A while back, I posted
Passing the Family Business On: The Sad Example of the Mondavi
Family, in which I used the famed Mondavi Winery as a business case
to illustrate the difficulties of inter-generational transfers of a
large publicly-held but family-controlled firm. As we discussed
therein, Mondavi's current business model appeared unsustainable over
the long-haul.
We may be approaching a denouement. Mondavi's most recent 10-K annual report announced a major
restructuring of the brand structure:
The Company has historically operated in one business segment. On August 20, 2004, the Company announced that it would create two separate operating units within the Company, one focused on the Company's "lifestyle" brands, and the other on its "luxury" brands. The Company's "lifestyle" brands are brands which generally sell for up to $15 per bottle at retail (including Woodbridge and Robert Mondavi Private Selection), while the Company's "luxury" brands generally sell for over $15 per bottle at retail (including Robert Mondavi Winery, Arrowood, Byron and many of the Company's joint venture brands). The board and management are considering various strategic alternatives, some of which would involve layoffs and significant restructuring charges including write-downs which could materially impair future earnings.Apparently they've settled on selling off the luxury brands. James Laube reports:
Amid a flurry of activity at Robert Mondavi Corp. today, Michael Mondavi resigned from the publicly traded company, which then announced that it would explore divesting itself of its luxury brands, such as Robert Mondavi Winery, Opus One and Ornellaia.
That would leave Robert Mondavi Corp. to focus entirely on lower-priced, large-production brands such as Woodbridge, Robert Mondavi Private Selection and La Famiglia from California, as well as Kirralaa from Australia and new brands, for which the company sees greater growth potential and higher financial returns.
But the company's announcement late this evening left many questions unanswered, including whether the Mondavi family members might try to acquire their original Robert Mondavi Winery in Napa Valley. In its statement, the company declined to speculate if the luxury brands might be sold to family members -- who are the company's most powerful shareholders -- or in some instances sold back to the joint-venture partners. One source said a "strategic review" is underway, with all options being considered. Other sources indicated that some family members and partners were scrambling to come up with funds to make the acquisitions.A solution in which the volume brands are retained by the public corporation, while the prestige luxury brands return to private ownership makes eminent sense. My sense of the wine industry is that the really big bucks - the kind public corporations need to keep investors happy - are in the high volume/low price sector. In contrast, even though Mondavi's luxury brands command high prices (Opus One and Private Reserve going for well over $100 per bottle at retail), they are also enormously expensive to produce. They are made from low yielding vines planted on very expensive land and handcrafted in the wineries. Indeed, high quality and high profitability seem to be incompatible. Economists Morton and Podolny report :
Many industries are characterized by heterogeneous objectives on the part of firm owners. Owners of private firms, in particular, are likely to maximize utility, rather than profits. In this paper, we model and measure motivations of owners in on particular industry, the California wine industry. In both a formal model and an empirical analysis, we examine the implications of these motivations for market behavior. We find evidence that owners with strong non- financial motivations choose higher prices for their wines, controlling for quality; owners with strong profit-maximizing motives choose lower prices for their wines, controlling for quality. We also find that utility-maximizers are more likely to locate at the higher end of the quality spectrum, whereas profit-maximizers are more likely to locate at the lower end.Since many observers believe quality has slumped at Mondavi's luxury brands lately, returning them to private ownership thus may be the best hope for a resurgence of quality.
