Willamette Valley Vineyards, Inc.

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Willamette Valley Vineyards, Inc.

8800 Enchanted Way, SE
Turner, Oregon 97392-9580
U.S.A.
Telephone: (503) 588-9463
Fax: (503) 588-8894
Web site: http://www.wvv.com

Public Company
Incorporated: 1988
Employees: 86
Sales: $13.7 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: WVVI
NAIC: 312130 Wineries

The wines of Oregon-based Willamette Valley Vineyards, Inc., come from grapes the company grows and from grapes purchased from other nearby vineyards. The company sells its wines principally under the Willamette Valley Vineyard label. The company's Estate and the Tualatin vineyards are both certified salmon safe and low-input viticulture and enology. Founder Jim Bernau owns a 20 percent share in the company; the rest is owned by about 4,500 shareholders.

1988–93: DEVELOPING A NEW MODEL OF VINEYARD OWNERSHIP

In 1983, Jim Bernau and his wife, Cathy, purchased land south of Salem, Oregon, and began to clear away the old pioneer plum orchard along with the scotch broom and blackberry vines that had overgrown it. At the time, Oregon offered lower prices for vineyard development than California or France as one of the few places in the world that can grow quality wine grapes. The Bernaus' dream was to build a world-class winery in Oregon's Willamette Valley. Bit by bit they purchased contiguous parcels of land from their neighbors until they owned 50 acres, enough for a vineyard and a winery site.

Jim Bernau, who worked as a lobbyist for the Oregon chapter of the National Federation of Independent Businesses (NFIB), bought his first tractor in 1981 and began farming part-time in 1982. However, his interest in wine dated back to his youthful days when his father, a lawyer, brought home wines manufactured by one of his clients and predicted the flourishing future for Oregon's wine industry. Bernau and his brother embarked on a series of experiments with fermented concentrated grape juice.

During the 1981 and 1983 legislative sessions, Bernau got a firsthand education about the Oregon wine industry while working at the NFIB. In his capacity as lobbyist, Bernau helped a small group of winery owners call for earmarking a tax on case sales to invest in viticultural research and industry promotion. With his help, the industry received money to research winery development and promotion.

Working with the winery owners helped Bernau draw up the plans for his own business. He decided he "wanted lots of owners" for his vineyard, according to a 2005 Portland Business Journal article. This position was part ideology: As a student at the University of Oregon in Eugene, where he had been student body president, he helped found a grocery cooperative and became convinced that people gained strength in numbers when it came to capitalist competition.

Yet his vision was also part necessity. As a college student, Bernau had worked his way through school. "Suffice it to say, I didn't have the $4 million I knew I needed to accomplish my goal," he said in a 2006 Oregonian article. "I knew there were a lot of Oregon wine enthusiasts who might join me. If I could organize thousands of those enthusiasts as owners, I could raise the capital I needed," he explained in the 2006 Oregonian.

In 1985, Bernau researched state restrictions on public ownership of businesses and discovered that existing law allowed start-up companies to have no more than 35 "unqualified investors." Bernau realized that his way out of this predicament was to become a public company and set about to underwrite his own stock offering. During the next three years, he joined forces with Donald Voorhies, wrote a prospectus, and circulated it. To find and recruit investors, he attended wine festivals, where he hung up a logo and architectural drawing; sent invitations to wine shops and wine tastings; talked to friends; and ran newspaper ads.

In late 1988, the sale of Willamette Valley Vineyard stock began. By June 1989, Bernau had fielded more than 2,000 phone calls, and 1,200 investors in Oregon and Washington purchased an average of $1,700 (or 1,000 shares) each to cover the winery's start-up costs. In fact, the stock offering was oversubscribed, and Bernau had to refund the money of about 200 potential investors. He and Voorhies retained control of more than 72 percent of the outstanding stock. "It's unbelievable. We made U.S. financial history doing this," Bernau explained of his do-it-yourself initial public offering in the 2005 Business Journal.

Significantly, at the time of the first offering, the company had not produced a single bottle of wine. Willamette Valley Vineyards consisted only of young grapevines growing on a patch of hillside. With proceeds from the offering, the company built a winery, with help from many of its initial shareholders, who showed up with shovels when the company broke ground. Willamette Valley Vineyard's first bottling in 1989 sold 10,000 cases, which placed it among the largest of Oregon's wineries.

The company distributed its product in a typically unconventional manner. Distribution staff consisted of many of the winery's investors, who enjoyed a 25 percent commission on every bottle they sold. Following one of Bernau's axioms: "Never talk about wine to anybody without an order form in your hand." Even the winery's proxy ballot in the annual report had an order form on its reverse side.

Demand for wine was on an upswing in the United States in the early 1990s, and domestic wineries responded by boosting production. This growth curve continued until 2000 when excess wine swamped the market and depressed the price of domestic wine. In 1990, Willamette Valley Vineyards held a second stock offering that raised $1.86 million for winery expansion and purchased another 80 acres for growing grapes. Bernau's ownership declined to 38.6 percent and Voorhies, to 9.7 percent, with the second sale of company shares.

1993–97: SELLING SHARES IN MICROBREWERY VENTURE

By 1993, Willamette Valley Vineyards had held four public offerings and had a capital base of more than $5.5 million. One of these common stock offerings in 1992 lasted 27 days and raised the $2.5 million Bernau needed to start Willamette Valley Brewing Co. (later called Nor'Wester), which was housed at Portland's upscale Harborside Inn. By this time, the vineyard was producing close to 100,000 gallons of wine per year, and the company signed a distribution deal to sell both its wine and beer in the state of Washington.

With the founding of Willamette Valley Brewing, Bernau left the day-to-day operations of the vineyard and winery to pursue dreams of building a string of microbreweries coast to coast. In 1994, he established Willamette Valley Inc./Microbreweries Across America and built his second and third microbreweries, the Orange County Brewing Co., at McCormick & Schmick's restaurant in Irvine, and the Seattle Brewing Co. in Seattle, Washington.

COMPANY PERSPECTIVES

Our approach is to grow, by hand, the highest quality fruit using careful canopy management, and to achieve wines that are truly expressive of the varietal and the place where they are grown.

This new venture was short-lived, however. In 1997, the company's beer business collapsed, victim of the competitive microbrewery business and a national beer distribution system dedicated primarily to large name brands. The company sold a 45 percent equity stake in Nor'Wester Brewing Company and WVI/ Microbreweries Across America to United Breweries of America, which formed United Craft Brewers and began trading shares on the NASDAQ.

After the sale of the microbreweries, Bernau returned to his original focus on wine production and daily involvement in Willamette Valley in 1997. In Bernau's absence, Willamette Valley Vineyards had grown to become the largest producer and seller of wine in Oregon. Matthew Dean Cox was general manager and winemaker of the vineyard, having joined the company in 1992, after working for Hanna, J. W. Morris, and Sierra wineries. Cox had more than 300 awards and 60 gold medals from national and international competitions and "was so gifted that our wines had received national acclaim and recognition from major wine critics," according to Bernau in a 1996 Portland Business Journal.

It was thus a shock and hardship for the company when Cox died suddenly in his sleep in 1995. At the time of his death, the company had 70 tons of grapes in the field, 900 tons already crushed, and was in the middle of constructing a 7,800-square-foot hospitality wing. Kevin Chambers of Nor'Wester took over as general manager, and Joe Dobbes, Jr., of Hinman Vineyards in Eugene, agreed to serve as emergency winemaking consultant. Dobbes eventually took over as the winery's winemaker.

Dobbes had grown up in Molalla, Oregon, on his family's marionberry and blueberry farm. After earning a degree in biology in the early 1980s, he accepted an offer to study winemaking as an apprentice at Weingut Erbhof Tesch, a winery in Germany's Nahe wine region south of the Rhine. From there, he traveled to other German wine regions, sampling wines and learning his trade. A few years later, he worked in France with Christophe Roumier, a leading vintner in the Burgundy region.

Dobbes returned to Oregon in 1989 and assumed full winemaking duties at Eola Hills Wine Cellars before taking over at Hinman Vineyards in Eugene in 1992. When he arrived at Willamette Valley, he told the Oregonian in a 2001 article, "I came with the understanding that we would grow the brand to the next level."

Dobbes, by his own account, was not disappointed. In 1996, the company, which by then produced 30 varieties of wine under three separate labels, began constructing a new bottling, storage, and shipping plant, along with a 3,000-seat amphitheater for its once-a-month marketing events. It also began purchasing grapes from Quail Run Vineyards in Ashland, for which it used to produce wines under the Griffin Creek label.

1997–2006: GROWTH THROUGH LAND ACQUISITION AND HIGHER-QUALITY WINES

In 1997, the company made the decision to focus more on higher-quality, higher-margin wines and initiated a ten-year lease with O'Connor Vineyards for use of 48 acres. It also purchased Tualatin Estate Vineyards of Forest Grove, Oregon, adding 83 acres of wine grapes and 60 more plantable acres. Established in 1973, Tualatin was one of Oregon's early pioneers in winemaking and had earned international acclaim for its Pinot noir, Chardonnay, and other wines.

By the late 1990s, Oregon's growing wine industry was composed of 122 wineries and nearly 8,000 acres of wine grapes. Oregon's wines, particularly its Pinot noir, were sought and purchased worldwide. Willamette Valley, which produced 90,000 cases per year, had revenues of $4.3 million in 1996, up from $3.6 million in 1995. In 1997, its revenues increased substantially again to arrive at $5.7 million. The company's wines sold in close to 30 states, and its out-of-state sales were increasing steadily.

KEY DATES

1983:: Jim Bernau purchases land south of Salem, Oregon.
1988:: Bernau and Voorhies sell shares of Willamette Valley Vineyard stock.
1989:: Willamette Valley Vineyard builds its winery; the first bottling takes place.
1992:: Bernau starts the Willamette Valley Brewing Co.; Matthew Dean Cox joins the company as general manager and winemaker.
1994:: Bernau establishes Willamette Valley Inc./Microbreweries Across America; builds the Orange County Brewing Co. and the Seattle Brewing Co. in Seattle, Washington.
1995:: Cox dies.
1997:: Company's beer business collapses; Willamette purchases the Tualatin Estate Vineyards.
1998:: Company begins trading on the NASDAQ.
2003:: Company converts its distribution system to Bacchus Fine Wines.

As Willamette Valley grew, its wine sales, 144,000 gallons a year, began to outgrow what its own plantings could support. To rectify this situation, it signed contracts in late 1996 and 1997 to buy more grapes—more, as it turned out, than it could handle in one season. Thus it sold some of its excess grapes to other winemakers and made the rest into wine which it sold in bulk.

Upon Bernau's return to day-to-day management of the vineyard, the company began to trade on the NASDAQ in 1998, in part at least, to provide liquidity for its shareholders. In 1999, it cleared and planted an additional 80 acres of Willamette Valley property, which it planted in French Dijon wines. However, the company was, according to Bernau in a 2005 Portland Business Journal article, "knee deep in debt" after purchasing Tualatin Estate. When its banks became worried about Willamette Valley Vineyards' debt, the company sold and subleased some of its undeveloped property in Tualatin and used the money in part to finance new plantings.

After 1998 and 1999, two of Oregon's and Willamette Valley's best vintages, the company saw a significant increase in revenues from sales directly to restaurants and retail accounts in Oregon. In 2000, it saw a rise in out-of-state sales as well. An oversupply of grapes led it again to process and sell Chardonnay and Pinot gris grapes as bulk wine. Lower than expected wine sales to retail trade in 2001 led to excess inventories in 2002; however, despite the decrease in sales that year to $5.9 million from $7 million in 2001, profits were up.

Beginning in 2003, Willamette Valley converted its longstanding shareholder-distribution system into a new sales organization called Bacchus Fine Wines. The company hired an experienced wine sales manager and increased the brands represented by its sales force. Two changes prompted this decision. First, the company had grown to a point where it required a specialized sales force. Second, an article appeared in a Salem newspaper describing how 150 of the company's "owners" accounted for about 10 percent of its labor in volunteer hours. The Oregon Bureau of Labor and Industries contacted Willamette Valley to tell it that, as a for-profit business, it was prohibited from using volunteer labor.

The loss of volunteers did not hamper Willamette Valley's growth. Revenues in 2003 reached $7.3 million. By 2004, that number was $9.4 million and by 2005, the company generated more than $13.7 million on 100,000 cases of wine. There was increased interest in Pinot noir nationwide beginning in 2005 after a quirky movie called Sideways debuted that year. For Willamette Valley Vineyard, which controlled about 210 acres of principally Pinot noir vines and managed another 60 acres of vines in the Eola Hills, this translated into a 70 percent increase in retailer and restaurant orders for Pinot noir during the first half of year. Sales to out-of-state distributors also increased. Not to be limited to one type of grape, however, the company signed a new long-term purchase agreement with one of its Willamette Valley grape growers to plant 40 acres of Pinot gris and 50 acres of Riesling, which it would buy at fixed prices through 2015.

Wine sales were strong again nationally in 2006 and industry analysts projected plenty of room for long-term growth given demographic and consumption trends in the United States. With baby boomers shifting away from beer and young adults who had grown up on bottled water rather than soda, wineries looked forward to selling their wines to people more willing to sample the tastes of different wines.

By 2006, Oregon wineries and vineyards were responsible for $1.4 billion in revenues statewide. In less than 35 years, the industry has gone from being a dream and a hobby to one of Oregon's more significant agriculturally-based businesses. For Willamette Valley Vineyards, still a rarity among Oregon's 251 commercial vineyards as a publicly owned company, sales to out-of-state distributors were up more than 150 percent. According to Bernau in a 2006 Oregonian article, the company's business plan was "aggressive, but conservatively done." It had paid off all of its short-term debt and was accumulating cash to fund its growth plan internally even as a trend toward consolidation emerged within its industry.

Carrie Rothburd

PRINCIPAL COMPETITORS

Constellation Brands, Inc.; E. & J. Gallo Winery; Kendall-Jackson Wine Estates, Ltd.; Newton Vineyard; The Chalone Wine Group, Ltd.; Foster's Wine Estates Americas; Ravenswood Winery, Inc.; Sebastiani Vineyards, Inc.; The Terlato Wine Group; Trinchero Family Estates.