Friday, May 15, 2015

Wine is a bad business, Cameron Hughes edition

Cameron Hughes
For the uninitiated, a winery is basically a license to hemorrhage money. Many smart companies like Coca-Cola have tried and failed.

Cameron Hughes is no fool, and he had a decade of success building a unique business model. But we learned last week that his company has been placed into receivership and he may be forced to sell.

The problem wasn't Hughes' initial innovative idea: buying wines out of tanks and barrels that famous wineries couldn't sell for nickels on the dollar, then selling them at Costco under his own name with lot numbers; i.e., Cameron Hughes Lot 218 Rutherford Cabernet Sauvignon 2008. That line of business is still profitable.

The problem also wasn't Hughes' innovative direct sale business, where right now you can buy 2012 Russian River Pinot Noir, Napa Valley Meritage or many other choices for under $20. As Hughes expanded his market, he moved into buying excess quality grapes in big vintages like the last three and having the wines made in custom crush facilities. These opportunistic buys are also profitable, according to court filings.

Where Hughes fell down was in two things: 1) entering the mainstream battle for ordinary cheap supermarket wine and 2) getting financing to do it from a bank that apparently wasn't really acquainted with wine industry.

It's just the latest sign that wine is a bad business, if your grandparents didn't own vineyards, and if you hope to make a profit on the kind of schedule that pleases a bank or traditional stock investors.

Hughes is not insolvent, and he may be able to right the ship. But the bank he owes $15.3 million isn't helping. His representatives told the San Francisco Superior Court the bank forced him to sell bulk wine at a loss, rather than bottle it and sell it on his website. His side also said he and the bank agree he needs to get out of the mainstream "broad market" business, but disagree on how to do it.

I'm rooting for Hughes. But let this tale be a reminder to people who want to make a small fortune in the wine industry, because we all know the prerequisite for that.

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Robert said...

It sounds like he bit off more than he could chew? Hopefully they get judge that understands that selling wine at a loss won't pay off a debt. Not a business guy but not sure why a bank would call in the note, sell the assets at a loss, and hope to make a profit. Unless they want the business/brand for themselves and sell it for more than it is worth.

W. Blake Gray said...

Robert: I don't see how the Cameron Hughes brand has any value without Hughes himself. But that may be where it's heading.

Anonymous said...

Also file under "don't do business with dumb bankers who don't know your industry." I'm pulling for Cam as well, love his wines.

Tom Merle said...

Given his track record and standing in the wine community, he should be able to replace much of his debt with equity investors if worse comes to worse.

Unknown said...

Robert, the bank isn't trying to make a profit for the business. The bank is only trying to recoup their loan. They have no interest in the long term viability of the business and will leave a burned out smoking husk in their wake if that's what they feel is the most efficient means to their recovery.

He might have 25M worth of inventory under normal sales models, but if the bank thinks they can dump it at a loss for 15 and the bank gets their loan paid back then that is what they will push for.

Think more Mr. Potter and less Jimmy Stewart.

Unknown said...

Debt is never good, but at least he's not totally floundering at the moment. I would caution against investing in anything that isn't a sure thing though, and even more so if your finances never looked good to begin with!