(Credit: CalTech, Stanford)
In a study that could make marketing managers and salespeople rub their hands with glee, scientists have used brain-scanning technology to shed new light on the old adage, "You get what you pay for."
Researchers from the California Institute of Technology and Stanford's business school have directly seen that the sensation of pleasantness that people experience when tasting wine is linked directly to its price. And that's true even when, unbeknownst to the test subjects, it's exactly the same Cabernet Sauvignon with a dramatically different price tag.
Specifically, the researchers found that with the higher priced wines, more blood and oxygen is sent to a part of the brain called the medial orbitofrontal cortex, whose activity reflects pleasure. Brain scanning using a method called functional magnetic resonance imaging (FMRI) showed evidence for the researchers' hypothesis that "changes in the price of a product can influence neural computations associated with experienced pleasantness," they said.
http://buywinedirect.blogspot.com/2008/02/fred-franzia-was-right-all-along-about.html
Thursday, February 14, 2008
Franzia was right all along says CalTech and Stanford
(Credit: CalTech, Stanford)
In a study that could make marketing managers and salespeople rub their hands with glee, scientists have used brain-scanning technology to shed new light on the old adage, "You get what you pay for."
Researchers from the California Institute of Technology and Stanford's business school have directly seen that the sensation of pleasantness that people experience when tasting wine is linked directly to its price. And that's true even when, unbeknownst to the test subjects, it's exactly the same Cabernet Sauvignon with a dramatically different price tag.
Specifically, the researchers found that with the higher priced wines, more blood and oxygen is sent to a part of the brain called the medial orbitofrontal cortex, whose activity reflects pleasure. Brain scanning using a method called functional magnetic resonance imaging (FMRI) showed evidence for the researchers' hypothesis that "changes in the price of a product can influence neural computations associated with experienced pleasantness," they said.
http://calnapawines.blogspot.com/2008/02/fred-franzia-was-right-all-along-about.html
In a study that could make marketing managers and salespeople rub their hands with glee, scientists have used brain-scanning technology to shed new light on the old adage, "You get what you pay for."
Researchers from the California Institute of Technology and Stanford's business school have directly seen that the sensation of pleasantness that people experience when tasting wine is linked directly to its price. And that's true even when, unbeknownst to the test subjects, it's exactly the same Cabernet Sauvignon with a dramatically different price tag.
Specifically, the researchers found that with the higher priced wines, more blood and oxygen is sent to a part of the brain called the medial orbitofrontal cortex, whose activity reflects pleasure. Brain scanning using a method called functional magnetic resonance imaging (FMRI) showed evidence for the researchers' hypothesis that "changes in the price of a product can influence neural computations associated with experienced pleasantness," they said.
http://calnapawines.blogspot.com/2008/02/fred-franzia-was-right-all-along-about.html
Thursday, February 7, 2008
Two Buck Chuck fuels urban legends...
Two Buck Chuck fuels urban legends...
Since its debut in 2003, the insanely inexpensive Charles Shaw wine, better known as Two Buck Chuck, has fueled urban legends.
The fables persist because no one can image how a bottle of wine could cost $2 or $3.Charles Shaw's bitter divorce, one story holds, ordered him to split winery profits with his ex. He responded by selling the wine at a loss, denying his wife a penny. Another tale holds that bankrupt airlines sold warehouses of wine at a discount to pay the bills.The truth is less dramatic.The man behind Two Buck Chuck is Fred Franzia. A nephew of Ernest Gallo and lifelong friend of the Mondavi family, he is perhaps among the most coarse and colorful people in the wine industry. He sells Charles Shaw so cheaply because he has taken advantage of the grape and wine glut. He started out purchasing grapes, juice and wine from desperate and anonymous growers and wineries. He still does that, but also owns about 80 square miles of vineyards.I give part of the credit for the increasing quality of under-$10 wines, and the growing levels of wine consumption to Charles Shaw and Fred Franzia.We love Fred!
Since its debut in 2003, the insanely inexpensive Charles Shaw wine, better known as Two Buck Chuck, has fueled urban legends.
The fables persist because no one can image how a bottle of wine could cost $2 or $3.Charles Shaw's bitter divorce, one story holds, ordered him to split winery profits with his ex. He responded by selling the wine at a loss, denying his wife a penny. Another tale holds that bankrupt airlines sold warehouses of wine at a discount to pay the bills.The truth is less dramatic.The man behind Two Buck Chuck is Fred Franzia. A nephew of Ernest Gallo and lifelong friend of the Mondavi family, he is perhaps among the most coarse and colorful people in the wine industry. He sells Charles Shaw so cheaply because he has taken advantage of the grape and wine glut. He started out purchasing grapes, juice and wine from desperate and anonymous growers and wineries. He still does that, but also owns about 80 square miles of vineyards.I give part of the credit for the increasing quality of under-$10 wines, and the growing levels of wine consumption to Charles Shaw and Fred Franzia.We love Fred!
Monday, February 4, 2008
Napa Valley: Off My Beaten Path With Fred Franzia (Pt. 1)
Friday, 10 Aug 2007
Napa Valley: Off My Beaten Path With Fred Franzia (Pt. 1)
Posted By:Jim Goldman
Topics:Marketing Advertising Africa Wine & Spirits Consumers Retail Sales
Sectors:Food and Beverage Retail
AP
Fred Franzia
Sure, I'm the Silicon Valley Bureau Chief, but every now and then I get to cover stories from that other newsmaking valley just north of here: Napa Valley. We're working up a story on Fred Franzia and when it comes to the wine business, he's probably not a name you easily recognize. There's Mondavi; the Gallos; and yes, Fred Franzia. He's either revered, or reviled, depending upon whom you talk to in the wine world.
Revered because he has become a kind of "everyman" voice in an industry increasingly dominated by high-end, exclusive, craft winemakers who literally turn their noses up at the vast majority of the wine business with their labels charging $20, $50, even $100 a bottle or more. Especially when wineries like Stag's Leap and Duckhorn each sold in multi-hundred-million-dollar transactions.
Or, he's reviled as the mogul behind the esteemed Charles Shaw label. Better known as "$2-buck Chuck." "We feel our wines are among the finest wines made," Franzia told me during my recent visit to his extensive bottling operation in Napa Valley. This massive operation bottles 300,000 bottles a day, for a variety of labels Franzia's Bronco Wine Co. works with. Every day.
Five years ago, this renegade businessman got the idea to offer quality wine at dirt-cheap prices, making money from volume sales. A successful strategy Franzia learned from other industries. "It's the same customer out there that's flying JetBlue, it's the same customer that's buying Dell computers. They're looking for good quality at fair prices," he tells me.
The trick was to find a good retail partner to handle marketing and distribution since his approach to wine really hadn't been done in California's high-brow wine business. So, enter retailing partner Trader Joe's, where these two sides split their pennies-on-the-dollar profits. And that was 300 million bottles ago.
In fact, Charles Shaw has become such a massive success in this country that the label is now going international. And it's beginning to appear in some pretty exotic markets. Franzia tells me he ships 144,000 bottles to Ethiopia every two weeks. (see more in part 2)
Napa Valley: Off My Beaten Path With Fred Franzia (Pt. 1)
Posted By:Jim Goldman
Topics:Marketing Advertising Africa Wine & Spirits Consumers Retail Sales
Sectors:Food and Beverage Retail
AP
Fred Franzia
Sure, I'm the Silicon Valley Bureau Chief, but every now and then I get to cover stories from that other newsmaking valley just north of here: Napa Valley. We're working up a story on Fred Franzia and when it comes to the wine business, he's probably not a name you easily recognize. There's Mondavi; the Gallos; and yes, Fred Franzia. He's either revered, or reviled, depending upon whom you talk to in the wine world.
Revered because he has become a kind of "everyman" voice in an industry increasingly dominated by high-end, exclusive, craft winemakers who literally turn their noses up at the vast majority of the wine business with their labels charging $20, $50, even $100 a bottle or more. Especially when wineries like Stag's Leap and Duckhorn each sold in multi-hundred-million-dollar transactions.
Or, he's reviled as the mogul behind the esteemed Charles Shaw label. Better known as "$2-buck Chuck." "We feel our wines are among the finest wines made," Franzia told me during my recent visit to his extensive bottling operation in Napa Valley. This massive operation bottles 300,000 bottles a day, for a variety of labels Franzia's Bronco Wine Co. works with. Every day.
Five years ago, this renegade businessman got the idea to offer quality wine at dirt-cheap prices, making money from volume sales. A successful strategy Franzia learned from other industries. "It's the same customer out there that's flying JetBlue, it's the same customer that's buying Dell computers. They're looking for good quality at fair prices," he tells me.
The trick was to find a good retail partner to handle marketing and distribution since his approach to wine really hadn't been done in California's high-brow wine business. So, enter retailing partner Trader Joe's, where these two sides split their pennies-on-the-dollar profits. And that was 300 million bottles ago.
In fact, Charles Shaw has become such a massive success in this country that the label is now going international. And it's beginning to appear in some pretty exotic markets. Franzia tells me he ships 144,000 bottles to Ethiopia every two weeks. (see more in part 2)
Fred Franzia still true to his commitment to make affordable wine for all
09:19 AM PDT on Sunday, June 3, 2007
By MICHELLE LOCKE
By MICHELLE LOCKE
The Associated Press
NAPA - Round and round they go, hundreds of bottles of Two Buck Chuck rattling and clinking their way toward a big machine that deftly fills, corks and seals each one in a rhythmic dance of metal and glass.
It's been five years since the first of these amazingly cheap wines started rolling off the line, released by maverick vintner Fred Franzia under the Charles Shaw label.
Some 300 million bottles later, Two Buck Chuck is still selling, and Franzia is still preaching his message of wine for the masses.
"We're not out to gouge people," says Franzia. "What I would like to see is every consumer be able to afford to have wine on the table every day and not feel insecure about it."
Last year, Two Buck Chuck -- available only in the Trader Joe's grocery chain and priced at $1.99 in California, hence its nickname -- accounted for at least 8 percent of California wine sold in-state, said Jon Fredrikson, who tracks wine shipments through his Woodland-based company, Fredrikson, Gomberg & Associates. National market share figures are not available.
The result -- along with the cute "critter" labels and more user-friendly packaging such as boxes and screw caps -- has helped knock a little of the starch out of the industry, the wine-industry consultant said.
"I think it shook up the business in several ways, but certainly it created this interest among consumers to seek out wine values," Fredrikson said. "It certainly plants a seed in everyone's mind about what you get for the money."
Michael Mondavi, founder of Folio Fine Wine Partners, a Napa Valley-based importer and producer of high-end wines, takes the glass-half-full approach to the Franzia effect.
"I think Two Buck Chuck has helped to make people aware that wine is not just for special occasions," says Mondavi, son of California wine country pioneer Robert Mondavi and a longtime friend of Franzia's. "I also believe that the vast majority of the people who originally start buying Two Buck Chuck within a period of a year trade up to better wines and enjoy better wines on a more regular basis."
Deep Roots in Napa
Franzia's roots in the winery business go deep. His grandfather, Giuseppe Franzia, immigrated from Italy to America in 1893, buying land in California in 1912 and beginning wine production three years later.
In 1933, the family started Franzia Brothers Winery, producing 100,000 gallons of table wine that year. After that winery was sold in 1973, Franzia started Bronco with his brother Joseph and cousin John. (The family has no connection with the boxed wine sold today under the Franzia name.)
He has crossed legal swords with the wine establishment more than once.
More than a decade ago, he and the company were fined after he pleaded no-contest to charges of mislabeling some grapes as a more expensive variety.
More recently, he was engaged in a pitched court battle with Napa vintners who argued that it was illegal for Bronco to sell wines that had "Napa" in their name but were made with grapes grown elsewhere.
Franzia lost that fight, but he soon had Napa buzzing again when he rereleased one of the disputed brands, Napa Creek -- this time made with Napa grapes -- and priced it at $3.99.
Making wine is expensive from the ground up, but Franzia owns a lot of ground -- 40,000 acres is the common estimate. He won't say. His Ceres-based Bronco Wine Co. also owns the crushing and bottling plants and has its own distribution company.
Until now, another company has supplied the bottles, but Franzia's latest idea is to fix that by building a glass-container plant near his Napa Valley bottling facility in a business park near the Napa County Airport.
Still in the preliminary planning stages, Franzia says the plant would reduce greenhouse gases by cutting down on delivery driving hours as well as using environmentally friendly technology to cut down on plant emissions.
This spring, he introduced plans for the glass plant by hosting an elegant lunch in Napa -- the whitest tablecloths, the finest food, all washed down with your choice of Two Buck Chuck.
Vintners Love to Hate Him
Industry veteran Richard Peterson, who worked for decades for E. & J. Gallo and other major California wineries and is now consulting for Bronco, sees Franzia as the guy Napa vintners love to hate.
"I enjoy watching them spar," he says with a chuckle.
"We do business with many, many people in Napa," says Franzia. "A lot of my friends are in Napa. Part of the fun is just rubbing their nose in it a little bit and I'm sure vice versa."
For instance: "He says no wine is worth over $10," says Mondavi, whose family's wines include the new I'M line that runs from $13 to $20. "I say, 'Yeah, you're right Fred, unless they're my wines because I've seen you buy 'em.' "
Franzia maintains he is true to his principles, even when the wine in question is his. Bronco's Napa Ridge Napa Valley Reserve often costs more than $10 because it's made with more expensive grapes, but he doesn't drink it.
NAPA - Round and round they go, hundreds of bottles of Two Buck Chuck rattling and clinking their way toward a big machine that deftly fills, corks and seals each one in a rhythmic dance of metal and glass.
It's been five years since the first of these amazingly cheap wines started rolling off the line, released by maverick vintner Fred Franzia under the Charles Shaw label.
Some 300 million bottles later, Two Buck Chuck is still selling, and Franzia is still preaching his message of wine for the masses.
"We're not out to gouge people," says Franzia. "What I would like to see is every consumer be able to afford to have wine on the table every day and not feel insecure about it."
Last year, Two Buck Chuck -- available only in the Trader Joe's grocery chain and priced at $1.99 in California, hence its nickname -- accounted for at least 8 percent of California wine sold in-state, said Jon Fredrikson, who tracks wine shipments through his Woodland-based company, Fredrikson, Gomberg & Associates. National market share figures are not available.
The result -- along with the cute "critter" labels and more user-friendly packaging such as boxes and screw caps -- has helped knock a little of the starch out of the industry, the wine-industry consultant said.
"I think it shook up the business in several ways, but certainly it created this interest among consumers to seek out wine values," Fredrikson said. "It certainly plants a seed in everyone's mind about what you get for the money."
Michael Mondavi, founder of Folio Fine Wine Partners, a Napa Valley-based importer and producer of high-end wines, takes the glass-half-full approach to the Franzia effect.
"I think Two Buck Chuck has helped to make people aware that wine is not just for special occasions," says Mondavi, son of California wine country pioneer Robert Mondavi and a longtime friend of Franzia's. "I also believe that the vast majority of the people who originally start buying Two Buck Chuck within a period of a year trade up to better wines and enjoy better wines on a more regular basis."
Deep Roots in Napa
Franzia's roots in the winery business go deep. His grandfather, Giuseppe Franzia, immigrated from Italy to America in 1893, buying land in California in 1912 and beginning wine production three years later.
In 1933, the family started Franzia Brothers Winery, producing 100,000 gallons of table wine that year. After that winery was sold in 1973, Franzia started Bronco with his brother Joseph and cousin John. (The family has no connection with the boxed wine sold today under the Franzia name.)
He has crossed legal swords with the wine establishment more than once.
More than a decade ago, he and the company were fined after he pleaded no-contest to charges of mislabeling some grapes as a more expensive variety.
More recently, he was engaged in a pitched court battle with Napa vintners who argued that it was illegal for Bronco to sell wines that had "Napa" in their name but were made with grapes grown elsewhere.
Franzia lost that fight, but he soon had Napa buzzing again when he rereleased one of the disputed brands, Napa Creek -- this time made with Napa grapes -- and priced it at $3.99.
Making wine is expensive from the ground up, but Franzia owns a lot of ground -- 40,000 acres is the common estimate. He won't say. His Ceres-based Bronco Wine Co. also owns the crushing and bottling plants and has its own distribution company.
Until now, another company has supplied the bottles, but Franzia's latest idea is to fix that by building a glass-container plant near his Napa Valley bottling facility in a business park near the Napa County Airport.
Still in the preliminary planning stages, Franzia says the plant would reduce greenhouse gases by cutting down on delivery driving hours as well as using environmentally friendly technology to cut down on plant emissions.
This spring, he introduced plans for the glass plant by hosting an elegant lunch in Napa -- the whitest tablecloths, the finest food, all washed down with your choice of Two Buck Chuck.
Vintners Love to Hate Him
Industry veteran Richard Peterson, who worked for decades for E. & J. Gallo and other major California wineries and is now consulting for Bronco, sees Franzia as the guy Napa vintners love to hate.
"I enjoy watching them spar," he says with a chuckle.
"We do business with many, many people in Napa," says Franzia. "A lot of my friends are in Napa. Part of the fun is just rubbing their nose in it a little bit and I'm sure vice versa."
For instance: "He says no wine is worth over $10," says Mondavi, whose family's wines include the new I'M line that runs from $13 to $20. "I say, 'Yeah, you're right Fred, unless they're my wines because I've seen you buy 'em.' "
Franzia maintains he is true to his principles, even when the wine in question is his. Bronco's Napa Ridge Napa Valley Reserve often costs more than $10 because it's made with more expensive grapes, but he doesn't drink it.
Fred Franzia Warms at 30th Anniversary of Bronco Wine Company
Fred Franzia Warms at 30th Anniversary of Bronco Wine Company
By Paul Franson
Notoriously reporter-shy Fred Franzia changed his spots recently, inviting a number of writers to his Bronco Wine Company's 30th anniversary celebration. He didn't disappoint those looking for good quotes.
Referring to retailers who charge too much for wine as "greedy bastards," and challenging restaurants to sell wines for $10, the irrepressible Franzia mostly touted his winery's accomplishments to refute those in the wine business that belittle his role. For example: Bronco was chosen the winery of the year for the second time at the Unified Wine and Grape Symposium to groans of other attendees in January.
This year, the winery's sales will be about $300 million on about 10 million cases of its own brands. It crushes 300,000 tons annually. The rest is sold to other wineries.
It exported four million gallons of bulk wine and 200,000 cases of bottled wine in 2003, mostly to the UK and Germany, but overall to 60 countries. "We just shipped a container to India," Franzia announced proudly.
The wine company claimed over 100 million gallons of temperature-controlled stainless steel storage and 80,000 oak barrels.
Bronco's wines won 623 medals at competitions last year, though even Franzia chuckles, "No one ever asks how many times you enter."
Two Buck Chuck Brings Fame
The pugnacious Franzia, of course, is best known as the father of "Two Buck Chuck," the $1.99 Charles Shaw wine sold by Trader Joe's discount gourmet stores.
Now approaching 10 million cases in total sales and running five million per year, the wines created a revolution among wine lovers. Decent, cork-finished dry varietal wines in standard 750-ml bottles, they quickly gained a cult following among the "underpaid and overeducated" shoppers Trader Joe courts.
The wines quickly became best sellers, taking an astonishing share of the total California grocery wine market, and if they didn't appear to significantly expand the population of wine drinkers, they attracted many current wine lovers to enjoy wine with dinner more often--or more generously.
Before Charles Shaw arrived, Franzia was perhaps most recently best known for building a huge bottling plant in southern Napa County where he could bottle Central Valley (and some Napa) wines with labels like Napa Ridge, Rutherford Vintners and others that suggest Napa origins.
Infuriating the producers of expensive Napa wines who called the technique at least misleading, he inspired the state legislature to ban the practice, a vote soon overturned by the courts and now under appeal.
That wasn't Franzia's first brush with controversy, either. He had earlier paid substantial fines for pawning off inferior wine under varietal names. He has always been considered a clever businessman.
Franzia marked the 30th anniversary at his Mountaintop Vineyard east of the tiny community of Herald among 6,000 acres of attractive rolling vineyards at 200 feet above sea level, higher than most northern California vineyards. It lies in the eastern Lodi appellation.
Choosing the site rather than a more 'convenient' one like his large Napa facility, he picked the location to remind writers that he and his family own 30,000 acres of California vineyards in 11 counties, the largest ownership of vines in the state. "It's important for you to see grapes growing like this," he told attendees.
He also reminded people that all of his land is in foothills, not the Central Valley floor, and his vineyard near Tehachapi lies at 800 feet above tdlemen to undercut rivals.
The cousins began as négociants with the super value wines of their day, JFJ Bronco and CC Vineyards, but they also started developing vineyards, another secret to their success. "We are growers," said Franzia, noting his company buys less than 10 percent of the wines it sells under its own brands, another of the many keys to its ability to sell good wine at low prices.
He claimed the group sells 35 to 45 percent of its own production as bulk wine.
The company has four wine production facilities, the original plant in Ceres, where most of the fermentation occurs, the impressive new bottling plant in Napa where 70 percent of its case goods are bottled, the old Petri plant in Escalon bought last year from Constellation, and leased facilities in Sonoma County used for the Hacienda brand he acquired there. The company also works with 10 additional wine production facilities.
The Napa plant started with one state-of-the-art bottling line, but with the success of Charles Shaw and other brands, has added another. The facility is no bare-bones industrial building, but comparable in design to other facilities in Napa County. It also serves as an aging facility for barrels of wine, with a sophisticated natural cooling system taking advantage of its location near San Pablo Bay.
Many Brands, Many Styles
Bronco makes wines under a vast number of labels. Many, like Charles Shaw, were acquired by Franzia from distressed companies. The brands include ForestVille Vineyard, Montpellier Vineyard, Hacienda Wine Cellars, Napa Ridge, Forest Glen, Estrella, Napa Ridge, Sea Ridge, Coastal Ridge, Silver Ridge and on-premise brands like Salmon Creek and Domaine Napa, plus, of course, Charles Shaw and a new super-value wine for independent grocers, Crane Lake.
Many wonder what the difference is between the wines, and reporters at the event joked that the two cooling towers for the nearby abandoned Rancho Seco nuclear plant will be his new tanks--one for red, one for white.
But Fred Franzia claimed a different winemaker for each wine in its price category. "They're all different," he asserted. He also disputed that the Charles Shaw varies. "No wine tastes the same every day," he claimed, dismissing reports by critics that they've found variations.
Franzia wonders why other wineries don't follow his lead and introduce lower-cost wines, and he said even wine patriarch (and relative) Ernest Gallo complained that he's selling wines too cheaply. "They're afraid consumers will get used to the prices," said Franzia.
Franzia is leading a virtual crusade for less expensive wines. Few restaurants feature his wines, and he fumes that they won't sell wines at low markups. "If they sold wine cheaper, everyone's food would taste better," he pointed out. "Until they do, America is never going to be a wine-drinking nation."
He doesn't add that he'd be a likely beneficiary if the restaurants more sold inexpensive wine.
Franzia challenges restaurants to sell decent wines at $10 per bottle, and has been seeking a major restaurant chain to partner with his company much as Trader Joe's did at retail. "The Charles Shaw project made Trader Joe's a destination retailer for wine; a restaurant chain should be able to do the same," he said
So far, however, Franzia has been unsuccessful in signing up a major restaurant chain for his wines, a process Gallo and some other producers have done well.
He also seems mystified that more groceries don't emulate Trader Joe's. "How can any major grocery chain not have a wine that competes with Two Buck Chuck?," he asked.
He said that Bronco's Sea Ridge brand, which is sold in Safeway for $4.50, sells for about the same at wholesale as Charles Shaw, so Safeway could sell the wine for $2 and still make a profit.
Chains have sold $2 wines, but when it was pointed out that other super-value wines didn't do well, Franzia asserted, "They weren't selling our wine!"
He seems especially incredulous that big box stores like Costco and WalMart don't sell super-value wines. "They're not in the game; their prices are way out of line," he said.
Fred Franzia has often complained about imports in the past, so it's interesting that he is now importing La Boca wine from Argentina, that is also sold at Trader Joe's.
In the past, he argued that imports undercut California wines in America. "Every time we give up market share to imports, we have to fight to get it back."
Now, he seems comfortable in importing wines that undercut other imports, but he also sees the weak dollar as a boost to our exports.
The Future of Charles Shaw and Its Cousins
Franzia asserted that little of the Charles Shaw wine was from surplus bulk. "There wasn't that much around," he said, dismissing the reports of vast surpluses. "There wasn't anywhere near as much as was reported."
He said the stories were affected by the inflated amount on the spot market, a small amount of total wine production.
He said that he can adequately supply the demand for the super value wine in today's environment, and has even introduced another version, Crane Lake, for stores other than Trader Joe's. He admits that sales to Trader Joe's are off a bit since last year, but believes that's because the stores loaded up inventory a bit too much last year due to the demand.
Most Charles Shaw wine is the four big varieties: Cabernet Sauvignon, Merlot, Chardonnay and Sauvignon Blanc, but Bronco has also tried some other varieties. It sold some 300,000 cases of Gamay Beaujolais in the fall, and is adding Syrah. He also has Viognier, but finds it is in little demand.
Interestingly, Franzia claimed to be California's largest producer of Pinot Grigio, the industry's hottest label, but it's in such demand from other companies that he only sells it in the Forest Glen line. "Others can buy it if they pay cash," he joked.
Looking to the future of his wine company, Fred Franzia worries that his generation lacks the leadership qualities of the Gallos and Mondavis of the last generation. However, there are 13 adult children between Bronco partners Fred, Joseph and John Franzia. Fred Franzia noted that nine of the 13 are working for the compnay.
If any of them have Fred Franzia's talent--and perhaps a bit more restraint--the future success seems assured. wbm
Paul Franson writes from St. Helena, California, about wine and business. Check out his websites: www.franson.com or www.napalife.com.
By Paul Franson
Notoriously reporter-shy Fred Franzia changed his spots recently, inviting a number of writers to his Bronco Wine Company's 30th anniversary celebration. He didn't disappoint those looking for good quotes.
Referring to retailers who charge too much for wine as "greedy bastards," and challenging restaurants to sell wines for $10, the irrepressible Franzia mostly touted his winery's accomplishments to refute those in the wine business that belittle his role. For example: Bronco was chosen the winery of the year for the second time at the Unified Wine and Grape Symposium to groans of other attendees in January.
This year, the winery's sales will be about $300 million on about 10 million cases of its own brands. It crushes 300,000 tons annually. The rest is sold to other wineries.
It exported four million gallons of bulk wine and 200,000 cases of bottled wine in 2003, mostly to the UK and Germany, but overall to 60 countries. "We just shipped a container to India," Franzia announced proudly.
The wine company claimed over 100 million gallons of temperature-controlled stainless steel storage and 80,000 oak barrels.
Bronco's wines won 623 medals at competitions last year, though even Franzia chuckles, "No one ever asks how many times you enter."
Two Buck Chuck Brings Fame
The pugnacious Franzia, of course, is best known as the father of "Two Buck Chuck," the $1.99 Charles Shaw wine sold by Trader Joe's discount gourmet stores.
Now approaching 10 million cases in total sales and running five million per year, the wines created a revolution among wine lovers. Decent, cork-finished dry varietal wines in standard 750-ml bottles, they quickly gained a cult following among the "underpaid and overeducated" shoppers Trader Joe courts.
The wines quickly became best sellers, taking an astonishing share of the total California grocery wine market, and if they didn't appear to significantly expand the population of wine drinkers, they attracted many current wine lovers to enjoy wine with dinner more often--or more generously.
Before Charles Shaw arrived, Franzia was perhaps most recently best known for building a huge bottling plant in southern Napa County where he could bottle Central Valley (and some Napa) wines with labels like Napa Ridge, Rutherford Vintners and others that suggest Napa origins.
Infuriating the producers of expensive Napa wines who called the technique at least misleading, he inspired the state legislature to ban the practice, a vote soon overturned by the courts and now under appeal.
That wasn't Franzia's first brush with controversy, either. He had earlier paid substantial fines for pawning off inferior wine under varietal names. He has always been considered a clever businessman.
Franzia marked the 30th anniversary at his Mountaintop Vineyard east of the tiny community of Herald among 6,000 acres of attractive rolling vineyards at 200 feet above sea level, higher than most northern California vineyards. It lies in the eastern Lodi appellation.
Choosing the site rather than a more 'convenient' one like his large Napa facility, he picked the location to remind writers that he and his family own 30,000 acres of California vineyards in 11 counties, the largest ownership of vines in the state. "It's important for you to see grapes growing like this," he told attendees.
He also reminded people that all of his land is in foothills, not the Central Valley floor, and his vineyard near Tehachapi lies at 800 feet above tdlemen to undercut rivals.
The cousins began as négociants with the super value wines of their day, JFJ Bronco and CC Vineyards, but they also started developing vineyards, another secret to their success. "We are growers," said Franzia, noting his company buys less than 10 percent of the wines it sells under its own brands, another of the many keys to its ability to sell good wine at low prices.
He claimed the group sells 35 to 45 percent of its own production as bulk wine.
The company has four wine production facilities, the original plant in Ceres, where most of the fermentation occurs, the impressive new bottling plant in Napa where 70 percent of its case goods are bottled, the old Petri plant in Escalon bought last year from Constellation, and leased facilities in Sonoma County used for the Hacienda brand he acquired there. The company also works with 10 additional wine production facilities.
The Napa plant started with one state-of-the-art bottling line, but with the success of Charles Shaw and other brands, has added another. The facility is no bare-bones industrial building, but comparable in design to other facilities in Napa County. It also serves as an aging facility for barrels of wine, with a sophisticated natural cooling system taking advantage of its location near San Pablo Bay.
Many Brands, Many Styles
Bronco makes wines under a vast number of labels. Many, like Charles Shaw, were acquired by Franzia from distressed companies. The brands include ForestVille Vineyard, Montpellier Vineyard, Hacienda Wine Cellars, Napa Ridge, Forest Glen, Estrella, Napa Ridge, Sea Ridge, Coastal Ridge, Silver Ridge and on-premise brands like Salmon Creek and Domaine Napa, plus, of course, Charles Shaw and a new super-value wine for independent grocers, Crane Lake.
Many wonder what the difference is between the wines, and reporters at the event joked that the two cooling towers for the nearby abandoned Rancho Seco nuclear plant will be his new tanks--one for red, one for white.
But Fred Franzia claimed a different winemaker for each wine in its price category. "They're all different," he asserted. He also disputed that the Charles Shaw varies. "No wine tastes the same every day," he claimed, dismissing reports by critics that they've found variations.
Franzia wonders why other wineries don't follow his lead and introduce lower-cost wines, and he said even wine patriarch (and relative) Ernest Gallo complained that he's selling wines too cheaply. "They're afraid consumers will get used to the prices," said Franzia.
Franzia is leading a virtual crusade for less expensive wines. Few restaurants feature his wines, and he fumes that they won't sell wines at low markups. "If they sold wine cheaper, everyone's food would taste better," he pointed out. "Until they do, America is never going to be a wine-drinking nation."
He doesn't add that he'd be a likely beneficiary if the restaurants more sold inexpensive wine.
Franzia challenges restaurants to sell decent wines at $10 per bottle, and has been seeking a major restaurant chain to partner with his company much as Trader Joe's did at retail. "The Charles Shaw project made Trader Joe's a destination retailer for wine; a restaurant chain should be able to do the same," he said
So far, however, Franzia has been unsuccessful in signing up a major restaurant chain for his wines, a process Gallo and some other producers have done well.
He also seems mystified that more groceries don't emulate Trader Joe's. "How can any major grocery chain not have a wine that competes with Two Buck Chuck?," he asked.
He said that Bronco's Sea Ridge brand, which is sold in Safeway for $4.50, sells for about the same at wholesale as Charles Shaw, so Safeway could sell the wine for $2 and still make a profit.
Chains have sold $2 wines, but when it was pointed out that other super-value wines didn't do well, Franzia asserted, "They weren't selling our wine!"
He seems especially incredulous that big box stores like Costco and WalMart don't sell super-value wines. "They're not in the game; their prices are way out of line," he said.
Fred Franzia has often complained about imports in the past, so it's interesting that he is now importing La Boca wine from Argentina, that is also sold at Trader Joe's.
In the past, he argued that imports undercut California wines in America. "Every time we give up market share to imports, we have to fight to get it back."
Now, he seems comfortable in importing wines that undercut other imports, but he also sees the weak dollar as a boost to our exports.
The Future of Charles Shaw and Its Cousins
Franzia asserted that little of the Charles Shaw wine was from surplus bulk. "There wasn't that much around," he said, dismissing the reports of vast surpluses. "There wasn't anywhere near as much as was reported."
He said the stories were affected by the inflated amount on the spot market, a small amount of total wine production.
He said that he can adequately supply the demand for the super value wine in today's environment, and has even introduced another version, Crane Lake, for stores other than Trader Joe's. He admits that sales to Trader Joe's are off a bit since last year, but believes that's because the stores loaded up inventory a bit too much last year due to the demand.
Most Charles Shaw wine is the four big varieties: Cabernet Sauvignon, Merlot, Chardonnay and Sauvignon Blanc, but Bronco has also tried some other varieties. It sold some 300,000 cases of Gamay Beaujolais in the fall, and is adding Syrah. He also has Viognier, but finds it is in little demand.
Interestingly, Franzia claimed to be California's largest producer of Pinot Grigio, the industry's hottest label, but it's in such demand from other companies that he only sells it in the Forest Glen line. "Others can buy it if they pay cash," he joked.
Looking to the future of his wine company, Fred Franzia worries that his generation lacks the leadership qualities of the Gallos and Mondavis of the last generation. However, there are 13 adult children between Bronco partners Fred, Joseph and John Franzia. Fred Franzia noted that nine of the 13 are working for the compnay.
If any of them have Fred Franzia's talent--and perhaps a bit more restraint--the future success seems assured. wbm
Paul Franson writes from St. Helena, California, about wine and business. Check out his websites: www.franson.com or www.napalife.com.
Friday, September 28, 2007
Valuing Insurance Companies: Part 2
Valuing Insurance Companies: Part 2
By Emil Lee September 28, 2007
In the first part of this article, we talked about some of the qualitative criteria investors should use to evaluate insurance companies. Now let's get down to some of the quantitative aspects of insurance valuation -- the hard numbers that help indicate insurers' overall health.
Tangible book valueTangible book value (TBV) is the value of an insurer's assets minus its liabilities, excluding intangibles and goodwill. This could also be a proxy for liquidation value -- an estimate of what the insurance company would be worth if the company closed its doors, paid out claims, and returned excess capital to shareholders. (Hence the term "shareholders' equity.") Obviously, you'd want to pay a lower multiple of tangible book value to increase your margin of safety, assuming you can't get shares at a discount to TBV.
The amount of floatA big part of a bank's value is its amount of core deposits, because a bank can easily earn more from a depositor's money than it pays out in interest. And that doesn't even include the myriad fees it can reap, including overdraft and service charges on those deposits.
Similarly, an insurer pockets any investment income it earns from policyholder float. So the amount of float an insurer generates plays a big role in determining its worth. To calculate float, add together loss and loss adjustment expenses with unearned premiums, then subtract premiums receivable and deferred policy acquisition costs. Using the latest quarterly figures, I calculate Income Investor recommendation Mercury General's (NYSE: MCY) float at roughly $1.5 billion, or about half the company's nearly $3 billion market cap. Meanwhile, I calculate Progressive's (NYSE: PGR) float at about $6.8 billion, or nearly half the company's $14 billion market cap. Clearly, Progressive's larger amount of float makes the company more valuable.
Cost of floatThe cost of float varies inversely with its value. The more you have to pay for it, the less it's worth. If I opened up my own bank, and offered depositors a 10% interest rate, I could probably attract deposits very quickly -- until I went broke trying to pay out that interest.
Insurers that generate low-cost float are much, much more valuable than their higher-cost peers. The best way to gauge the cost of float would be to look at a company's long-term combined ratio versus its competitors. If the insurer consistently earns combined ratios of less than 100%, that's very good. It means that the insurer earns an underwriting profit, and has a positive cost of capital. Think of it as a bank whose depositors pay the bank to hold their deposits -- and allow the bank to pocket any investment income it earns.
The two most sustainable ways to generate low-cost float are exercising underwriting discipline and maintaining low overhead and expense ratios. Progressive, and Berkshire's (NYSE: BRK-A) (NYSE: BRK-B) GEICO, particularly fit the bill in those regards. Last year, they posted 13.3% and 11.9% underwriting profit margins, respectively, compared to the auto insurance industry's average of 7%.
Float growthFloat growth, as long as it comes at a reasonable price, increases an insurer's value. For example, through organic growth and acquisitions, Berkshire increased its float from about $20 million in 1967 to $50.9 billion at the end of 2006. That represents a roughly 21%-22% annual increase, almost identical to Berkshire's share price appreciation and the annual growth in its per-share book value.
Investment incomeThe last piece of the puzzle? How profitably the insurer actually uses its float. Some insurers tend to put all their money in low-yielding investment-grade fixed-income securities. There's nothing wrong with that, but it'd be nice if insurers could earn higher risk-adjusted returns, the way Berkshire, Markel (NYSE: MKL), and White Mountains (NYSE: WTM) do. Flagstone Re (NYSE: FSR) and Greenlight Re (NYSE: GLRE) are just getting started, but they follow the same mold. I'd also advise Fools to look at Enstar Group (NYSE: ESGR).
Add these factors together -- tangible book value; the size, cost, and expected growth of the float; and the expected returns from that float -- and you should be able to estimate an insurer's true worth.
Related Foolishness:
Valuing Insurance Companies: Part 1
Don't Sell Without Reading This First
How George Soros Predicted the Mortgage Crash
By Emil Lee September 28, 2007
In the first part of this article, we talked about some of the qualitative criteria investors should use to evaluate insurance companies. Now let's get down to some of the quantitative aspects of insurance valuation -- the hard numbers that help indicate insurers' overall health.
Tangible book valueTangible book value (TBV) is the value of an insurer's assets minus its liabilities, excluding intangibles and goodwill. This could also be a proxy for liquidation value -- an estimate of what the insurance company would be worth if the company closed its doors, paid out claims, and returned excess capital to shareholders. (Hence the term "shareholders' equity.") Obviously, you'd want to pay a lower multiple of tangible book value to increase your margin of safety, assuming you can't get shares at a discount to TBV.
The amount of floatA big part of a bank's value is its amount of core deposits, because a bank can easily earn more from a depositor's money than it pays out in interest. And that doesn't even include the myriad fees it can reap, including overdraft and service charges on those deposits.
Similarly, an insurer pockets any investment income it earns from policyholder float. So the amount of float an insurer generates plays a big role in determining its worth. To calculate float, add together loss and loss adjustment expenses with unearned premiums, then subtract premiums receivable and deferred policy acquisition costs. Using the latest quarterly figures, I calculate Income Investor recommendation Mercury General's (NYSE: MCY) float at roughly $1.5 billion, or about half the company's nearly $3 billion market cap. Meanwhile, I calculate Progressive's (NYSE: PGR) float at about $6.8 billion, or nearly half the company's $14 billion market cap. Clearly, Progressive's larger amount of float makes the company more valuable.
Cost of floatThe cost of float varies inversely with its value. The more you have to pay for it, the less it's worth. If I opened up my own bank, and offered depositors a 10% interest rate, I could probably attract deposits very quickly -- until I went broke trying to pay out that interest.
Insurers that generate low-cost float are much, much more valuable than their higher-cost peers. The best way to gauge the cost of float would be to look at a company's long-term combined ratio versus its competitors. If the insurer consistently earns combined ratios of less than 100%, that's very good. It means that the insurer earns an underwriting profit, and has a positive cost of capital. Think of it as a bank whose depositors pay the bank to hold their deposits -- and allow the bank to pocket any investment income it earns.
The two most sustainable ways to generate low-cost float are exercising underwriting discipline and maintaining low overhead and expense ratios. Progressive, and Berkshire's (NYSE: BRK-A) (NYSE: BRK-B) GEICO, particularly fit the bill in those regards. Last year, they posted 13.3% and 11.9% underwriting profit margins, respectively, compared to the auto insurance industry's average of 7%.
Float growthFloat growth, as long as it comes at a reasonable price, increases an insurer's value. For example, through organic growth and acquisitions, Berkshire increased its float from about $20 million in 1967 to $50.9 billion at the end of 2006. That represents a roughly 21%-22% annual increase, almost identical to Berkshire's share price appreciation and the annual growth in its per-share book value.
Investment incomeThe last piece of the puzzle? How profitably the insurer actually uses its float. Some insurers tend to put all their money in low-yielding investment-grade fixed-income securities. There's nothing wrong with that, but it'd be nice if insurers could earn higher risk-adjusted returns, the way Berkshire, Markel (NYSE: MKL), and White Mountains (NYSE: WTM) do. Flagstone Re (NYSE: FSR) and Greenlight Re (NYSE: GLRE) are just getting started, but they follow the same mold. I'd also advise Fools to look at Enstar Group (NYSE: ESGR).
Add these factors together -- tangible book value; the size, cost, and expected growth of the float; and the expected returns from that float -- and you should be able to estimate an insurer's true worth.
Related Foolishness:
Valuing Insurance Companies: Part 1
Don't Sell Without Reading This First
How George Soros Predicted the Mortgage Crash
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