Interview, Part Two: Ste. Michelle Wine Estates President and CEO Ted Baseler

In this second part of our interview with Ted Baseler, the Ste. Michelle CEO discusses competitor E&J Gallo’s entry into the Washington wine business, distributor relations, Ste. Michelle’s new plan to ship half its wines by rail and the outlook on what looks to be a more robust U.S. grape harvest this year.

SND: With its acquisition of the Columbia and Covey Run wineries from Ascentia earlier this year, E&J Gallo says it’s aiming to produce 1 million cases of Washington wine within 5-10 years. How do you see Gallo’s entry affecting the Washington industry? Could it present supply issues down the road?

Baseler: We have long-term contracts with growers with whom we’ve developed relationships over the years, so I don’t see any supply problems on the horizon. Being the pioneering wine company in the Pacific Northwest, and specifically Washington, we’ve had to provide long-term contracts to incentivize growers. It’s not like in California, where people set out to be wine growers first and then find customers every year or every couple of years to write a contract. We give growers contracts that they can then take to a bank to get financing and plant a vineyard. So it’s a different relationship than in California. Growers in Washington are very much in-house, if you will. The other thing is that we produce over 8 million cases of wine—the Columbia winery produces a few hundred thousand. So I think for quite a ways in the future we should be in good shape. We welcomed them to the neighborhood. We understand why they wanted to be in Washington. Considering the growth of this region and the quality of the wines, it makes sense that Gallo would want to be involved.

SND: We’ve heard retailers in some areas complaining of shortages of key wine brands owing to tighter California supply and the switching of brands between wholesalers as the middle tier’s consolidation continues. How are conditions within your own route-to-market?

Baseler: It ebbs and flows. We hear about competitors who will provide more product to a wholesaler who has longer day supply on-hand. We try to be consistent, but sometimes when you have wine that’s going up in price, distributors will rush to bring it in before that happens. So there are lots of fluctuations, and it’s not an exact science. Sometimes a wholesaler will want to preserve cash, so they’ll reduce inventory. It’s just part of the business. We’re always looking at performance benchmarks to make sure that we’re with the best partner in each market. Our depletions growth has been stronger than our shipments, which are affected by changes in the pipeline and day supply and so on.

SND: You recently partnered with shipping company Railex in a bid to eventually ship half your volume across the country by rail. Where do you see the advantages in that route?

Baseler: Again, it’s a case of how the Washington wine business is a bit different from California. Down there, distributors constantly have trucks going into different areas of the state and loading up from each area’s various wineries at the same time. In Washington, you don’t have carriers assigned by distributors picking up from multiple wineries. Given that we ship millions of cases out of the Pacific Northwest and have such a large share of the business here, we knew we’d need to innovate to develop a cost-efficient approach. We approached Railex and other companies about partnering on a warehousing project, and they said they had a one-stop-shop answer. They agreed to build the warehouse (with an $18-$20 million investment) and also ship the wine via rail in a fully controlled, air-conditioned environment, which is also very efficient from a cost perspective.

SND: How is the 2012 wine harvest looking across the West after the light crop last year?

Baseler: The supply and demand issues have been interesting given the short harvest in 2011, but 2012 looks like a healthy crop and I’d expect that domestic wineries will have good quality. Washington and California most likely will have larger harvests this year. Oregon looks like it might be a little lighter. But of course the weather can always change things quickly.

Tagged : California, E&J Gallo, Ste. Michelle, Washington, wine

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