,700 acres (4,400 owned) of wine grapes in Monterey County. Its business goal originally was to "solve the grape supply problem for wineries" by selling grapes under short- and long-term contracts to wineries. The major buyer was Diageo's Guinness UDV subsidiary (Beaulieu, Glen Ellen and Blossom Hill), which bought 50 to 55 percent of Scheid grapes and provided 75 percent of Scheid's $26 million in annual revenue in 2003, when Scheid's net income was $3 million (with 20,700 tons harvested in 2003, Scheid received an average price per ton of $1,250). Diageo reduced its purchases Scheid grapes after 2006, when Scheid reported harvesting 23,000 tons of grapes, down from 32,000 tons in 2005.

Scheid uses high-density plantings and drip irrigation to develop new vineyards at a cost of $15,000 to $18,000 an acre. The first grapes are harvested after three years, and Scheid obtains higher than average yields; buyers of grapes from the 300 blocks of vineyard can check them via data downloads and video cameras in the vineyards. Scheid has farming and management costs of about $2,100 per acre per year, plus $400 per acre depreciation, and aims for yields of 7 to 8 tons an acre. At $1,100 per ton, gross revenues are $7,700 to $8,800 per acre. Scheid also farms—for a fee—vineyards it does not own or lease.

Scheid originally aimed to be a long-term and low-cost supplier of premium grapes for wineries, especially Diageo. However, some of its winery customers asked Scheid to make wine for them to eliminate hauling up to 25 percent grapes and stems to wineries far from its southern Monterey county vineyards. Scheid opened a winery in October 2005 that can crush 30,000 tons of grapes a year (one ton makes about 150 gallons or 750-750 ml bottles of wine), or about one percent of California's annual crush. The winery, one of the newest and largest in California, is configured so that the various winemakers from the wineries for whom Scheid makes wine can have significant control over fermentation.

Scheid is now analogous to an OEM manufacturer of electronics—Apple engineers and designs its products and has them produced by an OEM who puts the Apple label on the finished product. However, with power shifting toward wineries with brand names, Scheid in 2005 began to produce and market its own wines—competition with its winery customers is limited because Scheid wines in 2009 account for only two percent of the wine it produced, and are sold via tasting rooms in Greenfield near Highway 101 and on Cannery Row in Monterey and via a wine club.

Having large vineyards and a large winery means a substantial investment, which limits the entry of new competitors on Scheid's scale but also means heavy debt. The challenge for Scheid will be whether to remain primarily an OEM wine producer, and thus at the mercy of wineries that get bids for wine that meets certain specifications from around the world or begin to compete directly with other wineries using Scheid-labeled wine. Scheid would like to avoid using a distributor to sell wines, since distributors take such a large slice of revenue—wineries typically receive half of the retail price of a bottle of wine, distributors a third, and retailers 17 percent.

There is a global glut of wine in 2009 that is especially noticeable in Australia, where there may be 100 million cases of wine looking for buyers—perhaps 20 percent of Australian vineyards may be removed because of low prices and drought. The UK raised its excise tax on wine, prompting Australians to divert, by some reports, over 10 million gallons or over four million cases of wine to the US at prices of under $0.50 a bottle. Much of this wine was Chardonnay; over half of Scheid's vineyards are Chardonnay.

The major macro hopes for Scheid include recovery from recession and the resumption of sales at Olive Garden and other family restaurants, rising consumption among those now 20-30 years old, and rising exports and declining imports. The micro factors include maintaining winery customers, growth in the wine club as more consumers "discover" Scheid wines at its Cannery Row tasting rooms, and the evolution of Salinas's River road into a wine trail.

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