Golden State Vintners, Inc. Business Information, Profile, and History

Company Perspectives:

Golden State Vintners is one of the largest suppliers of premium bulk wines, wine processing and storage services, wine grapes and case goods in the United States. Management believes that the Company is a contract supplier of choice for many of the leading branded wineries in California because of its reputation for quality and service, extensive vineyard holdings, strategically located facilities and ability to tailor a full range of products and services to meet the particular needs of its customers.

History of Golden State Vintners, Inc.

Located in northern California, Golden State Vintners, Inc. is one of the most successful makers of premium bulk wine products in the United States. The company, which began as a small vineyard in Cutler, California, in the mid-1930s, is involved in every aspect of the wine production industry, from the storage and fermentation process of various types of grapes to the marketing of its own private labels. Golden State receives the majority of its revenue from supplying well known labels with premium bulk wine, but the company is also the second largest producer of brandy in the United States, with brandy and grape sales comprising about 30 percent of Golden State's annual sales. The company, which has only been prominent nationally since the mid-1990s, includes among its customers such wineries as Gallo, Sutter Home, Sebastiani, and Heublein, and holds almost 10,000 acres of vineyard properties throughout central and northern California.

Golden State's Beginnings: A Small Winery in the 1930s

Golden State was founded by a businessman and eoniphile named Arpaxat 'Sox' Setrakian in 1934. At that time, the wine industry was in its infancy in California, and consisted primarily of small, family-owned vineyards which produced a limited amount and type of grape. Having little chance of competing against the centuries old reputation and tradition of French and Italian wines, the inchoate California wine industry offered to American consumers what imported products could not: a good value.

The northern California climate proved to be particularly suitable for reliable harvesting of certain types of grape, especially the sort used in red wines, and within a couple of decades the industry took off, soon earning a reputation for its production of low-priced 'jug' wines. Setrakian's Cutler vineyard, located in Tulare County in northern California, followed the trend of most regional wineries: it was small, consisting of only 120 acres, and until the 1980s remained a family-owned business which catered primarily to local consumers.

During the 1960s and 1970s, box, or jug, wines became increasingly popular, and the California wine industry firmly established itself as a leader among lower priced labels. Along with increased popularity among consumers, however, came increased competition, and companies like Gallo and Sutter Home began to gain ascendancy over small, regional vineyards. Though many of the smaller labels were bought out, Setrakian's company remained independent.

The late 1970s, however, brought a change to the industry which threatened both Golden State and the industry as a whole. As premium imported wine sales began to rise in the United States, domestic bulk wine revenue floundered, forcing California vineyards to revamp both their image and sales strategies.

1981-94: A Company Transformed

In 1981 Setrakian's grandson Jeffrey O'Neil joined Golden State, bringing to the ailing company some much needed energy and drive. After encouraging outside investors to fund the company's restructuring, O'Neil and his partners embarked on an aggressive campaign to transform Golden State from a small vineyard to a supplier of bulk wines of premium quality. Such a transition required not only a change in management, but increased vineyard acreage and fermentation facilities as well, and with the help of its investors Golden State began expanding its harvestable land.

As wine consumption and expertise became more and more fashionable in the 1980s, consumer taste changed drastically, becoming both more sophisticated in wine selection and more demanding over price. This shift in consumer preference offered Golden State an opportunity to mass-produce premium grapes at prices which, because of the quantity harvested, could be offered to customers on a wholesale level. In 1985 the company received its first real break on the wholesale end, when Gallo Wines contracted Golden State to provide several tons of bulk premium grape. The contract extended over a period of several years, and soon Golden State began earning a reputation within the wine industry for reliable wholesale production of high quality grape at a reasonable cost.

During this time Golden State began to look for ways in which to expand its role within the changing California wine market. Besides focusing on its wholesale sales, the company also began offering to large vineyards such services as storage and shipping, and in so doing performed necessary functions for companies which were increasingly undergoing rapid growth and consolidation. By evolving into a company more involved in the service and supply end of the wine market, Golden State was able to fill a unique role in the industry, and became partners with large companies which otherwise would have been competitors.

By 1987 large California vineyards had made a decided shift away from the type of inexpensive jug wines on which the industry had originally established itself. Because the companies did not have to pay import costs, California wineries were able to market wines of a quality equal to some higher priced European labels for substantially lower prices. The market's new, more sophisticated image payed off, and by the early 1990s the industry as a whole was generating sales into the billions of dollars.

The Expansion of Golden State: Mid-1990s to 1999

In the early 1990s Golden State began an ambitious campaign of expansion which would allow for the company's involvement in every segment of the winemaking industry. In just over three years, the company acquired five vineyards and winemaking facilities, bringing its production capacity to 9,600 acres of workable land.

Golden State's first major acquisition occurred in May 1994, when the company purchased Napa Valley Winery, a company which produced its own private label wine and operated a small bottling facility. A year later, in May 1995, Golden State acquired Lost Hills Vineyard, a winery which produced a variety of mainly premium quality grapes. That same month, the company bought what was to become one of its most important assets, the Reedley Facility. The Reedley Facility, located in central California, was Golden State's first entrance into brandy production, a small and for the most part untapped niche in the domestic wine industry.

In December 1996 Golden State continued its acquisition strategy, purchasing the Monterey Winery, a facility intended primarily for the processing and fermentation of grapes. Six months later, the company bought the Napa Warehouse, a large facility which allowed the company to greatly increase its barrel storage capacity. After this brief but intense period of expansion, Golden State was in a position to become one of the top wine suppliers and producers in the country. The company had increased its vineyards to 9,600 acres; it was also now capable of many more times the amount of storage and winemaking processes than it had been at the beginning of the decade; and, most importantly, by growing so drastically in size the company could serve the largest wineries in the industry. From growing various types and qualities of grape to storage and shipping, Golden State was by the middle of the decade a distinct presence in the industry.

Though the company continued to receive the majority of its income by acting as a supplier of premium bulk wine, Golden State also continued to develop its own private labels, which it marketed nationwide to grocery stores and chain stores such as Trader Joe's. Golden State's own brands specialized primarily in the production of Chardonnay wines, and the company's trademarks included such labels as Edgewood Estate, Summerfield, Summerfield Reserve, Monthaven, Cutler Creek, and Golden State Vintners, among others. The company's private labels were, with the exception of Monthaven and Summerfield Reserve, generally categorized as lower-priced premium wines--wines which sell for less than $10 a bottle but are made with high-quality grapes--and helped the company gain recognition among the broader consumer market.

After Golden State's expansion in the mid-1990s the company began to attract some of the most powerful players in the industry. Gallo remained one of the company's most important customers, and by 1997 the company had added such wineries as Sutter Home, Canandaigua, Sebastiani, and Vincor to its list of clientele. To these companies Golden State primarily provided wholesale wines; the company also, however, developed winemaking supply service relationships with such companies as Robert Mondavi, Beringer, and the Wine Group. By offering such an expansive array of services in wholesale wine production and storage, Golden State was able to remain flexible to any given client's needs, as well as be involved during any or all of a winery's production process.

By the middle of the decade Golden State had successfully defined itself as a company which worked 'behind the scenes' of the domestic wine market: instead of focusing on its own brand and label recognition, the company operated support services for the biggest names in the business. When the company began its growth campaign at the end of the previous decade, its primary strategy was to become a bulk wine supplier. By 1997, over 50 percent of Golden State's revenue came from its role as a premium supplier; the rest of the company's sales were accounted for in brandy production, grape sales, storage and case goods production, and the sale of its own labels. Although the company's brandy sales made up only about 12 percent of the company's revenue, Golden State by decade's end was the nation's second largest domestic producer of brandy.

Within two decades the California wine industry had undergone drastic changes, growing at an unprecedented rate. In 1987, about $932 million worth of California premium wine was sold. Ten years later, in 1997, about $3.8 billion worth of premium wine was bought by consumers. That year, higher quality wines accounted for almost 80 percent of the California wine market, with sales increasing throughout the previous decade at approximately 15 percent annually. Needless to say, the growth of both premium wines and the industry itself was beneficial, if not necessary, for Golden State, which relied on both quantity and quality for its financial well-being.

As wine consumption became more popular in the 1990s, particularly among the 'baby-boomer' generation, competition became increasingly intense. It was not only domestic wineries which were competing in the low-end premium market: throughout the decade, South American wineries began to carve out a name for themselves through their high quality and low prices. With a climate conducive to efficient grape production and labor available at very little cost, South American vineyards proved to be tough competition to the California wine market, and forced companies like Golden State to keep their production costs down and their grape prices low.

By 1997 there were about 800 wineries in California. Out of that number, seven wineries made up for just over 75 percent of California's wine sales. With growing competition among domestic and international wineries the top California companies began to focus more than ever on advertising and high profile marketing campaigns. As such companies put more and more revenue into advertising, outsourcing became a lucrative and logical alternative to vineyard expansion. Golden State, along with only a small handful of other companies, was uniquely designed to answer such needs.

In 1998 Golden State, after being underwritten by J.P. Morgan and Goldman, Sachs, Hambrecht & Quist, went public on July 21. The company sold 2.15 million shares in its initial public offering (IPO), at a price of $17 each, which was slightly above what the company had originally predicted. Going public was a gamble for Golden State: there was no other bulk wine supplier being publicly traded, and the company's two main regional competitors, Delicato Family Vineyards and Bronco Wine Company, remained private.

At the end of the 1990s Golden State had not only penetrated the national wine market; the company had also begun exporting its products to European vineyards, and was by 1998 California's largest exporter of premium bulk wines. Golden State's own labels were gaining recognition as well, with three of the top selling 'best-value' Chardonnays (bottles under $10) belonging to Golden State's vineyards. Though the company's stock had dipped a bit after its IPO, Golden State at decade's end had revenue of $112 million and was holding steady in growth and profitability.

Principal Competitors: Delicato Family Vineyards; Bronco Wine Company; The Wine Group.

Chronology

• Key Dates:

• 1934: Arpaxat 'Sox' Setrakian founds the original Golden State Vineyard in Tulare County, California.
• 1981: Jeffrey O'Neil, Setrakian's son, joins the company.
• 1985: Gallo becomes Golden State's first major customer for bulk premium wine.
• 1994: Golden State begins an aggressive acquisition campaign.
• 1998: Golden State goes public.