BREAKING NEWS: The Fladgate Partnership Purchases ...

[Roy Hersh]

The official press release will be included in the January FTLOP newsletter. Due to the fact that this deal was just signed over the weekend, it is seen here for the first time outside of Portugal.
Roy

January 3, 2008
The Fladgate Partnership purchases 25% of the Casa do Douro stock –

For a number of years the Casa do Douro has been searching for a solution to the issue of its high levels of unsold Port and the corresponding levels of debts that it has. There have been a number of attempts to find solutions over the years but until now the Casa do Douro has not made a meaningful sale to any shipper. The Fladgate Partnership has now agreed to purchase about 25% of its stock, mostly Ports of about 10 years of age. It has decided to take this step as the destiny of the shippers and farmers are intertwined.

The Fladgate Partnership is only the fourth largest shipper with 11.7% of the total Port market volume (behind Symington 22.3%, Porto Cruz 20.5% and Sogrape 15.4%) but a more significant percentage of the value share. It is the only Port house to have remained focused on the Port market and not diversified into table wines. This focus on Port is lead by the special categories where the company accounts for about 30% of all specialty Ports sold and is the leader in volume and value in Aged Tawnies.

For this it holds the most extensive stocks in the industry and has just
completed, in 2007, the building of an additional 3,500 m2 warehouse specially designed for aging tawnies. The recent growth in this style of Port is led by strong consumer demand in many countries and is expected to accelerate in the coming years; it may only be restricted by supply. With the growth in demand from the top houses, like Taylor Fladgate and Fonseca, has come more interest in the mid priced range where the group expects to now be able to increase its offer.

In the last decade the entire Port industry has grown the special category sector by 105,000 cases and The Fladgate Partnership has accounted for over 73% of that total growth. Bridge added “I am constantly asked why we are not in the table wine business like all our competitors and the answer is always that we are busy helping to promote the growth of specialty Ports (vintage, LBV, aged tawny). The fact that our company has accounted for three quarters of the growth in the last decade is a testament to our top quality brands and our hard work in maintaining the high standards of quality of our Ports. We have lead the way and increasingly see the industry polarizing between the specialist companies and those who focus on volume for its own sake; the commodity producers.”

Bridge added “We certainly do not need to do this as we have extensive stocks but a company of our experience of selling quality Ports is able to develop a market for these wines. The truth is that over the last few years many shippers have made purchases of these wines and that they have leaked onto the market, sometimes in a disorderly fashion. Our intention in making this investment is to work the wines, which have strong potential, and help to ensure that Aged tawny Ports retain all the
quality elements that consumers are looking for. It is an example of how we, the shippers and growers, must work together to help promote this extraordinary unique product that is Port”.

David Guimaraens, the group’s head winemaker stated “Our technical expertise will help to present these wines in a way that is appealing to today’s consumers. This is more about the willingness of our group to help the situation in the Douro and to play our part in leading the sector forward.” Commenting on the deal, Managing Director Adrian Bridge said “this is an important step that we are taking to help solve a situation that has been overhanging the Port trade for a number of years. Although we are a small specialist company we are providing a strong leadership role in the industry as we believe in the future of Port and are responding to consumer led demand for more Aged Tawny. This deal will help the Casa do Douro solve some of its problems and improve conditions for the
farmers in the Douro who are the life blood of the Port industry.

______________________________________________________

Your thoughts?

[Andy Velebil]

I see they needed more liquid resources to make their 10 and 20 year tawnys. Considering how much they sell of this every year, its really no surprise. BTW, they are really trying to make a push to catch up to the Symington's.

One thing that always makes me laugh, is they do sell a dry wine. The Fonseca white dry wine (not at home now and I forgot the name). They don't talk about it, advertise it, but you can buy it at Panascal and I think their tourist store in VnG.

[Marc J.]

Interesting move! I agree with Andy, it looks as though The Fladgate Partnership is looking to make a push in the aged Tawnys sector and they saw this as a good, strategic acquistion. I'm intrigued to see how they plan to market this wine.....

Marc

[Andy Velebil]

Marc,

I'd guess that the aged tawny stocks are for the Taylor 10 and/or twenty year blends. Considering how much of it you see here in the states alone..at almost every wine store and decent corner liquor store, the amount is staggering. They sell so much of it that they do 2 bottling runs a year for the 10 and 20 year tawny. Thats a lot of juice So they really have no choice but to buy others stocks to keep theirs running at full tilt. So i doubt they bought it to expand another line, at least for the tawny's.

I found the name of the dry white wine....Fonseca Don Prior Douro (white wine). Its average, but by no means my favorite white wine from the Douro.

[Roy Hersh]

Actually The Fladgate Partnership produces a couple of different table wines. The one Andy mentioned is in my current newsletter's Feature Article re: the 2007 Fortification Tour. As the Fladgate Partnership has committed to Port and only Port wine, they do makes table wines that they then serve in the restaurant and when they do catered events. We started off with:


2003 Don Prior Douro White - 3,000 cases made by David Guimaraens but not a single bottle has been exported (and possibly not even commercially released). Green apples and pears come to the fore and a tangy acidity accompanies the flavors along with a slight green spritz similar to Vinho Verde. Made of Viosinho, Gouveia, and Mavasia Fina this was a nice accompaniment to our first two courses. 84 points 5/14/07

Another one that they own/bottle:

Romariz Tinto Red Douro Wine (VQPRD) - Young floral notes highlighting bright plums, dark berry fruit that translate to the palate as well. Easy to approach, smooth and possessing very light tannins. I’d suggest to drink now through 2012. 85 points 5/14/07

[Roy Hersh]

I disagree with some of the comments above from FTLOPers and probably should not have asked for speculation, so I apologize!

The Fladgate Partnership (TFP) - has been at the fore with the Symington's in the current wave of consolidation. Others like Sogevinus and Sogrape have also been very active this decade in carefully selecting weak Port shippers to purchase when the price and timing was right. These are four of the five major players in the Port trade, the other is Porto Cruz (mostly a low end dealer of commodity Ports as Mr. Bridge alluded to ... although his comment was not necessarily aimed at anyone in particular!). These 5 companies are the power players in the Port industry and there should be no misunderstanding of that fact.

TFP has purchased a handful of other companies and quintas in the past 7 years. As transparent as those transactions have been and I mean that in the purest sense of the word "transparent" -- they have also ... LIKE PLENTY OF OTHER PORT COMPANIES ...quietly purchased large and small stocks of Tawny Port which they've then been able to utilize for their own blends of Tawny Port with an indication of age (10/20/30/40 year olds). That is not new and again, they are far from the only ones doing so.

So to suggest that the motivation or even benefit of this "deal" was to gain further stocks of Tawny Port, is naive at best. But the naiveté comes from not understanding the history and politics of the Casa do Douro, their blemished image during the past 75 years, and their role & responsibility.

Most have learned about Beneficio here on FTLOP or on our trips. Especially the politics. I've included articles here on this topic including a recent one by Adrian Bridge of TFP. On our last trip, this was a major part of my discussions (in front of guests) with most of the producers we met with, so that this important dynamic could be better understood!

A brief aside: Going back to the year Prohibition was repealed in the USA, 1933 ... The IVP was born, but so was the Casa do Douro and at the very same time, so was the Port Wine Shipper's Association (this latter institution has been gone for 33 years now). Without creating an article here, I will just mention what the Casa do Douro was in charge of initially, at that moment of creation. Not unlike the powers bestowed by the Marques de Pombal in 1756, the Casa do Douro was handed the reigns to oversee viticulture throughout the Douro and they were also to represent tens of thousands of grower in the Douro at the time. Along with the IVP, (at the time, long before IVDP which came into being in 2003 when Douro wines were added to their responsibility) the Casa do Douro had a lot to say about Beneficio "rights" and quotas, in addition to specifying the price for grapes each year.

That last paragraph could easily be turned into an article or a chapter in a book, to say the least. The ramifications could be elaborated on for hours over a magnum of fine Port, if not for days! These are the details that are not understood and why it is easy to second guess the move that TFP has just made. Without getting preachy, I'd rather see what TFP creates for their official press release which you'll get to read later on.

But please know that their (TFP) intentions are solid and have nothing to do with the simple game of gaining stocks of Tawny Port. Afterall, they are only going in to partner -- with a 25% interest.

Understanding what has become of the Casa do Douro in the past twenty years or better yet, the last five to ten years ... along with their financial weakness is vital to understanding what is going on today and why TFP is stepping up. If you want a beginning spot for research, which folks outside of the Port trade don't even realize: look at the Casa do Douro's "involvement/investment" in a particular Port company. That is just one minute detail, a mere pimple on the labyrinth that is the Casa do Douro, and the lack of execution in their obscurely defined role today.

Their involvement in having governed Beneficio over the decades, as well as their handling and representation of the many large and small growers in the Douro ... is a bit more on target.

As was stated clearly in the article: Managing Director Adrian Bridge said “this is an important step that we are taking to help solve a situation that has been overhanging the Port trade for a number of years.

I don't want to speak for Adrian but I believe he is specifically refering to the "control" and direction of the Casa do Douro, the broken 'Beneficio system' (which allocates the right to make Port to the quintas/growers), the subsidies that ensue (for Douro table wines), and the simple fact that with almost 40,000 growers in the Douro ... less than 1.6% of them control more than 10 hectares. I could go on and on, but would prefer to leave these challenges for the industry to reveal and solve. Yet is clear that TFP wants to help and it seems that they've put their money where their mouth is.

Adrian Bridge will be putting forth a press release on this which will provide greater detail and should clear up some of the items I've mentioned above. Once again, there is far more to this than that which meets the eye (Tawny Port included ).

[Derek T.]

Roy,

You obviously have more knowledge on this subject than most of us here but one thing that is absent from the initial announcement and your summary above is that there simply must be a commercial advantage to TFP in making this investment otherwise it would be niaive in the extreme.

I am sure the intentions of the TFP managment team are entirely honourable in wanting to resolve whatever these historic issues are but at the end of the day they are a commercial enterprise and therefore need to operate as such.

Something else worth throwing into the pot here is that the past few years have seen a huge increase in the volume of port sold as BOB's through UK supermarkets. 10 years ago these were nowhere to be seen and now every supermarket chain in the country has there own range from Ruby through to VP and aged Tawny. A huge proportion of these are supplied by TFP through their subsidiary Quinta & Vineyard Bottlers (I think that's the correct name). This seems to be a good source of juice for these ports as it will allow them to keep the good stuff for their own branded products. I am not saying this is the reason they have done it, just that it is possibly one of the commercial benefits they will have gained from the investment.

Derek

[Roy Hersh]

Agreed my friend. No way they put their money into this if they are not deriving some benefit. Before exploring what you've postulated, how 'bout this hypothetical:

What IF The Fladgate Partnership did this to improve relationships with growers, so they could procure more grapes. Or, if they made the investment because they believed they'd be able to convince the Casa do Douro to change the way they handle the quotas on Port? It could be a million reasons and that is why I am hoping that Adrian Bridge will elaborate and get just a bit more specific, although he might not feel the need or desire to do so.

Your thoughts are certainly well within the realms of possibility. I have no prior knowledge of the rationale for this move. Who knows the extent of the investment though. I have not seen that in print and we may not see it in the future either. Regardless, this wasn't done totally with benevolence in mind. So, you could be as right as it gets. I won't speculate further, because it would be meaningless with no knowledge of what TFP hopes to gain. Hopefully, this will be made clear in Bridge's next missive.

Good points!

[Andy Velebil]

Is the original post a press release? Because it reads like one and going off just that, it really should be worded differently. I'll explian in a second. I'm sure there is an honorable thing there, but like Derek said, they are a money making company...a very solid company at that. Nothing wrong with that at all. They make some very very good products. However, you can't deny their own statements. Irregardless of other intentions....

For this it holds the most extensive stocks in the industry and has just
completed, in 2007, the building of an additional 3,500 m2 warehouse specially designed for aging tawnies. The recent growth in this style of Port is led by strong consumer demand in many countries and is expected to accelerate in the coming years; it may only be restricted by supply. With the growth in demand from the top houses, like Taylor Fladgate and Fonseca, has come more interest in the mid priced range where the group expects to now be able to increase its offer.

That one paragraph flat out says one of the reasons for the investment is to increase their holdings of Port stocks and the realization that they need to increase their available resources.


Of course, increasing their benificio is something most major companies probably want. One other point...but I gotta run to work, so more later.

[João Rico]

I believe that TFO tried to help the Casa do Douro as all of this money will go to pay debts. Besides, TFP exhorted the other players to do the same.
Of course that this ports will give profit to TFP and could not be otherwise since they are there to make profit.

BTW, the most valuable wines from Casa do Douro are now mortgaged to the Portuguese Government.


All the best,

[Andy Velebil]

Derek has made a very good point and one we here in the states rarely see, and that is about the BOB's (Buyers Own Brand). For those that don't know, some port companies sell their ports under a "store" label. an example for us American's, Costco is now selling a Fonseca 10 year old tawny under their "Kirkland" label, which would be a BOB. Sometimes these are the exact same juice as their producer labeled counterpart and sometimes they are a different blend of grapes altogether. They are typically sold at a reduced price than the "original" label stuff. Many times offering a great QPR value. No doubt that these BOB's must put some strain on the supply end and the only way to relieve that is to either buy someone elses already made port or buy more properties to make your own. Or lower the quality of your current Ports as you redirect the better grapes to use as a foundation for the lower end stuff and BOB's.

Most port sold is the lower and mid-priced stuff, remember that VP's only make up a very small percent of all Port sold. So a major company like TFP, which is growing and continually increasing its presence, needs more resources to support it. This can be in the form of existing stocks, more vineyards, production facilities, and all the other things that come with it, including political stuff. I have no doubt that TFP is trying to steer things in their favor, what company wouldn't. There is nothing wrong with this, as that is just part of business (of course, this brings up another disccusion altogether). My only complaint or arguement against would be if their quality started to suffer. So far, I really havn't seen that with TFP products, which is great. Hopefully they maintain that.

I disagree with some of the comments above from FTLOPers and probably should not have asked for speculation, so I apologize!

Roy, don't appoligize, this has sparked a really good discussion. I hope more people chime in with their thoughts. If we all agreed or didn't talk about stuff like this, the world would be a boring place.

[Roy Hersh]

That one paragraph flat out says one of the reasons for the investment is to increase their holdings of Port stocks and the realization that they need to increase their available resources.

Andy, I don't deny this is the case, but it certainly is not the major impetus for this move. It is more like a "bonus" in signing the deal. There is a much bigger picture here, whether that is presented in a press release or not.


João makes an excellent point: I believe that TFO tried to help the Casa do Douro as all of this money will go to pay debts. Besides, TFP exhorted the other players to do the same.

It is clear, that when a "governing entity" like the Casa do Douro has been broken, it affects the entire Port trade. TFP's efforts to be a leader in finding a solution, goes far beyond their 25% investment.


Andy wrote:
No doubt that these BOB's must put some strain on the supply end and the only way to relieve that is to either buy someone elses already made port or buy more properties to make your own. Or lower the quality of your current Ports as you redirect the better grapes to use as a foundation for the lower end stuff and BOB's.

I don't disagree, but almost every year, the Port market is awash with small grower's Port that sits in tanks at coops or never gets made because there isn't a buyer ... or ... they can't get paid in a timely manner OR their aren't the required Beneficio rights to get the juice past the IVDP in order to get it bottled. I realize I am generalizing here, but the juice that goes into BOB bottles comes predominantly from lesser vineyards in the Baixo Corgo sub-region with lower ratings and grapes typically of inferior quality to what we normally see packaged on shelves.

In the grand scheme of things, the BOB juice does not effect what the vast majority of people on this FORUM ever consume. That is not to diminish the "category" -- but it is not taking enough high quality grapes away from the stuff that we usually drink. That said, the growers are the ones who need better "incentives" and the assistance of well-trained viticulturists to help them improve the innate quality of their produce.

[Luc Gauthier]

If as Richard Mayson stated :
- Estimated debt 110 million €
- The government was planing on releasing the stock on the market within 10 yrs .
- Wines are of doubtful quality

Knowing the above , what is the main thrust behind the stock purchase ?

[Alan C.]

If as Richard Mayson stated :
- Estimated debt 110 million €
- The government was planing on releasing the stock on the market within 10 yrs .
- Wines are of doubtful quality

Knowing the above , what is the main thrust behind the stock purchase ?

To talk hypothetically, and in general terms, imagine if you had two barrels of Good Port you could sell for £100 each. But you bought 6 barrels of doubtful Port for £10 each.
You then blend it all and sell the new Port(8 barrels) for £50 each. You turn £260 into £400.

Now take this simplistic thought, add the buyers good reputation, BOB's, and the through the floor price of a struggling companies stock, and would it make any more sense?

Alan

[Roy Hersh]

Did you gents read this thread or just the first posting?

[Andy Velebil]

what is the main thrust behind the stock purchase ?

The Brits are trying to take over the wine world again and this is the first place to start. where is that pot stirring emoticon when I need it

[Roy Hersh]

Andy,

Either that or breaking the monopoly of the SAQ in Montreal/Quebec.

[Andy Velebil]

Andy,

Either that or breaking the monopoly of the SAQ in Montreal/Quebec.

There are a few people here that would really like that

[Alan C.]

Did you gents read this thread or just the first posting?

Roy,

I always look forward to reading your Posts, and digesting your opinions and knowledge. I would though, have to suggest you can, on occasions, see the Port world through Rose tinted spectacles. (Even if true, that's no bad thing) Yes you can criticise, and give controversial views, but, in my opinion, you can also see the good natured, and altruistic in Port people, where others, including me, see hard-nosed businessmen.
I'm not saying you are wrong, or that I am right, but they are just differing opinions. You of course, know the individuals involved. I merely know human nature.
I love Port and the History, and the skills used to make it. I do not necessarily think the blurb that comes out to explain any business deal, is anything other than what smooths things over.
We can often do the same in our own own Posts.

Alan

[Roy Hersh]

Alan,

I totally respect what you are saying and of course you are right. I do like to think the best of people naturally, but at times like the deeper exploration of possible ulterior motivations. As you well know, I don't shy away from controversial views or letting the cat out of the bag at times, even knowing it may result in my being criticized.

In this particular case, it is not just about knowing the personalities of TFP, which I do ... but I am only speculating based on knowledge of some inner workings of the trade overall and Casa do Douro in particular (fraught with poor decisions, structure and execution = IMO) which I base my hypothesis.

Of course others are allowed to disagree and have a very different take on the situation, but often times that is done without the understanding of the dynamics of the interplay of the governing organizations, if not their basic roles, whatsoever. That does not diminish their opinions at all in my mind, but having a broader perspective at times can provide different insight that may (or may not) be more relavent.

Either way, right or wrong .. we will all find out soon enough what the real motivations are and I am not just speaking about the upcoming press release. It won't take long, in retrospect to understand exactly why this deal was done ... after we get to see how it all plays out.

Thanks for sharing your thoughts!