Maryhill Provides A Peek into the Washington Wine Scene

FILED DECEMBER 18, 2013

Dear Client:

The Washington wine industry has been a hot topic this year as some of the biggest names in California wine have begun to capitalize on the region's growing notoriety. Recall, E & J Gallo purchased Columbia Winery and the Covey Run brand from Ascentia Wine Estates last year, Cakebread Cellars launched Mullan Road, a blended brand with grapes from Walla Walla, and Trinchero Family Estates formed a strategic alliance with Washington-based Charles & Charles brand, to name a few.

In order to get further insight into this growing region, WSD recently sat down with Craig Leuthold, who co-owns Washington-based Maryhill Winery with his wife Vicki. Established in 2001, Maryhill is the 10th largest winery in Washington and among the top five most-visited in the state. Below is our conversation with Craig, in which we discuss the region's changing perception, the challenges of privatization and what Maryhill does best.

Wine & Spirits Daily: There are over 40 varietals and blends in the Maryhill portfolio. Which are the best selling?

Craig Leuthold: I think our best-selling wine would either be the pinot gris or our viognier. But our number one and two top-selling wines are our red and white blends. As you're probably aware, blends are just absolutely taking off in the marketplace and our red blend [Winemakers Red] is one of the 25 best-selling wines in the whole Pacific Northwest in terms of retail. Our Winemakers Red makes up approximately 40% of our total production - it's a blend of cabernet, merlot, syrah and cabernet franc. And then our white blend is made up of chardonnay, pinot gris, sauvignon blanc, semillon and viognier.

WSD: Have the blends always been best-sellers or is that a new thing?

Craig: The white is, but the red -- we really started our red blend all the way back in our inception. Our first red blend was in 2000. Maryhill's Winemakers Red was one of the first in Washington state. I think Charles Smith's House Wine was another one. That's now owned by Precept Wines. His was also out on the marketplace about that time, but the category has since just caught on fire. It's been consistently one of the fastest-growing categories.

When we introduced the white blend there really were only two national white blends at the time, and that was Conundrum and Sokol Blosser's Evolution [brand]. We thought adding a little sister to the Winemakers Red would be appropriate and we could go in and offer both those wines as glass floors for on-premise business and also to the retailers.

Wine & Spirits: How much of your wine is estate-grown and how much is sourced?

Craig: About 20% of the grapes that we buy are grown around the winery and about 80% we contract with 15 other vineyards throughout the Columbia Valley. We have most of the major appellations represented in our tasting room from the Horse Heaven Hills to Walla Walla, Yakima Valley, Wahluke Slope and Red Mountain. We really want our tasting room to be a showcase for what Washington has to offer. Having all of the major appellations and most of our many iconic vineyards represented is one of our goals in educating people about what is available in Washington state.

WSD: What is the price range for Maryhill wines?

Craig: For retail here in the northwest most of our white wines sell between $10 and $12. The Winemakers Red retail is about $11-$12 and the rest of our red wines start at $15 and go up from there. About 90%- 95% of our distribution sales are in the sub-$20 retail category. The vast majority of our reserves and our single vineyard wines is all sold in the tasting rooms.

WSD: As a winery that plays solely in the premium category, what are your thoughts on the segment? How is it recovering from the recession?

Craig: If you talk about statistics, and I am a statistics guy, the fastest recovering category has been the $15-$25 category. The $25-$50 category actually got hurt very bad by the recession and it's been relatively slow to come back. Although there's no question that people are willing to buy more bottles of wine in that category. We certainly have seen an increase in the total amount of wine sold in that category at Maryhill. But I also have to put a caveat on that because at the same time we introduced all of these single vineyard wines that are super premium. They're in the $25 to $40 category. Our wine club members love those wines. I don't know if we're really comparing apples to apples.

The above $60 category, frankly, did not get affected very much by the recession because people with that kind of money continued to have that kind of money and as a percentage of the total amount of wine sold, it's always been relatively small anyway.

WSD: How much wine are you selling direct-to-consumer versus through the distribution channel?

Craig: We see about 75,000 visitors a year in our tasting room and so we do have a lot of traffic. On an annual basis we're selling approximately 15,000 cases direct to consumer, but our total production in 2013 is right at about 90,000 cases. Now that won't be bottled and ready for sale, for the whites, until the middle or toward the end of next year. The reds not until the following year or even beyond because right now, for instance, most of our red wines that we're selling are 2009 and 2010 vintages. We will sell in the neighborhood of about 60,000 cases total through distribution this year.

WSD: What is the ratio for on-premise to off-premise sales?

Craig: It varies from distributor to distributor. Here in the Northwest where we are way more mature and our brand has been around a lot longer, it's probably about an 80-20 ratio, 80 percent off and 20 percent on. But, for instance, in Florida our distributor there has focused almost strictly on the on-premise and it's probably flip-flopped. We're probably 80% on-premise and 20% off.

Philosophically we believe that you really start building your brand on-premise and then you transfer that market presence in the off-premise. In all of our markets we concentrate first in on-premise and then eventually off-premise becomes a larger and larger portion of our sales.

WSD: Let's talk about your distribution partners. Are you primarily with the larger guys or the smaller guys, and why?

Craig: Well, we started out all across the board. Our very first distributor here in Northwest was called Northwest Select. They were located here in Spokane. Through a series of acquisitions, they basically now have become the largest distributor in the Pacific Northwest. And three years ago they merged with Southern Wines & Spirits. So we went from having all independent distributors across the country to being aligned with the largest distributor in the country in our core market. Through that we have leveraged our relationship here in the Northwest for them to agree to bring us on as a national distribution partner. What that has meant is that in all the states where we currently don't have distribution, we're systematically rolling out the Maryhill brand with Southern Wines & Spirits. They're currently in 15 states that we're not in. The first states we're doing are California, Nevada and Hawaii.

We do already have distribution in 20 states. We have Johnson Brothers in Florida just on the East Coast and that's the only place we're with them. And then we have Glazer's in Texas. Other than that, all of our distributors are smaller, independent, privately-owned distributors.

WSD: Does it present any challenges to have a couple big distributors with the rest being small?

Craig: So what we've found is that it doesn't really make any difference after you already have a distributor. The advantage we have with a big distribution partner like Southern is that my main contact here, the senior vice president for Southern in the Pacific Northwest, went to Florida and pitched Southern Wines & Spirits' corporate to bring Maryhill on as a national partner. He believed in our brand, believed in Vicki and me, knew that we wanted to continue to grow Maryhill and that we had long-term strategic goals, and he wanted to help us try to accomplish those goals. I kind of feel like that's a little unusual because a lot of people say that with big business the relationship is dead. Well, I don't really believe that. I believe that everything is about relationship, no matter how big or small companies are.

WSD: You've been doing this for over a decade now. What do you think is the difference between Washington's reputation now versus when you began?

Craig: Let me give you a fun story. I'm standing in [a] wine shop in New York City, very iconic, right off of Times Square. We're doing a wine tasting with the staff. One of the guys walks up to it and see the brochure, sees that it has 'Washington' on it and says, 'Wow. I didn't know they were growing grapes in D.C.' This was about ten years ago.

Even though wineries like Chateau Ste. Michelle and Columbia Crest have done an incredible job of making Washington well-known across the country, a lot of people are not aware that they're Washington brands. I shouldn't say not aware now, they weren't aware then. The profile of Washington has increased dramatically. I think the fundamental reason is the quality of the grapes we have to work with are among the finest in the world.

WSD: In the last few years some big California wineries have branched out into Washington wine. Do you see this sparking a gold rush for Washington vineyards?

Craig: I kind of thought this would have happened before now to be honest with you. Gallo has been sniffing around here for five years or more. They've been talking to lots and lots of wineries. I think they were looking for a bargain basement entry to Washington and they found it with Columbia Winery, which frankly, has had a great reputation. They took the Covey Run brand, and my understanding is Gallo is not going to use that brand. They're going to basically liquidate all of the inventory that's left with Covey Run and not do anything with it because Ascentia made too much wine and did not invest properly in educating people about it being a premium Washington brand.

I think what's been happening and why more players have to come into Washington is there really aren't that many large wineries for people to acquire. At 90,000 cases we're the 10th largest winery in Washington. When you get to the 25th winery, you're down below 20,000 cases. I can't see any major players wanting to buy someone who is only 20,000 cases because you won't have a national distribution footprint, you really won't have a lot of panache in the marketplace, so you're not really going to accomplish your goals. There aren't that many players that can be acquired to make it worthwhile for a big player to come in and purchase them.

WSD: What about plantable land? Is there still room to plant and expand?

Craig: I think Ted Baseler, Ste. Michelle chief, was just quoted as saying we have just shy of 50,000 acres planted in wine grapes in Washington. We do have some issues with water rights with The Department of Ecology in Washington state because of the Salmon Recovery Act. We have a couple of species of salmon that have been listed as endangered species.

Water reform is going to have to happen in a fairly meaningful way for us to do dramatic changes on ground that isn't currently irrigated. With that said, there's still lots of ground where people could convert it from Concord grapes, or apples, or other crops that are currently being planted, and move them into [wine] grapes. That could happen over time, and frankly, it is happening on a fairly steady basis.

WSD: What's your biggest challenge with Maryhill right now?

Craig: I would say up until bringing on Southern as a national distribution partner it was figuring out how to expand our distribution footprint. We have consistently grown our business here in the Pacific Northwest, with the exception... of 1183 that privatized liquor in Washington. It hurt everybody from the big boys to the small. Overall wine sales in 2013 in Washington state are down about 4%, but our business will be up approximately 20% because of our relationship with Southern Wine & Spirits and because of their commitment to help us grow our brand.

That said, we're only just getting back to where we were in 2011. We lost almost that much ground in 2012 during this transition when the retailer -- what did they do to get space for their liquor? They just went in and took a third of their wine space and a few sundries, pulled it off the shelf and replaced it with liquor. We fortunately did not lose a lot of our distribution footprint, but what we did lose was some ad space. In addition, with stacks on the floor, there's only X amount of floor space. Until new stores are built, until people remodel their stores, the wine footprint on the store is being replaced by liquor in a pretty meaningful way. Our biggest challenge is keeping the distributors focused on our wine and finding and opening up new markets.


WSD: Thank you for your time.

REMY COINTREAU TAKES ON DISTRIBUTION OF BRUICHLADDICH

Remy Cointreau USA will officially assume the import, distribution and marketing of the Bruichladdich brands, effective January 1. The Bruichladdich brands include single malt Scotches Bruichladdich, Port Charlotte and Octomore, as well as The Botanist Gin. Bruichladdich was formerly with Winebow.

You'll recall Remy Cointreau purchased Bruichladdich Distillery Company Limited earlier this year for $90 million, marking the company's first move into the single malt whisky category. It has since confirmed plans to double its Scotch whisky production.

"We are excited to add the Bruichladdich line of superior single malt scotch whiskies and The Botanist Gin to our high-end portfolio," said Remy Cointreau USA chief Suriya Parksuwan in a release from the company. "We already have strong ultra premium brands in such categories as cognac, liqueurs, rum, champagne and now the addition of a unique whisky and gin help complete our portfolio. This ensures that we are well positioned to compete in this growing segment of the market. He also thanked Winebow for their part in the growth of the Bruichladdich line."

DIAGEO LOOKS TO INCREASE ITS PRESENCE IN NORTH AMERICAN WHISKEY IN A BIG WAY

Diageo's North American whiskey strategy has received a lot of attention this year. You'll likely recall recent announcements that the drinks company will be adding two new premium bourbons to its portfolio next year (see WSD 11-20-2013). This week the Wall Street Journal delves into Diageo's strategy with Bulleit.

In the past, the company has nurtured the "independent, hipster vibe" surrounding Bulleit by restricting advertising and spending, and selling it to only select bars. As a result, the brand's sales have increased fivefold in the past three years, particularly in the on-premise. You may recall GuestMetrics recently told WSD volumes were up 71% in the on-premise year-to-date November 3 and it had the fourth largest gains in distribution (see WSD 11-21-2013 ).

Next year the drinks giant will attempt the brand's biggest-ever expansion. They will launch the brand in 14 international markets and have allotted it "millions of dollars" for marketing. But in order to preserve the brand's "indie vibe" Diageo will use ads in trade magazines, but won't use TV or mainstream press. The goal? One million cases a year.


WSD BRIEFS:

BEAM INC. IS RELEASING ITS FIRST single-barrel bourbon under the Jim Beam label next spring. Jim Beam single-barrel bourbon retails for approximately $35 a 750 ml and gives the brand a mid-tier offering between entry level bourbon and Signature Craft. "We understand there is a growing demand for premium bourbon options," Dan Cohen, a spokesman for Beam Inc told Crain's Chicago. "We feel the time is right to utilize this process for a single-barrel Jim Beam."

SOUTHERN WINE & SPIRITS has appointed Mel Velez as vp, demand planning and logistics. Mel has 22 years of experience under his belt, in a variety of leadership roles in multiple industry. He began his career working as a general manager for AT&T Global Business Systems, and most recently worked at Citrix System as global director of global procurement and accounts payable. He will report to Phil Morsing, vp supply chain operations, effective immediately.

Until tomorrow, Emily

"The surest cure for vanity is loneliness."
-- Thomas Wolfe

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