What a Bad Business Looks Like by John Szramiak was originally published on Vintage Value Investing
This article was originally published on SleepyCapital.com by Chris Spanel.
From The Ten Commandments for Business Failure by Donald Keough, there is a great section covering Coca Cola’s diversification into the wine business.
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For years, Coca Cola met with consultants who would pitch acquisition ideas to diversify their business. They said the “core business of soft drinks and juices gave [coke] no hedge against the future and the comany needed to look around to acquires businesses that were compatible but different. From there, they were pitched a nice wine business and they bought it. Robert Woodruff, the former president of the Company (and also the one who made Coca-Cola the cultural icon it is today), decided to take a “personal look at this wine business “his” company had gotten into.” Below is the excerpt of what Woodruff told Keough after visiting the winery.
“Well, the wine business is interesting. I went out to California to see the vineyards. It seems that it takes five or six years for a vine to be mature enough before you can start harvesting grapes. During those years you’ve got quite a few people tending to the vines and praying for the right kind of weather so they yield a good crop. Finally, though, if everything works out, they pick the grapes and they take them to the plant where they squeeze them and put them into these great, hugely expensive stainless-steel tanks where they ferment. From these expensive tanks the wine goes into many small caskets made out of equally expensive French oak. The casket cost fifty-five dollars each. The wine then ages and for some time in the many small expensive casks. Meanwhile, about 15 percent of the wine is lost through evaporation.Soon, however, after aging quite awhile, the wine goes into bottles. They pay a tax at that time on each bottle and then put the bottles away for more aging. You keep the bottles for years, and if everything has gone well during the process and you have a reasonably good vintage, then you finally send the bottles into retail stores where there are hundreds of different kinds of wines on the shelves. At that point, you hope to God that out of that whole array of similar bottles someone is going to buy yours.
Now I grew up in a business where you bottle it in the morning and sell it in the afternoon and in a lot of places there is no other competition. Seems to me that’s the kind of business we want to be in!”
Shortly after, in 1981, Coca-Cola sold the wine business just after they had taken assignments to lead the company.
With regard to the winery deal, Keough said, “Take your eyes off the bull and you will fail. I did.”
This excerpt makes you think about what type of business characteristics you should look for when making an investment. Looking at an investment is like owning a piece of a business (or the whole business, for that matter). It’s not difficult to see that the wine business is not the ideal business to be in. Yes, there are thousands of wineries out there. Some wineriess have 15+ generations on their slab of land and they have been extremely successful in running it over many years. But the amount of risk, variability, high costs and time that is involved in producing wine makes it difficult to be a strong investment. Diversification for the sake of diversification, is something to be careful of. This is both in a business sense, as well as investing.