Why luxury conglomerates like LVMH are ramping up their investment in Napa

If you’ve ever perused the wine list at an American restaurant, you’ll find the cheaper wines often fall under the New York or California section (aka the section I naturally stick to).

Meanwhile, European wines tend to be priced higher, or so seems the general perception. So, when the likes of LVMH and Chanel started slowly ramping up their acquisitions of wineries in Napa, California, (the go-to place for a fairly drinkable $11 bottle of Chardonnay) starting about six to seven years ago, it came as a surprise.

Just last year, LVMH acquired acclaimed Napa winery Joseph Phelps Vineyards. But why is the French luxury conglomerate—that already owns 20+ wine and liquor brands—betting on Napa?

Next in line

Douglas McKenzie, partner in the leadership, change, and organization practice at Kearney, believes it could be part of succession planning for the founders or owners of wineries who might be ready to retire.

“There’s an opportunity for succession to happen with professional management to apply to a traditional industry,” he told Retail Brew. “There’s just tremendous opportunity to make these businesses more successful.”

For the luxury brands and conglomerates doing the investing, an additional benefit is that “the business climate in Napa is considerably better” than a lot of other parts of the world, Matt Crafton, the head winemaker who oversees production at Chateau Montelena, a historic luxury and independent winery in Napa, told Retail Brew.

“If I’m a conglomerate looking to invest in wine in Napa, and in America, in general, our markets are more fluid,” he explained. “Direct consumer shipping has increased profitability considerably in the last 20 years. So Napa is a good investment just from a business climate standpoint.”

McKenzie added that there are also several “cross-sell” opportunities that allow international luxury companies to introduce new customers who are not familiar with their brands to their broader portfolio of products.

While these target customers include young and curious wine aficionados, it also extends to those interested in collecting wines as assets.

For keepsakes

“It is about getting a particularly special segment and quite different from the weekend Napa traveler who comes up and hits seven wine clubs in a day, and maybe buys a bottle of wine,” Mckenzie said. “[Their target] is a small but very elite group of buyers that don’t just buy wine, they buy lots of other luxury goods as well.”

Crafton echoed that sentiment, explaining that while Chateau Montelena does get some consumers simply curious about wine, it also attracts a considerable number of collectors.

“For them, having Montelena is really kind of like an earned indulgence. It sets your bona fide status,” he said. Wineries also have the opportunity to turn their products into collectibles when they have a big name such as LVMH associated with it,  Garrett Sheridan, co-founder and CEO of corporate advisory firm Lotis Blue Consulting, told Retail Brew.

“Brands like LVMH are gonna get a halo effect, because they are so trusted, and the consumer is going to assume that they’re making good decisions about the wineries that they’re buying,” he said.

Still, while brand loyalty plays a big role, it is not enough to guarantee success. Crafton says the wine business is all about the “long game.”

That means keeping the personal touch of the wineries intact and retaining the existing staff who are able to conduct operations the way they always have. If they’re going to be successful, Crafton said they have to avoid “trying to pound a square peg through a round hole”Sheridan agreed, adding that the more successful investors will try to “maintain the culture of the vineyard.”

“As soon as the consumer, especially the higher-end consumer, gets a sense that ‘Oh, my gosh, my favorite winery has been completely corporatized and professionalized, and they don’t have that high touch anymore,’ those brands lose their relevance somewhat,” he said. “That’s going to be a careful type of tightrope for these companies to navigate.”—JS