The Chalone Wine Group, Ltd.

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The Chalone Wine Group, Ltd.

621 Airpark Road
Napa, California 94558
U.S.A.
Telephone: (707) 254-4200
Fax: (707) 254-4201
Web site: http://www.chalonewinegroup.com

Public Company
Incorporated: 1969 as Chalone Inc.
Employees: 156
Sales: $51.45 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: CHLN
NAIC: 31213 Wineries (pt); 11132 Grape Vineyards

The Chalone Wine Group, Ltd. produces and markets premium-priced red and white wines under the labels Chalone, Acacia, Sagelands, Carmenet, Edna Valley, Canoe Ridge, and Echelon. Chalone’s wines, which include Pinot Blanc, Pinot Noir, Merlot, Chardonnay, Sauvignon Blanc, and Cabernet Sauvignon, are produced at six wineries, four in California and two in Washington. Instead of expanding by increasing production capacity at one facility, the company increases production volume by developing or acquiring additional wineries, each managed and operated as autonomous entities. All of the wineries share sales, marketing, financial, and administrative support provided by Chalone’s main corporate offices. The vintner’s prices range between $12 and $45 per bottle. Chalone also operates an import business, distributing premium wine from Mexico, Chile, and France. World-renowned French wine-maker Domaines Barons de Rothschild owns approximately 45 percent of the company.

Origins

Chalone was founded by Richard Graff, whose career was determined by a fateful discovery in 1964. At the time, Graff, a Harvard graduate with a degree in music, was reacquainting himself with civilian life, having finished a stint with the U.S. Navy. He took a trip to Windsor Vineyard in Sonoma County, where he tasted the 1960 vintage of a Chalone Vineyard Pinot Blanc. The wine made a strong impression on the 27-year-old Graff, who had previously taken a wine appreciation class and was just beginning to develop a lifelong passion for wine. Few others, experts and novices alike, could have shared in Graff’s high appraisal of the 1960 Chalone Vineyard Pinot Blanc. Graff had tasted the first vintage adorned with the Chalone Vineyard label, and, as he would later discover, perhaps the last wine bearing the Chalone Vineyard label.

Despite the infancy of the Chalone Vineyard label, the Chalone Vineyard itself was the oldest commercial vineyard in Monterey County. The vineyard, located in a remote location near the town of Soledad, took its name from Chalone Peak, so named by the native Ohlone tribe who once occupied part of the land. The first ten acres of grapevine had been planted in 1919 by a French vintner named Curtis Tamm, but the first wine bearing the Chalone Vineyard label was not produced until 1960.

After his introduction to Chalone wine, Graff visited the vineyard and, not long after, pointed his life in a new direction. The vineyard, comprising 160 acres of land and a weathered cabin, was insolvent, a financial condition that provided Graff with the opportunity he needed to begin his career as a vintner. In 1965, Graff, with the financial help of his mother, purchased the bankrupt Chalone Vineyard and produced his first vintage the following year. Graff’s grape harvests were pilfered by birds the next two seasons, making for a painful introduction to the caprices of winemaking, but the winery reached full production again in 1969, a vintage, like 1960’s, that had a profound influence on the history of the secluded and virtually anonymous Chalone Vineyard. Graff’s company incorporated as Chalone, Inc. the same year and also gained the corporate strategist who would promote the vineyard’s ascension toward recognition.

Philip Woodward, raised on a farm in Illinois, became the financial and marketing muscle underpinning Chalone’s success. After earning an M.B.A. degree from the Kellogg School of Business at Northwestern University, Woodward spent much of the 1960s working in Detroit for the international accounting firm Touche Ross & Co. While working for louche Ross, Woodward enrolled in a three-week wine appreciation course offered by the company. The effect of the course on Woodward was profound. “Out went the gin, out went the scotch,” he remarked in an October 12, 1987 interview with San Francisco Business Times, “and in came the wine. I even started a wine club.” His passion for wine taking a firm hold, Woodward left Detroit in 1970 for San Francisco, but the pursuit of the nearby wine country was not foremost in his mind. As a business consultant, Woodward preferred advising small companies; in Detroit, most of his clients were large industrial concerns. San Francisco, where Touche Ross maintained a thriving small business consulting practice, was the solution.

In San Francisco, Woodward set his sights on small businesses, which included winery and vineyard commercial concerns. He assisted Robert Mondavi in the buyout of Rainier Brewing’s interest in his winery, helped a small winery with its start-up, and provided advice to Inglenook. Woodward, finding himself in the epicenter of wine production in the United States, devoted his spare time to experimenting with new wines and to exploring the region’s wineries, a practice that further intertwined Woodward’s professional career and his personal interests. When wine-sellers learned of Woodward’s occupation—he had become a regular customer at many of the region’s smaller shops—they often asked for his professional help. Woodward’s billing price, however, was beyond the means of many of those who solicited his advice, prompting him to offer his services in exchange for wine. It was through such a barter arrangement that Woodward came into possession of a bottle of Graff’s 1969 Chalone Vineyard Pinot Blanc.

He soon arranged a meeting with Graff—not an easy task considering that Chalone Vineyard, sheltered by the Gavilan Mountains, had not yet received telephone service (nor would it until the late 1980s). Shortly after the meeting, Woodward resigned from Touche Ross and joined Chalone in 1972 as vice-president of finance, a post that would see the new arrival take over the financial and marketing responsibilities of running the winery. Significantly, Woodward brought with him much-needed capital by forming a partnership that included some of his Touche Ross clients. He also espoused a corporate vision that complemented Graff’s insistence on quality over volume. “The strategy I had from the beginning,” Woodward revealed in a January 1987 interview with Inc. magazine, “was to grow by staying small, to keep the production facilities separate and limited, and to build a different winery in each of the four premium wine-growing areas of California.”

1980s Expansion, Public Stock Offering

Graff and Woodward envisioned creating a number of autonomous wineries, managed and operated separately from each other and from the company’s flagship Chalone Vineyard. Rather than expand the capacity of the company’s existing facility, the company would grow by establishing or acquiring additional wineries, thereby keeping quality—and prices—high, ideally, according to Graff, limiting production to 50,000 cases per year at any given facility. Such was the reasoning behind the company’s joint venture with Paragon Vineyard Company in 1980. Wishing to expand, Graff and Woodward chose to create a new winery rather than greatly expand Chalone Vineyard. Under the terms of the arrangement, Paragon Vineyard, located near San Luis Obispo, California, grew the grapes and Chalone produced the wine at a separate facility christened Edna Valley Vineyard.

Edna Valley became the second wine-producing property for Chalone. Its debut was quickly followed by the addition of another winery. The company was more ambitious with its second attempt at expansion, forgoing a partnership arrangement and creating its third winery on its own. After buying a vineyard near Sonoma, California, the company founded Carmenet Vineyard in 1981, burrowing a series of tunnels into the Mayacamas Mountains to build a winery modeled on the concept of a Bordeaux estate. The cost of developing the winery ran high, however, more than doubling projected costs to reach $3.1 million. Chalone’s interest expenses doubled because of the cost overruns, saddling the company with debt. To pay off the debt, Woodward and Graff made an unprecedented move, completing an initial public offering (IPO) of stock in May 1984. Chalone, with only $1.7 million in annual sales, raised $5 million from the IPO and became the first publicly traded premium wine producer in the United States.

The IPO relieved Chalone of some of its debt, but expansion plans soon lifted the total again. In 1986, the company added a fourth winery to its portfolio, paying $8.5 million for Napa Valley, California-based Acacia Winery, a producer of Chardonnay and Pinot Noir that had been founded in 1978. Although long-term debt remained substantial, it was the price the company paid for operating its wineries separately and projecting itself as a premium wine producer. The prestige associated with the company’s labels helped sales, but, according to Woodward’s estimate, operating costs were 25 percent higher than they would have been if the company produced the same amount of wine at one winery.

Company Perspectives

Chalone Wine Group has built its philosophy around the concept o/terroir, a French term used to define the myriad of indescribable geographic and climatic conditions that make each growing region and vineyard site unique. By developing or acquiring vineyards in distinctly different locales, Chalone Wine Group assures that each wine estate produces wines that reflect its unique location. As the company grows, it will continue to focus on quality and terroir. By directing all aspects of winemaking and winegrowing to ensure the highest quality, Chalone Wine Group limits each winery to a production level that is in keeping with our standard of quality as well as our dedication to the vineyards within its appellation. The company as a whole continues to grow by adding first-class wine estates in distinctive grape growing regions.

By the end of 1986, thanks in large part to the previous six years of expansion, the company’s annual sales approached $7.4 million, having doubled every year since the addition of Edna Valley Vineyard in 1980. Chalone produced approximately 125,000 cases of wine each year from its four wineries, each with a chief winemaker responsible for monitoring production and hiring and firing employees. Roughly 60 percent of the company’s Chardonnay, Pinot Blanc, Pinot Noir, and Cabernet Sauvignon wines were sold in restaurants, 25 percent in retail stores, and 15 percent by mail order. Prices ranged between $10 and $20 per bottle, with distribution handled by a network of independent agents who sold the company’s wines in 40 states and six foreign countries.

Following the addition of the Acacia Winery, Chalone prepared for what promised to be a highly competitive decade ahead. Before entering the 1990s, the company forged a bond with the famous Rothschild family, headed by Baron Eric de Rothschild. In 1989, Chalone and Domaines de Barons de Rothschild (DBR), one of the most prestigious winemakers in the world, agreed to exchange purchases of approximately six percent of the stock of each company. The investment by the Rothschild family, which totaled more than $5 million over the ensuing two years, marked the beginning of a distribution and production partnership between Chalone and DBR that would grow stronger in the coming years.

Growth in the 1990s

The 1990s began as the 1980s did, with Chalone adding a winery through a joint venture agreement. For the first time, the company extended its operating territory beyond California’s borders, choosing to expand in Washington where land prices were substantially less expensive than in California. In June 1990, the company announced a 50 percent purchase of Canoe Ridge Vineyard, located in eastern Washington, which paved the way for a proposed $2.5 million winery. At the time, property ranged between $5,000 and $6,000 per acre in eastern Washington, compared with as much as $30,000 per acre in Napa Valley.

After changing its name from Chalone Inc. to The Chalone Wine Group in 1991, the company moved its headquarters from San Francisco to Napa, completing the relocation in 1993. Two years later the company acquired 24 percent of Bordeaux-based Chateau Duhart-Milon, an investment facilitated by Chalone’s relationship with DBR. In the same year, in 1995, the company’s annual sales eclipsed $25 million, capping a period of strident growth during the first half of the decade. The latter half of the 1990s brought equally impressive growth, but the period was marred by two tragic events.

In 1996, Chalone fell victim to a wildfire. The blaze occurred at the company’s Carmenet Vineyard, where terraced vineyards rose more than 1,000 feet up the Mayacamas Mountains. On July 31, the grasses and mulch put in place to prevent soil erosion on the steep slopes caught fire. The winery’s wine-maker quickly hosed down the roof of the winery, saving it from the flames, but the blaze destroyed 75 percent of Carmenet Vineyard’s crop. The local utility company later admitted blame for the incident and agreed to pay a settlement fee, but the winery was not expected to reach full production until 2004. Replanting of the vineyards was completed in 1998, the same year the company suffered another loss. Richard Graff was killed in January when the single-engine Cessna he was flying crashed near Salinas, California. His death marked the loss of one of the leading American vintners and, for the small, tightly knit Chalone workforce, left a leadership void not easily replaced. Woodward, who had been serving as president of the company since 1974, was named chairman. Thomas Selfridge, recruited by Woodward from Kendall-Jackson Winery, was named president and chief executive officer.

During the last years of the 1990s, Chalone enjoyed decidedly more positive events, as the company set a tone toward expansion for the beginning of the 21st century. In 1998, the company established another California facility, Echelon Vine-yards, which began producing Chardonnay, Pinot Noir, Merlot, and its signature Syrah. In 1999, the company established a second wine-producing property in Washington through the acquisition of Staton Hills Winery. The winery was subsequently renamed, creating a new brand named Sagelands.

As Woodward guided Chalone into the 21st century, there were no indications of the company’s expansion slowing down. In April 2000, the company acquired Jade Mountain, a transaction that gave Chalone its first Rhone varietal brand. The company also acquired the 62-acre Hewitt Ranch in Rutherford, California, and the 160-acre Suscol Ranch in northeastern Napa, with plans to develop both properties into wine-producing facilities. Sales for the year edged past the $50 million mark, a total that was sure to grow as the stable of wineries operated by Chalone increased.

Principal Subsidiaries

Acacia Winery; Carmenet Vineyard; Chalone Vineyard; Echelon Vineyards; Canoe Ridge Vineyards; Staton Hills Winery.

Key Dates

1960:: First wine bearing the Chalone Vineyard label is released.
1965:: Richard Graff, impressed by the 1960 Chalone Vineyard vintage, buys the vineyard; four years later he incorporates the business as Chalone Inc.
1972:: Graff is joined by Philip Woodward, who takes charge of marketing and financial matters.
1980:: Chalone forms a partnership with Paragon Vineyard Co., creating Edna Valley Vineyard.
1981:: Company develops Carmenet Vineyard.
1984:: Chalone completes its initial public offering of stock, becoming the first company of its kind to go public.
1986:: Company acquires Acacia Winery.
1990:: Canoe Ridge Vineyard is established in Washington.
1996:: Carmenet Vineyard is ravaged by a wildfire.
1998:: Echelon Vineyard is formed.
1999:: Washington-based Staton Hills Winery is acquired and renamed Sagelands Vineyard.
2000:: Jade Mountain is acquired.