I think I first encountered Pepperwood Grove Syrah in the mid-'90s. I was astonished that a $6 California Syrah could taste the way it did — namely, like honest-to-goodness Syrah. Then they did it again, this time with Pinot Noir. Then Zinfandel. Who are these guys?
Connoisseurs of bargain wine will no doubt shake their heads at this. "The mid-'90s? Pepperwood Grove was already a decade old! 'Who are these guys?' Has he never heard the name Sebastiani? Hello?"
Indeed. It turns out that Pepperwood Grove was born in 1986 — not with the planting of a vineyard, nor with the purchase of tanks and barrels, but rather, with the installment of a telephone in one room of the house belonging to Don Sebastiani. Don was (and is) the grandson of August — one of Sonoma's iconic early producers — and he had just been installed as the new Man in Charge. Almost immediately, he started up Pepperwood Grove as a side project with his brother-in-law, Roy Cecchetti. Don's son Donny takes up the story. "It was a very pure, bare-bones, no-asset-negociant operation. They had the telephone, and that was it. Somebody else was making the wine, somebody else was selling the wine, the whole nine yards." But Don and Roy made it all come together, assembling the wines and selling them under the Pepperwood Grove label.
It might seem odd to be starting a side venture just as you're settling into power, but the move was entirely in keeping with Don's general approach to business. "One of our strengths," says Donny, "and something my dad has always preached — is that we don't fall in love with any one particular idea. When he took over the Sebastiani winery in 1985, he didn't have a grand plan, but he wanted to create options."
That meant diversifying. "In 1985, everything that went out of that place was branded Sebastiani, and it was low-end stuff." Don set about dividing his kingdom, creating multiple brands. "The lower-end stuff started going out under the Nathanson's Creek and Vendange labels. The option there was to have a product that didn't have our family name on it. You could have everyday prices, even be super-aggressive, and you didn't have emotional and political ties to a trademark." And without those ties, an outright sale to a strategic buyer — should such a thing ever prove desirable or necessary — would be a lot easier to contemplate. "It's just an asset, as opposed to your last name." (Sometimes, it's tempting to wonder how the original Charles Shaw — whose name now graces the Bronco-owned wine known as Two-Buck Chuck — feels about the brand these days.)
Vendange took off — "Zero to five million cases over the course of ten years." And with Vendange & Co. providing cash flow, Don could concentrate on polishing Grandpa August's legacy. By the time Don left Sebastiani Vineyards, says Donny, "The brand was arguably in better condition than when he arrived. The Sebastiani brand had been traded up from jug wine to a pretty good premium wine -- I think they get around $20 a bottle now."
That incredible growth also helped spur Sebastiani's expansion into the quasi-negociant market. "Sebastiani owned (and still owns) a lot of grapes in and around Sonoma County, and we had long-term relationships with growers in Lodi, the North Coast, and even Monterey. Our grower-relations manager knew those vineyards as well as some of the guys who worked them." But even so, when demand explodes, you sometimes have to scramble to keep up supply. "You can't really forecast that kind of thing." In this case, scrambling meant buying grapes and even wines on the spot market just to keep bottles on the shelf.
Then, in 2000, Don decided to sell the winery's non-core assets — six brands and two Lodi wineries — to Canandaigua Wine Company (now Constellation). "My dad developed all those assets, and they were all non-core assets. We didn't sell any of the Sebastiani trademarks, the Sebastiani brand name, or any of our real estate in Sonoma County." After the sale, Don resigned as chairman and CEO of Sebastiani Vineyards, handed over control of the core assets to his sister and her husband, and used his new liquidity to found Don Sebastiani & Sons. At the same time, he bought out Roy Cecchetti's interest in Pepperwood Grove and made it the first brand of the new operation.
Again, it was about keeping options open. "At Sebastiani, even though he was CEO, he still had family constraints. He was looking for some elbow room. And my generation was getting ready to come into the workforce — there are 14 grandkids. You have to start thinking about who's going to run what. Why deal with it?" Plus, Canandaigua was "on a buying binge, and the market was getting really aggressive. Don caught it just before Two Buck Chuck came in; it was a smart time to sell."
Pepperwood Grove "established the corporate identity as a negociant, at least from a production standpoint." But Don & Sons are a long way from a telephone in a home office. Among other things, they have a winemaker, Richard Bruno. "Any way that you can get wine from a piece of dirt and onto a retail shelf, we're doing it," says Donny. "The majority of our wines come from long-term wine-processing contracts. That's the best of all worlds — somebody else makes the wine. There are dozens of wineries up and down the coast of California that make, predominantly, wine for somebody else. We work with a handful of them — not the super-big guys, but the next strata down. We get to talk about some winemaking protocols, get our spoons stirring the soup. Our winemaker knows what he's getting delivered to him. But we also buy wines on the spot market, and we buy a lot of grapes. For the last couple of harvests, I think we crushed around 5000 tons." Again, the work is being done at someone else's facility, but "our man is there, watching the grapes go through the sorting table."
Other aspects of the business, however, keep to that stripped-down ethos. "We work on low margins, but we make it up on volume. We're a private company, so we don't have to go to Wall Street every quarter and hit profit-margin numbers. We buy growth with our profit margin by spending more money on grapes and wines and by getting really aggressive on price. In the wake of Sideways, we were, to be honest, losing money on Pinot Noir. We just said, 'We've got this big demand for this brand that we've built, so let's spend whatever it takes to fill the Pinot Noir slot.' But that was an anomaly."
The general trends in the wine market have helped some, of course. "I've been in the wine business for ten years, and throughout, there's been a pretty consistent excess in supply. It's still difficult to find Pinot Noir, and Dry Creek Zinfandels are pretty hot. But for the most part, you can find whatever wine you want for that under-$10 range. I don't want to discount what our winemakers do — they do a phenomenal job — but the wine is available."
Interestingly enough, the bare-bones business style sometimes aids in the practice of keeping one's options open. "People talk about the success of screw-cap wines," offers Donny. "Clearly, consumer acceptance is on the rise, but I think it's only in particular categories. Alternative whites like New Zealand Sauvignon Blanc — wines that are crisp and fresh and cold? There, screw-caps work. But for an $8 Merlot? I think that definitely calls up the wrong association. It can be a hindrance toward sales, and we definitely walked into that bear trap. But we were able to walk right back out. We didn't spend $2 million on consumer research or $5 million on packaging and television ads. If it doesn't work, walk away from it."
The model is working, and the industry is taking note. "I don't know if people are actually following us, but they're definitely adopting the model. Guys are trying to get assets off the balance sheet. They're saying, 'Listen, we don't have to have an address to sell wine. The wine is good. We should be taking the money and putting it into making the wine better, making the price point sharper,' whatever."