With the acquisition, Ste Michelle is now the largest winery in both Washington and Oregon

Earlier this week Ste Michelle Wine Estates (SMWE) announced it had purchased Oregon’s A to Z Wine Works and Rex Hill Winery. The reasons why the winery did so are simple says CEO David Dearie.

“Like everyone else, we’re looking for growth and saying, ‘Where is the growth likely to come from?’”

For many in the wine business lately, the answer has been from Oregon.

Oregon wine has two clear things going for it in the market at present. The first is an abundance of high quality Pinot Noir, a variety that has been on a long run of success with consumers. The second is the higher cost associated with those wines. This puts the offerings in a sweet spot.

In Silicon Valley Bank’s 2022 report, they noted that last year premium wine sales reached growth highs not seen for over a decade (though they noted some concerns as well). Northern Oregon wineries at the same time reported the second highest revenue growth in the nation last year. (Washington was first.) As a result of these trends, the mergers and acquisitions market has been more active than ever, with Willamette Valley wineries often at the center of activity.

“Looking at the numbers, Oregon is a growth category,” says A to Z and Rex Hill CEO Amy Prosenjak. “So at all price points, when you have Oregon in your portfolio, it’s a profitable business for you, and it’s a growing category.”

Two of a kind

On paper, the pairing of SMWE and A to Z/Rex Hill makes immediate sense. Ste Michelle has a portfolio of premium wines with a consistent focus on quality. A to Z has made its mark by offering premium, high quality whites, reds, and sparkling wines. Ste Michelle also has a number of luxury brands in its portfolio, where Rex Hill fits in nicely.

Still, for the obvious compatibilities, the acquisition was equal parts fortuitous and opportunistic for both parties. On the Ste Michelle side, the company was looking for growth.

“Our focus for the future is on premiumization, like everyone else at the moment,” Dearie explains. “[When we looked at where to get growth from], we had a list of potential acquisitions that may or may not be available that fit into the profile, and A to Z/Rex Hill were right at the top of the list.”

A to Z/Rex Hill might have topped Ste Michelle’s wish list. However, they were not necessarily available.

“We were never interested in selling,” states Prosenjak. “We were interested in finding good partners.”

While Ste Michelle was looking for growth opportunities and A to Z/Rex Hill for a partner, the acquisition was ultimately kindled by one simple spark. Both companies have a relationship with lender Bank of the West.

“Our banker brought the two parties together and said, ‘You know, maybe something could happen here,’” Prosenjak recalls. “When we sat down and had the first conversation with David and the team, we could just see the synergies.”

Ste Michelle’s expansion in Oregon

Ste Michelle made its first foray into Oregon in 2006 when it purchased Erath, one of the state’s founding wineries. The company has since grown that brand from approximately 70,000 cases to 300,000 cases annually. While Dearie says Erath continues to have growth potential, A to Z – one of the largest wineries in the Oregon – gives the company much more. Additionally, the Erath and A to Z wines taste different.

“They’re both from Oregon, but they’re very different in the look and feel and their flavor profile,” Dearie says. “So we see them as complimentary even though they compete on the shelf.”

At an annual production of 7.3M cases across all its brands, SMWE has long been the largest winery in Washington, headlined by Chateau Ste Michelle14 Hands, and Columbia Crest. With the acquisition of A to Z and Rex Hill, SMWE now becomes the largest winery in Oregon as well according to the company. The combined production of Erath, A to Z, and Rex Hill will be 700,000 cases. Moreover, Dearie believes that wineries in both states are positioned to grow – and Ste Michelle along with that.

“We see tremendous growth opportunities from Washington, and we’re very well positioned to be able to take advantage of those growth opportunities at various price points,” he says. “We see the growth of Oregon. We think there’s a long-term potential. This acquisition gives us the opportunity to grow both.”

A year of change at Ste Michelle

The acquisition comes after a year of transition for SMWE. The company itself was purchased by Sycamore Partners, a New York based private equity firm, last year for $1.3B, with the deal completed in October.

At the time, some feared that Washington’s founding winery might be sold for parts and quick profit. However, Sycamore’s investment in Ste Michelle with the purchase of A to Z and Rex Hill would seem to indicate both companies are playing the long game.

“Obviously Sycamore is coming in as a private equity group. They will be looking to get growth,” Dearie says. “They’re prepared to invest behind the portfolio and the brands to achieve that.”

Sycamore’s belief in the potential of the winery is due to the long-term strategy that Ste Michelle presented when it was looking for a buyer.

“We put a very simple strategy in place, which is fix, build, buy,” Dearie says. “Fix some of the challenges we’ve had; build on the core brands that we’ve got; buy where we see opportunities. Our intent is to grow and grow at the premium end. [The purchase of A to Z and Rex Hill] is just an extension of that strategy.”

Prior to Sycamore purchasing the company, Ste Michelle had made a number of acquisitions over the years. Most recently, the company purchased Sonoma’s Patz & Hall in 2016.

However, this is the company’s first acquisition since the Sycamore purchase and since Dearie became CEO in October of 2020. It is also the first since the winery hit a rough patch, with a decrease in production of 1.2M cases per year between 2016 and 2020. In 2020, former owner Altria announced a $292 million inventory write-off and $100 million in losses on non-cancellable grape purchases.

Since the purchase by Sycamore, Ste Michelle has made a number of changes. Some of those have come on the corporate personnel side, such as recently appointing Andy Feuerstein as senior vice president of national accounts on/off sale. Others have come in distribution, such as announcing a strategic partnership with Southern Glazer’s Wine & Spirits. The company also made several changes to its winemaking team last year and this year.

“Sycamore bought the business less than a year ago. We’ve done quite a bit in that year,” says Dearie. “We managed to close down Woodinville [wine production], and then we’ve got a distribution contract with Southern. We’ve now bought A to Z. So it’s been a busy 12 months. Hopefully the intent is people see that we’re in this for the growth and for the good of the Pacific Northwest wine region in general.”

Plans for the Woodinville property

While Ste Michelle’s purchase by Sycamore initially caused trepidation in some corners, those concerns were heightened when Ste Michelle put its Woodinville property up for sale in whole or part earlier this year. However, Dearie says any potential changes to the property would be both pragmatic and in the best interest of growing the brand.

“We’re not in any need to move anywhere,” Dearie explains. “We’re just looking to see what have we got and what can it be worth, and the intent is for us to invest behind our brand building efforts.”

Ste Michelle made the decision to list all or part of the property for sale after moving its white wine production to eastern Washington starting this vintage. Red wine production has long taken place there.

“We have got to be good stewards of the land, and we’re focused on that,” Dearie says. “When we started to look at the amount of diesel that we were using to bring grapes backwards and forwards, it made much more sense to have those wines processed in eastern Washington where the grapes are grown.”

The exploration of whether it could sell part or all of its Woodinville property was a natural follow on to that decision.

“Like anything else, we’ll explore all of the options, but if we don’t like any of the options for the site here in Woodinville, we won’t take any of the options,” Dearie says. “You’ve got to look at where the best places to deploy capital are. We’ve got some assets, like part of the Woodinville site here, that is excess to our needs, and if we can redeploy the capital in there, we should.”

Dearie says he doesn’t expect moving production and potentially selling parts of the property that were used for that purpose to negatively impact consumer experience at the winery.

“The consumer is coming to the Woodinville site not to see the winemaking production facilities. They’re coming here for the consumer experience of tasting wine, sitting on the lawn, watching the concerts. What we want to do is give more wonderful experiences to consumers who come into the site.”

What’s next for the A to Z/Rex Hill team

While some recent winery acquisitions in Oregon have been influenced by the 2020 vintage where wildfire smoke drastically reduced production at many wineries, A to Z/Rex Hill’s Amy Prosenjak says that was not the case here.

“It was really about the future rather than anything that had happened in the past,” she says.

Prosenjak will join the Ste Michelle team as President of Oregon Brands. “When you take Erath and A to Z and Rex Hill, you have these three great brands that you can provide distinct flavor profiles, distinct wines, distinct price points, [and] distinct brand stories,” she says. “It gives you a lot of options out there to our great consumers.”

Founding partners Deb Hatcher, Cheryl Francis, and Sam Tannahill will join Ste. Michelle as consultants. Michael Davies will continue as executive winemaker. Bill Hatcher, another founding partner, is retiring as chairman of the board for A to Z. Otherwise, consumers should expect more of the same. All in a newly renovated tasting room

“A to Z’s premise has always been ‘Try Oregon for $20. Try it tonight. And if you like it, maybe you’ll buy the next great $50 bottle that you come across from Oregon,’” Prosenjak says. “That’s what it was from the beginning and still is today.”

The power of Oregon Pinot

The acquisition of A to Z/Rex Hill makes SMWE the largest producer in Oregon. This also sets the winery up well for what many expect to be the two biggest growth categories of the next decade – Oregon and Washington. It also clearly shows the power of Pinot Noir in general at present, and Oregon Pinot Noir in particular.

“Pinot is a hot varietal right now,” Dearie says. “And we’ve got two core brands with A to Z and Erath which are very different styles and then a more premium one with Rex Hill. So we think we’ve got to the best of all worlds where we can we can speak Oregon from multiple different styles in flavor, profile, and processes. I think that’s really quite exciting.”

As the company continues to grow these brands, it’s a message Ste Michelle can take not just around the country. With an international sales team, it’s a message that Ste Michelle can take around the world.

“I think Oregon is renowned for making fantastic quality, particularly Pinot Noir, Pinot Gris, Chardonnay, and sparkling [wines],” Dearie says. “And the consumer recognizes the quality that comes out of Oregon, and we see that as well.

“We’re hoping to be able to continue with that legacy and to make Oregon stronger, to take Oregon not only across the US but then ultimately into some selective international markets so folks can taste these great Oregon wines.”

Image of Chateau Ste Michelle by Richard Duval. Image of Amy Prosenjak, David Dearie, and schematic of A to Z Winery courtesy of Ste Michelle Wine Estates.