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Interview, Part 1: Jim Mortensen, President And CEO, Ste. Michelle Wine Estates

May 4, 2020

In its first quarter results released last week, Ste. Michelle Wine Estates parent company Altria recorded pre-tax charges of $392 million on Ste. Michelle’s operations—including a $292 million wine inventory write-off and $100 million for losses on future non-cancellable grape purchases. In concert with that move, Ste. Michelle has implemented a “strategic reset” aimed at maximizing profitability and cash flow generation. Shanken News Daily editorial director David Fleming spoke with Ste. Michelle president and CEO Jim Mortensen to learn more about the reset and future plans.

SND: What led to the write-off just announced in Ste. Michelle’s recent first quarter results?

Mortensen: Some years ago, there were ambitious plans and prospects on volumes. If you’re projecting a certain sales level, you look at vineyard capacity. We grow only about 10% of our grapes, so 90% of our supply comes from our growers. We asked them to add vineyard acreage, and they did. Our projections didn’t materialize, and so inventory levels built up over a number of years. It got to the point where we needed to take care of that—we saw that we weren’t going to sell our way out of the problem. We conducted a disciplined analysis, and then took the brave decision to write it off. And it’s a large write-off.

SND: You also announced the implementation of a strategic reset. What are the elements of that?

Mortensen: The reset needs to be seen in parcel with the write-off. Now that excess wine is no longer an element in deployment of CapEx and OpEx, there are things we can do. One is more disciplined behavior on CapEx. We need to be more selective about where we place our CapEx bets. As the market comes back, we’re fully prepared to deploy people against opportunities, but we have to see the rate at which it comes back. There are some marketing expenditures we think were unnecessary, particularly over the last five or six weeks. Our pricing strategy also was a bit incoherent, and that’s not the case anymore. We now have greater disciplines and analytics against pricing and pricing behavior. That’s a critical area in the strategic reset.

SND: Have any SKUs been eliminated as part of this entire process?

Mortensen: No, but I would add that to the list of things requiring more discipline in the strategic reset. We have a long tail of small SKUs, and we plan to confront that. I can’t tell you which SKUs will go, but there’s plenty of room to shorten the tail. However, we also have wines that sell mainly through the wine club channel and have incredible character, great stories, and good margins. They may look small, but it isn’t just about volume.

SND: What about the brand innovation piece, which has been a focus at Ste. Michelle, most recently with the Elicit Project?

Mortensen: With Elicit, we’re pushing the innovation envelope. We recently launched Liquid Light, an amazing Sauvignon Blanc, as one of Elicit’s first projects. But here’s the issue: retailers aren’t interested in launching new brands and doing in-store resets during Covid-19. We got a little unlucky there, because some products were slated to launch at around this time. So we’ve decided to delay some of them, because it’s costly to launch a product twice. The market can be pretty unforgiving—if you launch and it doesn’t work and then come back to relaunch, people may not always remember that the initial effort was during Covid. So I prefer to pull back and introduce these products when market conditions are more accommodating. Having said that, Liquid Light is off to a good start, based on IRI numbers, where it’s the number-four new Sauvignon Blanc. We also have Altered Dimensions, as well as Fruit & Flower, which I find very interesting. It’s a Chardonnay in a 750-ml. bottle, plus a smaller canned format across three different varietals.

SND: What other aspects of the Elicit Project are key?

Mortensen: We’re very focused on health and wellness. We’ve observed the phenomenon of hard seltzer, and I get asked all the time whether we’ll go into that business. My answer is an emphatic no, but we are drawn to the reasons why people go there. A large part of it is lower calories, lower sugar, and lower carbs. There’s space for that in wine, and we have people developing products to compete in the health and wellness space. I don’t want to give too much away, but I’ve tasted some prototypes, and they’re very promising.

Ste. Michelle Wine EstatesLeading Brands in the U.S. (thousands of 9-liter case shipments)
Rank Brand Origin 2018 2019 Percent
Change1
1 Chateau Ste. Michelle Washington 3,281 3,275 -0.2%
2 14 Hands Washington 1,649 1,579 -4.2%
3 Columbia Crest Washington 788 735 -6.8%
4 Antinori Italy 388 376 -3.1%
5 Erath Oregon 293 344 17.1%
6 Two Vines Washington 351 294 -16.1%
7 Red Diamond Washington 248 209 -15.6%
8 Motto California 67 162 +
9 Domaine Ste. Michelle Washington 157 148 -5.7%
10 Stag’s Leap Wine Cellars California 139 138 -0.9%
11 Prayers of Sinners and Saints California 74 +
12 Intrinsic Washington 67 66 -0.9%
13 Drumheller Washington 47 64 36.2%
Total Ste. Michelle Wine Estates 8,246 8,294 0.6%
1 based on unrounded dataSource: IMPACT DATABANK © 2020
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