End of an Era: Ste. Michelle's Parent Is Dumped by the Marlboro Man

Part 2

By Ronald Holden

Over time, Ste. Michelle grew to become the nation's third largest producer of fine wine, farming nearly 30,000 acres across Washington, Oregon, and California and selling wines under labels including Chateau Ste. Michelle, 14 Hands, Columbia Crest, Erath, Intrinsic, and Patz & Hall. Its corporate name evolved along the way, from Ste. Michelle to Stimson Lane Wine & Spirits to SMWE [Ste. Michelle Wine Estates].

To finance this astounding growth, it called on the resources of its longtime parent company, a family-owned marketer (the Bantle family) of "smokeless" tobacco (Copenhagen, Skoal) in Connecticut called U.S. Tobacco. Until, in 2008, UST itself was inhaled by the Marlboro Man. Marlboro and Philip Morris were owned by an outfit called Altria.

Was it a deal with the devil? The tobacco industry once spent billions to polish its image, then had to pay billions more to settle claims it lied about the dangers of smoking. (Or chewing, in UST's case.) In 2008, Altria acquired Bantle's company along with its odd duck, Ste. Michelle, and for the next decade, Altria left the winery alone. Deal with the devil? Ted Baseler, the marketing whiz who spent the better part of a decade as Ste. Michelle's CEO, doesn't see it that way. "We were able to build the Washington wine industry with UST's money," he told me shortly before he retired.

Ted Baseler at Chateau Ste. Michelle

But then things took a turn for the worse. Altria began to look at Juul and other smokeless alternatives to tobacco just as Ste. Michelle needed a new round of investment.

One of the things a big company does that a mom & pop cannot (or won't) do: make tough decisions dispassionately. Even on the most evident local scene, a multi-unit operator like Tom Douglas can read the balance sheets and close a once-popular place (Palace Kitchen, for example). Starbucks has no problem dropping (or temporarily closing) stores that don't live up to expectations. And a global business like Altria has no compunction sending a corporate hit-man (Jim Mortenson) across the country with a tough assignment: to write off close to half a billion dollars in contracts with grape growers around the Northwest. Contracts entered into during more optimistic times, when SMWE was expanding rapidly and foresaw the need to lock in a deep supply of grapes. (CEO Ted Baseler was seen as something of a visionary for taking this road.) But even before COVID put the brakes on the hospitality industry (and SMWE's thriving on-premise sales), it was clear that the company had made commitments beyond its capacity.

Jim Mortenson at Chateau Ste Michelle

Selling surplus juice on the bulk market, should it come to that, might have seemed like a good idea (to someone, years earlier), but Mortenson and the bean-counters in Connecticut were in no mood to test that market; they needed an immediate solution: dump the contracts. It's doubtful that Baseler, had he still been around, would have let them do it; he would have argued that now, more than ever, the entire northwest wine industry was looking to its tent-pole, SMWE, to do the right thing by the growers. But Baseler, it could also be argued, had gotten over his skis when he signed those long-term contracts. In any event, he opted for "early retirement" and took himself out of the picture.

Sales sank substantially, to roughly $700 million, until COVID hit, then took a nosedive. Profits? Down 50%. Heads rolled; high-priced talent (winemaker Bob Bertheau, consultant Bob Betz, comms Senior VP Kari Leitch) found themselves on the curb. And then Mortenson himself was out, replaced by David Dearie, who had run multi-unit winery operations in Australia. If Mortenson had been brought in to fix a sputtering engine, Dearie was hired to spiff up the once-proud old jalopy and get her ready for a shining moment in the spotlight.

Bob Bertheau at Chateau Ste Michelle

And so, despite its investment of hundreds of millions of dollars building Ste. Michelle's brand (and its stable of stand-alone wineries), rumors began to float that SMWE might be for sale. Domestically, it would be a big bite for entities of a similar size (probably not Gallo, which is huge, but the parent companies of brands like Mondavi or Almaden), or a South American or Australian wine company seeking to expand its share of the US market (Concha y Toro out of Chile, Wolf Blass out of Australia, or even some ad hoc investor group out of Argentina).

In the end, the phone call came from outside the house: a mid-size ($10 billion) private equity firm in Manhattan with no previous holdings in the wine business called Sycamore Partners. Their investments so far are in fashion (Ann Taylor, Lane Bryant) and office supplies (Staples), nothing remotely connected to wine, food, agriculture, or hospitality. The price was $1.2 billion, a figure so low that it must have seemed Altria was getting, ahem, anxious about the wine business. Even when compared to its costly tobacco alternatives, Altria was increasingly eager to unload its odd duck.

Are there clunkers lurking under the duck's feathers? Perhaps, but some golden eggs as well: Erath, one of Oregon's premier producers of pinot noir, has been part of SMWE since 2006; production has doubled, and every drop gets sold. Similarly, Stag's Leap in California, the winery that knocked the world on its ear at the Paris tasting in 1976. Founder Warren Winiarski sold his baby in 2007 to a partnership of SMWE and Italy's Marchesi Antinori. And the Antinori venture in Washington, Col Solare atop Red Mountain, remains the state's priciest and most sought-after wine. Similarly, 14 Hands is the leading brand in on-premise, by-the-glass sales. Its "value" brand, Columbia Crest, remains wildly popular. It boasts prestigious relationships and special bottlings with leading winemakers in Italy, France, and Germany. Even its faux-chateau headquarters is a hit with visitors and locals alike, and the summer concerts on its lawn have become an essential stop for touring musicians. But by chopping up and segmenting the wine market, SMWE has not solidified its position as an industry leader; rather, it could be accused of losing focus. The pandemic didn't help, of course, as sales slipped badly across a swath of brands and market segments.

Warren Winiarski, Napa

Back in the vineyards of eastern Washington, Dick Boushey keeps an eye on the wine business from his vantage point as the state's most savvy grape grower. "I think Altria wanted out bad," he told me in an email last month. "I know Erath and Stags Leap are selling everything and are cash cows for the company." But not enough cash for the Marlboro man. So how does he view the price tag of $1.2 billion? "Compared to other sales it seems like a bargain."

Now, with David Dearie at the helm, the company says it has a plan in place "to return the company to profitable and sustainable growth." In other words, Dearie wrote a prospectus designed to highlight SMWE's potential to an investor (a naive investor at that), and Sycamore went for it. SMWE spokesperson Ryan Pennington calls Sycamore's purchase "a tremendous vote of confidence in our team and our plans for the company."

David Dearie at the opening of The Blend By Ste Michelle in Kirkland

Private equity typically chops its acquisitions into smaller pieces and sells them off to finance the purchase. What might that entail? A piece-meal sell-off of the crown jewels? A vineyard here, a winery there? Freestanding "value" brands like 14 Hands sourcing cheaper grapes from, gulp, California?

Is SMWE worried that this marks the beginning of the end? Hardly, officially at least. Pennington calls it "a tremendous vote of confidence in a very bright future for the entire Washington wine industry." Dearie says, "The idea was to find an owner that would work with the management team to execute against the vision that we laid out for the future." But that vision no longer includes the excitement of building an industry in the arid desert of eastern Washington, or showing off the region's unique potential, of winning wine competitions around the world. Now, it's just a giant agri-business like Ore-Ida potatoes; it's a production business like Campbell soup; it's a distribution business like Coca-Cola; it's a commodity business like, well, Gallo. Instead, to many of those who rode the rocket to Ste. Michelle's stunning success, it appears that its glory days are over, the dance is done, the spotlight has moved on.

October 2021

Click here to read part 1 of this story.

Ronald Holden, a longtime contributor to seattledining.com, is a local restaurant critic, food blogger, and author of FORKING SEATTLE.