Investment Insights in the Alcohol Industry with Michael Cella - 014

Join host Brandon Amoroso as he delves into the fascinating world of the alcohol industry with Michael Cella, a seasoned expert in consumer investment banking. In this episode, Cella shares valuable insights into the macroeconomic landscape of wineries and alcohol, challenging prevailing narratives with a contrarian perspective. From the impact of COVID on online alcohol sales to the rise of experiential retail, Michael and Brandon explore the trends shaping the industry's future. With a focus on resilience and innovation, this conversation offers valuable takeaways for entrepreneurs and investors alike. Join the conversation today to stay ahead in the ever-changing landscape of the alcohol industry.

Topic timestamps
🎙️ Introduction to Michael Cella and Oppenheimer & Co. Inc. (00:00:00)
🍷 The macroeconomic environment for wineries and the alcohol industry in 2024 (00:02:07)
📉 Mistakes made during the COVID boom in online alcohol sales (00:05:30)
🛒 Inventory challenges and supply chain issues in the alcohol industry (00:07:43)
📈 Valuations and market dynamics amidst the current challenges (00:08:35)
🌱 Shifts in consumer preferences, including the rise of experiential retail and non-alcoholic alternatives (00:09:24)
🌿 The impact of cannabis as a substitute for alcohol and its regulatory landscape (00:14:06)
🍹 The opportune timing for starting an alcohol business amidst market fluctuations (00:19:49)
🍾 The fun questions (00:22:17)

Mike Cella:
LinkedIn - https://www.linkedin.com/in/michael-cella-54a49a2

Brandon Amoroso:
LinkedIn - https://www.linkedin.com/in/brandonamoroso/
Web - https://brandonamoroso.com/
Instagram - https://www.instagram.com/bamoroso11/
X - https://twitter.com/AmorosoBrandon

Transcript

Speaker 1: 0:04

Hey everyone, thank you for listening to the Drinkscom podcast the business of online alcohol. I'm your host, brandon Amoroso, and today I'm talking with Michael Cella, managing Director Group Head of US Consumer Investment Banking at Oppenheimer Co. Thanks for coming on.

Speaker 2: 0:25

Great to be here. Thanks, Brandon.

Speaker 1: 0:27

So before we jump into some of the topics we want to cover today, can you give everybody just a quick background on yourself?

Speaker 2: 0:34

Yeah for sure. So, again, great to be here. I'm a managing director and I run the Consumer Investment Banking Group at Oppenheimer. I've been here for about a year, overall 20 years investment banking experience, spent most of my time working in the fun subsectors of alcohol and cannabis, and so, as it relates to alcohol, wine is one of the areas that I specialize in as well. So, based in San Francisco, wine is one of the areas that I specialize in as well, so, based in San Francisco, wine is an industry that I care a lot about and have some family history in as well.

Speaker 1: 1:12

What's your family history in the wine?

Speaker 2: 1:23

Yeah, so my grandparents were in the wine business, actually sold wine during Prohibition to the Catholic Church, moved from New York to California, started in the Central Valley and eventually sold their business and moved up to Northern California. I also have a sister who's a winemaker in South Africa, so we've kept that tradition going.

Speaker 1: 1:39

Nice, I had no idea. That's really cool and makes this even more relevant for our talk today. So, pulling back from that, given that you're obviously on the investment side, what does the macroeconomic environment look like for wineries and just the alcohol industry as a whole in 2024? And how does it differ from the COVID period and even before that?

Speaker 2: 2:07

Well, I'll start by saying if you're reading the headlines, there's a lot of negativity on the industry. But maybe I'll take a contrarian view and look longer term. I don't think alcohol is going anywhere. I think the headlines for wine in general have been California wine industry is hurting. There's some view of pain for specific operators in the industry.

Speaker 2: 2:36

Today, a lot of people consume all the time. If you compare it to the COVID times, I think everyone was pantry loading and buying alcohol and consuming it on a pretty regular basis. I think we're now getting back to a new normal, which is the kind of pre-COVID time, and so we've seen some pullback in terms of consumption. I do think that there are some interesting trends as it relates to alcohol, where non-alcoholic options are growing, and I think that that's an interesting dynamic. But I still think that alcohol broadly and wine specifically are going to be consumed quite regularly over time. I will say the way that consumers are consuming is changing a little bit too. During COVID, online that's where you did your shopping that took a lot of share from the traditional brick and mortar operators. But we've had some more return to normalcy in the last couple of years where online hasn't grown as fast, but I think, if you think about yourself and I'll speak for myself too I generally trend towards buying online these days, and I think that that's only going to continue over time as well.

Speaker 1: 4:03

Yeah, I think the time and convenience factor, especially as cities are getting more and more populous, it's getting more and more difficult to even just get around and commute. The thought for me of going to a brick and mortar store is it's almost impossible. I don't even know when I would do it during the day, because I basically have to block a full hour and a half chunk to be able to get in the car. Drive there, find parking, get into the store, go through the selection process which is more difficult, I would argue, in-store than it is online because you don't have access to all this information at your fingertips and then you've got to make the whole return trip back too, all this information at your fingertips, and then you've got to make the whole return trip back too. And if you're in Miami, the bridge will probably go up because there's a boat passing through, so then you'll sit there for another 25 minutes. That's the convenience that people are getting familiar with, especially with Amazon. I mean, I can literally order something you know tonight and it'll be at my doorstep at 7 am. Why would I ever you know ever leave the house to go out and get something like that? So I think long term. It's definitely going to continue in that direction.

Speaker 1: 5:11

But there were some, I think, overreactions in COVID. From your perspective, what were some of the mistakes that were made during the COVID sort of boom when it comes to online alcohol and maybe not mistakes, because you know there's a lot going on at that time and nobody really knew what was going on. But looking back and obviously hindsight is 2020. What were some of the missteps that have led to this being worse than it would have been otherwise, because obviously a lot of industries are cyclical and still there might have been a downturn here even if it wasn't for COVID. But what were some of the things that happened during that time period that have made it a little bit more harsh in 2024?

Speaker 2: 5:52

Yeah, I think that there are two key aspects. One is expecting that revenue growth would continue indefinitely. I think businesses are right to prepare for upside and if you look back, the last 20, 30 years in wine consumption has been pretty consistent in going up and to the right and, you know, preparing for the chance that it wouldn't do that, I think, would have been a good thing to do. The other is the cost dynamics. We see inflation continues to be challenging and building in costs going up. I don't think every company did that. I think that there was some hope that on the cost side things could stay flat or efficiencies could be gained, and so ultimate margin expectations, I think, were probably too high for some. So I would say, both on the revenue and on the margin side, being prepared for what is now proving out to be a more challenging time. I think that could have been something that with hindsight you know, kind of makes sense.

Speaker 1: 7:09

Yeah, I think there's a lot of companies that are sitting on quite a bit of inventory right now. It feels like as but not just in the alcohol vertical either. I see it across the board where there was a mad dash to order during that COVID boom and then, because of the supply chain issues, a lot of the product didn't get there until the demand was already starting to subside because regulations were getting lifted. And now there's quite a few companies with too much stock on their hands and are trying to figure out ways to get through that.

Speaker 2: 7:43

Yeah, and with wine in particular, you know you generally want to sell the most current vintage that's available, whether it's a red or a white, the most current vintage that's available, whether it's a red or a white, and so having too much of a stockpile for prior vintages, it's going to be costly to move through that.

Speaker 1: 8:00

And when you're speaking with wineries and alcohol companies at large, what are some of the things that they're thinking about or that they're focused on moving through this period?

Speaker 2: 8:13

I think it's being careful, making sure that the companies have the financing they need to be able to operate, have a bigger cushion and bigger financial flexibility. That said, we see this not just in wine, but I think you're going to continue to see the haves and the have-nots, where some companies are doing just fine, and so I think, where there's strength in the industry, those companies can continue to grow and in some cases, they may take advantage of other companies that are having a harder time. But look, in terms of valuations, we're not seeing fire sale prices at this stage. Um, I suppose it could come to that, but even even if you just look at the headlines, you know you think things are tough. Valuations are holding up decently well and I think that that's a testament to the strength of the industry and the overall long-term approach that some of these stronger operators in the industry are taking.

Speaker 1: 9:24

And the thing that's pretty unique about at least the wineries and some of the public coverage I've seen is that in the case of most of the Shopify brands we work with, you know they're totally digitally native. They have no retail presence. They don't have any land.

Speaker 1: 9:39

They don't really have any assets, it's just the products that they're trying to sell through, whereas most of the wineries out there, you know they own the land that they produce on, they have the physical, you know tasting room where they're selling out of. So they do have other things aside from that online sales channel. And I think you see it, with sort of the D2C brands that only have D2C, they've been impacted the most, whereas the ones that do have those other channels that they've already been selling through and they're seeing more and more traction through those.

Speaker 2: 10:14

Yeah, and I take Napa or Sonoma as an example, we're seeing consumer trends continue to be strong with what I'll call experiential retail. People are still traveling, people want to visit and so, to your point, I think, having a tasting room, people that are going to wine country here in California and things are, I think things are challenged but there's still reason for optimism as the consumer wants to travel and have those sorts of experiences have those sorts of experiences.

Speaker 1: 10:54

Actually, on another podcast unrelated to alcohol that I recorded literally just this past Friday, all we talked about was experience, retail and how, as the younger generations are getting older and older, they value experiences significantly more than generations previous to them, and that's starting to reflect itself in the way that they purchase, but also in the way that brands and retailers are trying to market and, you know, create these experiences around the products they sell, because it's not, you know, it's not enough to go off of hype alone or to have, you know, a product that you're able to market effectively online. I think the stats for something like Gen Z and younger is really frugal, like rather tight with where they spend, except when it comes to things like experiences, and a lot of that has to do with the social component of it, because when you go to that experience, you know it's almost like social signaling or status signaling, because you're posting about it on Instagram, you know you're showing it to your friends. It's more like an experience based economy than it is hyper consumerism, trying to buy labels and things of that nature. That was sort of the way older generations shop previous to that, the way older generations shop previous to that. So I think it'll be curious to see how wineries and alcohol companies try to tap more into that, because from my perspective, you have alternative products or alternative product formats that have been entering the market that are doing a better job of that, whether the branding perceives more to the younger generation or, you know, they're more focused on experiential pop-ups and things like that.

Speaker 1: 12:36

There's companies like Nomadica or Bev or a lot of these other like you know, sort of startup wine companies I mean Gary Vee, like had his that, I think, sold to CBI and they are, I think, pushing the industry forward faster than it would be moving otherwise because of the way that they're able to tap into the younger audience through some of the things that they do in that, in that front, yeah, that's an interesting dynamic and wine, I think, in particular is is such a heritage driven industry historically and I think it's been slower to move and adapt than perhaps some other industries.

Speaker 2: 13:17

But, to your point, there are new brands that are exciting, that are speaking to the next generation consumer, and generational change in wine, I think, is a really important dynamic that's going on right now and it'll be interesting to see how it plays out.

Speaker 1: 13:34

Yeah, and you have the low-alk and no-alk folks that are starting to take more market share. I think Athletic Brewing is a fascinating company that continues to seem growing and doing really well though I don't know if they actually are, but it feels like that category is taking up a lot of steam and I've also heard from some wineries that they're worried about cannabis as well, because that is being viewed as an alternative for some, especially as cannabis moves into other consumption methods. It's not just smoking it. You can take tinctures, there's drinks, there's literally a thousand different ways that you can consume it now and it actually is typically cheaper, like on a price per. I forget what the term is, but if you're looking at even like a canned beverage, it's typically cheaper. The cannabis alternative to like wine in a can have you been hearing that at all in terms of a shifting in consumer trends towards that as an alternative versus alcohol?

Speaker 2: 14:37

Absolutely. There's no hangover, generally no calories for cannabis and, to your point, the amount of buzz that you can get per dollar spent, it's a pretty good deal if that's what you're looking for in terms of consumption. So, yeah, I think that those are all real dynamics that are occurring. What I would say is cannabis in the United States, it remains federally illegal. There's been a lot of talk about change and opportunity for that to change in the future, but the reality is it's already an industry that exists. It's a $50 billion industry and the way that people are consuming cannabis is going to change and I think the regulatory environment is going to change over time.

Speaker 2: 15:32

And if you, if you look at generationally, the number of consumers that have tried cannabis of younger generations, you know you might see more of a preference shift for them to wine. But you know wine has historically been something that can be aspirational and so, as younger generations, you know, advance their careers in the workforce and build their wealth, I think that there is an aspirational aspect to wine that maybe doesn't exist in the same way for cannabis, doesn't exist in the same way for cannabis. So, um, you know, I wouldn't, I wouldn't be surprised if, um, you know there's some initial pullback in consumption for younger generations of in in wine. Um, except for, maybe, the brands that are really speaking to them, uh, like, like the brands that you mentioned earlier.

Speaker 1: 16:27

Yeah, I don't really know why, but it feels like, uh, cannabis has sort of been turned a little bit into a commodity, uh, when there's it's very difficult to have that brand differentiation. I mean, that's an industry that has been hit really hard over the past two, three years, where it feels like companies are just going out of business left and right. I mean there's obviously a few winners, but the market is saturated with with supply. There's still that aspirational aspect to wine that I haven't seen in cannabis, where there's that sort of legacy and history and especially at the higher end, above a certain price point. I think that'll continue to persist and, you know, as long as they're able to maintain that not only the quality itself but the perception of quality and value, I don't see them really going anywhere and I think that that subset of the market hasn't really been impacted that much throughout any of this, because those are relatively consistent consumers.

Speaker 2: 17:30

Yeah, I think you bring up a good point. There's not a national brand, or there aren't really national brands in cannabis yet that have the same sort of share that other product categories outside of cannabis have. Part of that again is the regulatory environment, where every state has a say as to what they want their cannabis market to look like. So there are a few examples of brands that have pretty good US coverage, brands that have pretty good US coverage, but what you see a lot of is individual states with brands that don't necessarily travel outside that state yet, and so alcohol has the benefit of national branding in a way that cannabis doesn't. So you're not wrong. In terms of wholesale flower prices in cannabis, those have faced some pretty significant downward pressure, and then, moving away from the concept of is this a commodity, is going to be important if those companies are going to build a brand over time.

Speaker 1: 18:34

Yeah, the brand differentiation, I think leads itself into the experience component that we were talking about earlier. I think leads itself into the experience component that we were talking about earlier, Because the brands that really can build out that differentiation, it's all based off of their customer base and, whether or not, you know, the customer base is able to connect and relate to the brand. And one of the best ways to do this, to do that, is through the experiences, which, sure, there there is that component in in cannabis, um, but it is definitely not as prolific as the concept of going on a winery tour or going for a wine tasting. Um, maybe they'll change in 50 years, but but I don't think anytime soon.

Speaker 2: 19:18

Yeah, I think it's going to take time. The concept of going to a bar, enjoying alcohol at a meal, doing a wine tasting, those are all very natural things. There hasn't really been built an equivalent in cannabis at this stage and I think, to your point, it may take decades to get there.

Speaker 1: 19:41

Given the current climate, would you say now is a good or bad time to start an alcohol business.

Speaker 2: 19:49

Yeah, maybe I'm a contrarian and I think of the Warren Buffett quote be greedy when people are fearful and be fearful when people are greedy. I think we're in that market where people are fearful right now. I think some of the M&A activity that happens in this market is going to be really lucrative for those buyers because they're able to buy a business at a fair price rather than maybe at a premium price when things are better In terms of starting a business. I think that there will be great businesses started right now and I think in part because there are folks that are pulling back and reading the headlines. So, yeah, I'll be an optimist right now when people are pessimists and say now is a good time.

Speaker 1: 20:45

Yeah, I think I read an article somewhere and it wasn't related to alcohol specifically, but some of the best businesses, and some of even the ones that we all interact with today, were started downtimes or recessions, and it's almost can be viewed as an opportunity, especially, I think, coming off of the heels of a big boom where a lot of the existing players are maybe reeling from some of the missteps that they took during that uptick. You could really, you know, be well positioned, both from a cash standpoint, but also just a market opportunity standpoint, to be able to take up some share. But I feel like now would be a great time to have a lot of money to take advantage of some of these opportunities.

Speaker 2: 21:30

Yeah, and I think you're going to see some parties do that. There are some recent acquisitions by Constellation and Gallo Um. You know these are some of the largest uh wine businesses out there and you know they're taking advantage of what's uh uh. You know what, what's available in the market.

Speaker 1: 21:53

And alcohol is is not going anywhere, at least not anytime soon. So, um, it will always come back. I've got a couple of uh fun questions for you, uh, stepping back from the the nitty gritty of the uh of the finance world. But first, what is your your favorite wine memory, or it can be alcohol memory.

Speaker 2: 22:17

Yeah, great question. I'd say wine tasting in Napa. I did a tasting at Opus One for an anniversary recently and it was fantastic and it reminds me what's so great about Napa. I've probably done I don't know over 100 wine tastings in my life and it doesn't get old, and so I think the recent one that I'm thinking of is one that is a great memory. But I think what makes it great too is it's a reminder of all the other great memories of wine tasting in wine country in California.

Speaker 1: 23:06

I think that's one of the unique things about wine and alcohol in general is that there's typically you know, a setting, an environment, a person or a group of people that you're with when you're enjoying it, and that lends itself to you know more than just being a product, because there's memories associated with it. You know you don't remember necessarily the best bottle you've ever had. You remember the bottle because of who you're with, where you were, what you were doing and all the other components that go into it.

Speaker 2: 23:37

Absolutely.

Speaker 1: 23:40

Last one if you could share a bottle with anyone, who would it be and what would you drink?

Speaker 2: 23:46

Ah, good question. Um, I mean, I I feel like I made the wife comment earlier so that that that's the obvious answer um, as I was referencing my, my anniversary, but I'll, I'll, I'll, maybe I'll use a more aspirational um idea. Uh, in the future, um, you know, I think it would be really fun. Um, I, I have a, I have a poster of um, my grandfather being in the, uh, one of the, the early italians in the, the california Italians in the California wine industry, and it's with all, all, the, all the names that you still recognize today.

Speaker 2: 24:25

I think it would be really cool to do a tasting with, kind of the next generation winemakers. You know big, bigger event and be a part of. You know what's going to be the next hundred years of wine. You know, in terms of bottle or type of bottle or type of wine. Maybe I'll give a crazy answer. Rather than focus on the cult wines, I do think that technology has an opportunity to impact wine in the future. So maybe something that UC Davis is doing around creating flavor profiles for wine that can match what nature can do. I think that that would be fun. So I'm going to take a futuristic approach and maybe a wine that doesn't quite exist yet. That could be made in the likes of a I don't know a Screaming Eagle or a Colgan, but maybe it's done with more technology.

Speaker 1: 25:22

That is an interesting point that you bring up. You know, if at a certain point, you can basically just engineer wine to taste exactly like the really high end stuff, you know, is there a point where that has some sort of impact on them? Or is it similar to like having an original painting versus having copies of it? I think that'll be an interesting, interesting next 50 years.

Speaker 2: 25:53

Yeah, yeah, and I think that there's always going to be a place for the real thing. You know, having a copy or something that's modified I think will be really interesting. But you know, take plant-based meat. You know people are still eating steaks, and people are still eating high-end steaks, even though that there are options that are, you know, interesting alternatives to that. So, alternatives to, uh, to that.

Speaker 1: 26:19

So yeah, agreed Well. Thank you so much for joining me. Um, before we hop off here, uh, if anyone wants to uh connect with with you?

Speaker 2: 26:32

uh, where's the best place to find you? Um, online? Yeah, I'm on LinkedIn, um, so Michael Chella is is my name. Feel free to connect and look forward to talking about alcohol, wine or anything else that touches on the consumer. So appreciate the plug. Thanks, Brandon.

Speaker 1: 26:51

Awesome. Thanks for joining, as always for everybody listening. This is Brandon Amoroso and you can find us at drinkscom. We will see you next time.