Fruity, With Lush Margins Vintners scoffed when Nickel & Nickel debuted $125 wines in a recession. But Napa Valley is toasting it now.
By Paul Kaihla

(Business 2.0) – California's wine country, it turns out, was hit just as hard by the economic downturn as the rest of the world. Prices for some of the most coveted brands plummeted by a third, and profits of high-end producers fell by half as restaurants canceled orders and drinkers traded down. The conventional wisdom in Napa Valley was that only vintners who'd been sampling too much of their own product would be foolish enough to launch a high-priced brand.

But that's exactly what Dirk Hampson and Larry Maguire did when they launched Nickel & Nickel in 2000. And they must have been drinking big, because they sure weren't thinking small: The $25 million launch was the biggest for an ultrahigh-end wine since Robert Mondavi and Baron Philippe de Rothschild created the highly successful Opus One brand in the late 1970s.

As it turned out, it was the smartest move the two men could have made. Not only did they plant their "single vineyard" wines in the cellars of leading restaurants and wine snobs across the country, but they did it without marking down their prices the way other high-end wineries were doing. While their Oakville, Calif., winery isn't profitable yet, it's nearly into the black after just four years. Most vineyards take 10 years or more to reach profitability.

Nickel & Nickel's strategy plays to the snobbery of luxury branding by creating wine from a single grape varietal from a single vineyard. Much like single-malt whiskeys or boutique beers, the product appeals to the drinker who is part collector, part show-off. "It was the next step in the evolution of Napa's luxury industry," says Hampson, Nickel & Nickel's chief winemaker and president.

During the good times of the late 1990s, Hampson and Maguire, both Far Niente winery executives, had approached their employer, the Nickel family, with the idea. The family liked the plan because the new wines wouldn't compete with its own well-regarded blended cabernets--liked it so much, in fact, that Far Niente put up the initial investment needed to start the new winery. Hampson and Maguire began buying old-growth vineyards and grapes from vineyards that abut Napa's most prestigious estates. They nabbed the Sullenger vineyard partly because of its proximity to Opus One, whose wine sells for $150 a bottle. The new winery's Stelling vineyard is adjacent to the plot that grows the grapes for Robert Mondavi's reserve cabernet, which sells for $100. Because an acre of land in this area goes for as much as $300,000 and produces a mere 3 tons of small, dense grapes, the new brand attained instant credibility. Then came the recession. As other luxury winemakers began cutting corners--and prices--Hampson and Maguire began dreaming up ways to make Nickel & Nickel stand out.

A Diversified Portfolio

What they came up with was counterintuitive, to say the least. As the wine industry's troubles deepened, the two execs decided to produce more wines, but in smaller volumes. "I didn't bring in a team of Harvard MBAs and do 45 studies," Hampson says--but it was clearly the right move. Though upping production from six to 25 single-vineyard wines complicated their marketing plan, it made sense in the way that portfolio diversification does: Going with a broader range of wines reduced the upside potential because not all of them would be hits, but it diluted the impact of any failures. And with volume limited to about 1,000 cases per vineyard, the wines would seem more select, and thus worth more to the average wine snob.

Nickel & Nickel still had to stir up demand. While most luxury brands take years to establish cachet, there are shortcuts. In the wine industry, the fastest--and most difficult--route is to get an endorsement from the Wine Advocate's Robert Parker or Wine Spectator's Jim Laube.

In the end, Hampson and Maguire decided to ignore Parker, fearing that his preference for full-bodied, fruity wines would penalize their brand's subtler flavors. Instead, they courted Laube with private tastings at the winery. The result: a 92 rating for the 1999 Stelling cabernet sauvignon, just one of 11 Nickel & Nickel vintages to score 90 or more points. Laube described the wine as "intense and focused, with complex, concentrated, firmly tannic blackberry, chocolate, currant and cedary oak flavors that firm up nicely on the finish, offering depth and length." For an oenophile, it doesn't get much better than that.

Friends in Hot Places

With that stellar recommendation, Hampson and Maguire could target the wine lists of the nation's top restaurants, the so-called A++ establishments like Gary Danko in San Francisco, Charlie Trotter's in Chicago, and New York's Gotham Bar and Grill. "I was already friends with Gary and Charlie," Hampson boasts. Getting the 1999 Stelling cabernet, for instance, on a top wine list--such as Danko's 1,600-label roster, where it sells for $255--is like an advertisement to industry insiders. The approval gives other chefs, sommeliers, and wine connoisseurs the confidence to buy the brand too.

But the real test would be whether Nickel & Nickel wines could resist the discounting that was going on around them. For that, Hampson and Maguire needed the muscle of distributors.

Courting the Power Brokers

When Nickel & Nickel sells a bottle of the Stelling cab, it collects just half the suggested retail price from the distributor--$62.50, in this case. The middleman then sells it to a store or restaurant for $94. The retailer, in turn, typically marks up the bottle to $125. A vestige of the post-Prohibition era, the distributors are the only companies that can sell wine to stores--and that makes them gatekeepers to the consumer market. With this enormous power, they can make or break a new brand. So a winery needs to really sell to these guys.

Consider Jim Myerson's Wine Warehouse, one of the biggest distributors in Southern California, which is the largest wine market in the country. If you'd blown into Napa, set up a winery, and tried to get an appointment for Myerson to taste your new wine, you'd probably wait for months--or perhaps forever. Hampson, though, had known Myerson for 21 years through Far Niente. "We made those guys a lot of money," Hampson says. He had kept Myerson in the loop about Nickel & Nickel's plans and gave the distributor a taste of the product while it was still aging in barrels. When it was ready to pour, Myerson invited the Nickel & Nickel crew to present a pre-release mass tasting and pitch to more than 100 members of his L.A. sales staff. The wines were a hit. "If we didn't have the loyalty of distributors who believed in us," Maguire says, "we could never get the product to consumers."

This is no vanity project, though, so the true measure of success will be profits. Nickel & Nickel, which this year is selling 15,000 cases from 16 vineyards, might be profitable already if the price of cabernet grapes hadn't jumped 15 percent in 2001. Hampson, with plans to increase the annual volume to about 25,000 cases of 25 different wines in 2007, takes note of Opus One, which produces about that amount and is said to net $7 million a year. "That kind of number puts us right up there as a serious contender," he says. As he well knows, profits only add to the mystique. And that's how you sell even more.