Jim Bernau: The Ramble

My rambling interview with one of wine's most thoughtful leaders

Jim Bernau, Founder and CEO of Willamette Valley Vineyards, is, in my view, among the top ten smartest and most thoughtful people in the American wine industry. And you are about to find out why in this Ramble of an interview with Jim.

Jim founded Willamette Valley Vineyards in 1983, on his own, planting the first vineyard in the hills south of Salem, Oregon. He would go on to fund his winery through the first “crowdfunding effort” in the wine industry. This amounted to much more than signing up for “GoFundMe”. It was a multi-year effort to convince the Securities and Exchange Commission that his idea of recruiting “investors” who would also be part owners, wine club members, and ambassadors was legal under SEC regulations, and also giving numerous presentations to potential investors. The effort was eventually successful and Willamette Valley Vineyards remains today on the NASDAQ stock exchange (WVVI & WVVIP).

But before Jim was a winery owner and in the early part of his winemaking career he was also a lobbyist. In that capacity, he played a key role at the founding of the Oregon wine industry by helping shepherd bills that led to the passage of the Oregon Wine Advisory Board, allowing wineries to be permitted on land zoned for farming, establishing the right for the direct-to-consumer shipment of wine, for allowing wine tastings in stores and restaurants, and for the establishment of the Oregon Wine Board.

Over the years, Bernau has carefully expanded Willamette Valley Vineyards through acquisitions and mergers, vineyard development, using suburban tasting inside and outside of Oregon, and expanding to the Rocks District of Milton-Freewater in the Walla Walla AVA under new brand names. Today, Willamette Valley Vineyards is the largest winery in Oregon, yet produces what can only be described as artisan wines. It’s a remarkable achievement.

Set all this aside though and carefully read Jim’s comments in this interview and you’ll quickly realize why I say Jim is among the smartest and most thoughtful people in the American wine industry. Read closely his last response in this ramble about the future of wine. This is a man who knows where the bodies are buried, has clearly thought very deeply about not only the state of the industry but also the state of the people in the wine industry. You are going to enjoy this.

This interview approach, “The Ramble”, begins with one question emailed to the subject. They respond in any way they choose, which in turn prompts my next question, and so on. It is a less formal way of conducting an interview, results in something a bit messier and rambling, but also produces something more interesting and authentic I think.

TOM WARK: Thank you for taking this ramble with me. I’ve yet to interview an Oregonian since beginning these Rambles and as far as the Oregon wine industry is concerned, you may in fact have earned the “Mr. Oregon” moniker. As I look over your career, beginning with your wine-related lobbying efforts, then the innovative funding efforts, the rise of Willamette Valley Vineyards, its expansion, and your continued involvement in the Oregon wine industry, you strike me as the consummate “Do-er”? Are you one of those folks that need to be in the midst of something, a project, have a solid goal in front of them always reaching for it? And if so, how much of your success would you attribute to this quality? Or, I could be wrong. Maybe you just work really hard despite a sincere desire to plop on the couch and turn on the “Friends” marathon.

JIM BERNAU: I am persistent for sure!  If you binge watch the last several years of Friends you can spot our bottles on the back bars, counters, and dining tables.  How that happened is a fun story and an example of the power of wine enthusiast ownership.

After the business was solidly on its feet, I used to take the month of August off before harvest (in the Cascades) but after meeting Jan, my vacation time got shortened with never a vacation day without an eye on the business.  She works harder than I do!

My confidence in and enthusiasm for Oregon’s potential to become a world-class wine-growing region began with my Dad.  His law office was a block from the Douglas County Courthouse.  He was often in the county offices where a county surveyor, Richard Sommer asked for his help with forming his winery business and securing a winery license.

My Dad shared his passion for gardening, love for Oregon’s natural beauty, and belief in her climate and soil’s potential for quality wine.

I was put to work there after school with filing duties from time to time.  My Dad hoped I would return to practice law with him but my belief in a more effective way to seek change kept me in Salem.

TOM: I had a chance to work on the Oregon Direct Shipping bill in 2007 that included a provision to allow out-of-state retailers to ship along with wineries. It was one of my first forays into lobbying and trying to help guide legislation. It passed, but not because of me (more in spite of me, actually). You have been involved in the politics of Oregon wine for a very long time now, often successfully. Can you, without being too diplomatic, give my subscribers a sense of what it takes to see an idea turn into a law in Salem given the political divisions in the alcohol industry?

JIM: Generally, some ideas are one-session bills, others two or three-session bills.  Many ideas never make it into statute depending upon their continued relevance over time or the resources and organization of opponents.

In our industry, wholesaler opposition is difficult to overcome.  We battled with Paul Romain for years achieving some very hard-won wins but it took much effort beginning with particular candidates’ first local fundraisers.  On issues where our interests aligned with wholesalers, I can’t remember a loss.

Am guessing we would get raised eyebrows on how much we spend in the effort of nurturing receptive lawmakers.  Our industry is a creature of the changes we have secured in statute and administrative rule, so it has been worth it.

TOM: Let’s talk about that creature. From where I sit, it appears to me the reputation of Oregon wines has been increasing at a pretty good clip over the past decade. More attention was paid. Higher prices for the wines paid. More visitation to the area. More representation on wine lists and retail shelves. At the same time, there is a palpable fear In the OR wine industry that it (or at least the Willamette Valley) not become a “Napa Valley”. Talk a little about that fear and anything this is being done or could be done to avoid that fate.

JIM: Too much of a good thing can be a spoiler in many ways.  For those who live in and around wine country, heavy tourist traffic and noise in rural settings creates unsafe and annoying conditions.  For those seeking a farm business and/or rural lifestyle in these areas, acreage is becoming unaffordable.  For those seeking personal connections with wine families, impersonal,  large investors and wine producers can diminish the charm and long-term brand loyalty.

In my view, there is only some factual basis for this fear, the downsides of Oregon’s success with growing world-class wines will be muted for a number of reasons:

- Oregon’s leading wine-growing regions are much larger and adjacent population centers much smaller than California’s leading wine destinations.

- Relative to total production, Oregon has a much higher number of small, independently owned, and operated wineries (and greater diversity).

- Consumer behavior trends, like making brand affiliations with in-person tasting room visits, ordering online with direct shipment, Oregon’s high price positioning (and margins), and longer length of club membership all contribute to the financial health of small wineries.

- Low to no use of financial leverage by many of these winemakers reduces the potential for predatory consolidation.

- Land use controls to reduce unrelated or loosely related commercialization.

In the long term, changing demographics may ease this concern as “Napa Valley” was fueled by a now aging consumer group.  Even today, Boomer Oregonians tend to culturally eschew this type of commercialization.

Defending current OLCC administrative rules and state statutes (as well as federal and case law) that shape the character of our industry is important:

- alcohol excise tax policies that recognize the greater negative impact on small producers (40,000 gal state exemption for those under 100,000 gals and federal CBMTRA and repeal of the Special Occupational and Bond Requirement).

- winery self-distribution, multiple tasting rooms, alternating premises, and direct ship laws.

- winery conducted tastings & promotions in retail licensed premises.

- permitted land use commercial privileges for small producers in agricultural zones.

- simplified regulatory reporting & compliance.

- prohibition of non-Oregon grape material in Oregon-labeled wines (like MegaPurple and out-of-state fruit) and geographic designation misrepresentations.

- high standards for varietal & AVA labeling.

- “tied house” financial assistance prohibitions.

- professional development and research at higher education institutions.

Improving the conditions

- allow retailers to direct ship in all markets.  Small producers are benefited by non-chain alcohol beverage retailers.  Concentration at wholesale and retail is continuing to limit small producers’ access to customers.

- prevent large producers from providing chain schematic and reset services.

- organize buying groups to achieve volume pricing for key inputs and big data for identifying likely Oregon wine consumers.

- improve support of the OWB with grape tax collection from out-of-state Oregon wine producers, tourism promotion by promoting Oregon Wine Country vehicle plates, and improved collection of the Oregon transient lodging tax.

- fully implement the 2012 Jobs Act signed by President Obama to further enable small business capital formation.

TOM: So, you’ve thought about this a little bit?

Your point about Oregonian Boomers culturally eschewing the compulsion to commercialize the state’s ag areas strikes me as a pretty insightful point that I hadn’t thought much about, perhaps because I’m at the tail end of the Boomer generation and grew up in a region that has been quite happy to commercialize what were primarily ag zones, but are now very mixed-use. Have you thought about why Oregonians might possess a lesser tendency to commercialize nature and agriculture? I would think that if this is correct, it must certainly have something to do with geo-cultural influences imposed upon residents of the Pacific Northwest. I”m still, after 4 years moving to Oregon from Napa, hyper-aware of the geographic and climatic differences between the two areas. Do you think climate and geography has significantly influenced Oregon's economic and wine culture and even economic motivations? Or, is your observation about the economic culture of Oregonian Boomers a matter of historic inertia…a way of being established some time ago that took on a life of its own?

JIM: Could be many reasons, enjoyed your article today and this Oregon demeanor could be “seen as a sure sign of one’s virtue”.

Both political parties in Oregon years ago cooperated in shaping our state’s environmental stewardship.  Governor Oswald West (D) declared Oregon beaches “public highways” to forestall private ownership in 1913.  Governor Tom McCall (R) was committed to protecting what he described as the “Oregon mystic” following up with “The Beach Bill” with further beach protections.  The Oregon Bottle Bill requiring bottle deposits and grocery redemption was introduced by a conservative Republican state legislator as was SB 100 which preserved farmland and prescribed a statewide system of land use planning.

The Oregon Forest Practice Act for example requires sustained yield - the replacement planting of all harvested timber and the buffering of streams.  Oregon won’t end up looking like Easter Island or the more populated areas of the U.S.  It wasn’t that long ago Oregon families depended upon proper care of our forests, farmland, and health of our waters where economics supported environmental stewardship.  Now, hunters, fishermen, kayakers, birders, hikers, skiers, kite surfers, and recreational businesses are a powerful lobby.

I have found many new Oregonians to be the strongest disciples - refugees from California and other urban centers escaping the growing parking lots, traffic congestion, and continuous strip malls connecting urban commercial centers.

You asking a great question.  I don’t have a complete answer.  We are in-part products of our forests and geography which for me has developed into a devotion and duty upon which I will be held to account.

When traveling east on Hwy 22 and cresting at the Detroit Lake Dam, I can feel the stress lift quickly away.  Even though our lab was lying down in the back seat, she would let me know we were back in the Cascades.

TOM: But, Jim, if you kept heading out Highway 22 over the Cascades, hooked up with highway 20 then over to highway 26, and finally turned north onto 395, you’d end up taking the long way to The Rocks District and Walla Walla, a place that you’ve invested a good sum of time and money to create your Maison Blue winery that is dedicated to the region’s unique terroir and to Rhone varieties. If I had to name the top 5 most exciting vineyard regions in America right now, Walla Walla and the Rocks would easily make the list. I LOVE the Syrah grape (particularly when grown in colder climes, and in my estimation, some of the best is coming from this region. But you clearly came to this conclusion a long time ago—well over a decade ago. But I want you to look forward now. Tell me what your expectations are for the Rocks District and Walla Walla 20 years from now. What do you expect will be happening there? What do you expect will be the reputation of its wines? And how do you see Maison Blue evolving over the next couple of decades?

JIM: In my view, Walla Walla AVA wines will continue to perform favorably, their quality and artisan winemakers have captured discerning wine enthusiasts’ attention.

The Rocks District of Milton Freewater will do even better.  The unique “soil” and climatic conditions combined with its acreage limits and sharp focus on a single variety will contribute to its long-term success as an AVA.

Oregon wineries uniquely benefit from this AVA as the AVA designation may only be used on wines made in Oregon from these grapes.  This is a logical TTB requirement as each state has its own standards and winery licensing to ensure accurate and lawful use of the AVAs wholly within the state.  While Washington wineries only a couple miles over the border make a strong case for revising the federal law, it is very unlikely the powerful Napa Valley wine lobby will go along.

We have three vineyard properties in the Walla Walla AVA, two in SeVein (one Pambrun mostly on loess next to Figgin’s, the other unplanted/broken basalt to the west of Bledsoe’s McQueen).  The third is on the corner of Hwy 11 and Sunnyside Rd (not including the cut-out for the convenience store).  This is the entry to The Rocks District of Milton-Freewater at among the highest elevations there (good for air drainage) and fortuitously located where we can bring city water and commercial zoning to the site.  In cooperation with the city, Steve Martin’s firm in Sonoma has designed a winery, cellar, restaurant, and lodging to be the home of Maison Bleue as well as a cooperative winemaking and retail facility.  The city water and zoning enable the destination’s commercial activities.  The vineyard has 1859 surface water rights.

We are ready to create an iconic wine destination in this AVA, now we just need to build the volumes and markets to support such a facility.

TOM: Jim, as I survey your career in wine and your projects inside the Willamette Valley and outside of it, it looks like your time in wine has been filled with success after success. What about the not-successes or at least the most challenging aspects of the wine business that you have and continue to confront? What would you tell those just starting out and with grand visions to be wary of as they continue their journey?

JIM: There are so many unforced errors.  The old saying “fail fast” is good advice as it recognizes achievement often rises out of failure - except the course corrections can take much time to implement as they can be dependent upon consumer perception.

My biggest lesson came from the necessity to cash flow the winery when we first started.  

Our first public Common Stock Offering (the first successful self-underwritten Reg A in the U.S.) after 8 months of many hundreds of phone calls and presentations resulted in meeting the maximum allowed under the law at that time -  $1.5 million (we oversubscribed and were required to return $370,000 within the time allowed).  We made wine at the facility before the roof was on in 1989 and were close to finishing construction of the tasting room and consumer portions of the building in late February when we ran completely out of money.  The only paid people were the consulting winemaker and two vineyard employees along with the building contractors.  A friend and I finished building the bar out of leftover oak flooring remnants.

I didn’t have the cash to complete the construction and start up the winery so I contacted all the local banks for bridge financing till we opened our doors.  Have kept a couple of rejection letters but got an opportunity from a commercial load officer at First Interstate Bank who lived on the hill above Dundee.  He would loan the company the $267,000 it needed to bridge us to opening (we owned all the wine inventory) if I would personally pledge all my stock in the company.  So I took down all my stock certificates (over 60% of ownership at the time) and got the cash.

We recruited volunteers from our shareholders and opened in the spring to an Owners Open House resulting in a packed building with over $70,000 in sales in one day.  In less than a month, I got my stock back.

We aggressively sold what we had available to sell, the Riesling and Pinot Noir blush wine as the Pinot Noir and Chard were in barrel.  We sold futures in those but unbeknownst to me the damage had been done to the brand that wasn’t fully corrected until late Oct 2004 when a campy movie started getting attention. Malcolm Gladwell is right.

Next time, I figured out how to organize the resources to get the correct blink that properly positions the brand.

Another big lesson I have learned is high functioning individuals who are insecure can make excellent achievers as they tend to work very hard and thus rise in an organization.  Highly insecure individuals however can make poor leaders and managers as they will not be vulnerable and transparent.  Problems that can be fairly easy to address early can become company killers if not revealed until it’s too late.

TOM: Perhaps we need more campy movies focused on this industry.

One more question in this Ramble, Jim. You’ve had a good deal of time to watch the evolution of the Oregon wine industry in particular and the American wine industry in general. I want you to take a look 10 to 20 years out and give me your thoughts on where you think Oregon and the industry, in general, will be. Currently, we are seeing a good deal of concern over younger folks and their relationship with wine. We are seeing spirits on the rise and wine on a narrow decline. Climate change is on folks’ minds. In addition to all this, there appear to be no campy wine films coming our way. What do you see coming wine’s way?

JIM:  I wish Silicon Valley Bank (SVB) had been collecting detailed wine consumption data since 1974 so I could apply it to my own experiences when my legal drinking began.  Anecdotally, that young age group today is far more developed to become fine wine consumers than we were.  SVB’s own data shows young consumers buying way more expensive sparkling wine and mixed drinks than we did at that age.

These younger age groups will become the wealthiest in our history from Boomer inheritances (and we generally know how people spend money they didn’t earn).  There should be a much more detailed examination (thank you for doing this) of all the factors that will influence profitable, sustainable fine wine production as these groups age into the consumption we now enjoy.

The SVB has many useful insights but some recommendations are puzzling.  Advertising trends in the beer industry probably say more about the brewers’ capability and will they had at the time rather than resulting increases in consumption.

The reference to “Got Milk” is puzzling as it is easily studied to be a significant failure. While it is reported that the $23 million ad spend increased milk sales by $244 million, the gross revenue growth was short-lived as the campaign ignored the principles of marketing.  The reason why the industry didn’t continue the ad effort was those paying the bills lost money.  At a U.S. dairy industry under 3% EBIT, they would have had to sell twice what they did just to cover (the multiple to cover depends upon the ad expense deduction value against taxable income - C corps were at approx. 43% combined state and federal income tax rates at the time).

If the U.S. dairy industry looked to Europe they would discover profit in value-added products where Italian Galbani earned a 13.6% EBIT and British Crediton Dairy 11.3% EBIT in 2020.

Am wondering to whom the SVB was addressing with these recommendations.  Does America really need cheap wine which produces a lot of unfunded, damaging externalities?  Do we really depend on developing converts from cheap wine drinkers for our $30 bottles of Pinot Noir as these drinkers age or is this just post hoc ergo propter hoc?

As you and others have pointed out, soldiers returning from the European theater, the impact of the Sixty Minutes French Paradox, and Sideways moved the wine market to our collective benefit where millions in advertising have had no long-lasting effect.

Sales of inexpensive wine will continue to decline in large part because it cannot be profitably produced as many components increase in cost, alcohol tax-funded health care grows, labor saving and yield enhancing chemicals costs grow with war, regulation, and litigation and water become much more expensive, regulated and difficult to obtain.

The future:

For Willamette, we will continue organizing a segment of the wine market as owners, securing a strong base of volunteer marketers and consumers.  Our approach of larger vineyard parcels and generally centralized production will continue to provide reasonable cost spreading and vertical integration (growing, producing, bottling, direct distributor and account representation, farm-to-table direct retail sales) will capture more margin.  We will continue to take the wine and food experience into more suburbs convenient to fine wine consumers seeking these “experiences” funded by wine enthusiast investors who live and dine in those communities. (SVB did recommend this in the 2018 report: “Successful companies will be those that evolve retail strategies away from the winery location as the sole point of experience and find other, scalable means of delivering the experience — and the wine — to consumers where they live.” - Coopers Hawk started in 2005 and remained under the radar for some time!  Our strategy differs as we are winegrowers, have Estate vineyards, produce and label by vintage year, focus on varietal wine, and can benefit in the broad market with our winery tasting room/restaurants brand presence.)

Our NASDAQ listing enables us to sell our Preferred without having the expense and time of “blue skying”.  The Common shareholders this past year increased the total authorized Preferred shares from 10 million to 100 million so at the current share price, this enables approx. a half billion dollars in capitalization.  We currently have a total of 26,000 shareholders who have invested $45 million in Preferred since 2015.  Their wine purchases (1/3 of direct sales revenue) more than cover all our direct and indirect costs relating to those sales.  It’s like perpetual motion.

For the northern Willamette Valley AVA, the realization that the cool climate varieties of PInot Noir, Chardonnay, and Pinot Meunier produce ideal flavors and aromas for sparking at lower levels of grape maturity (and before the rains and migratory birds).

For Oregon, our industry will continue to grow significantly due to entrepreneurial and sophisticated out-of-state and foreign operators.  The changing climate will increase the available suitable land, varieties, and per acre yield substantially while our winter rains (much “wasted” into the Pacific) will continue to fill our inexpensive catchment ponds.  Wine (and other craft beverage) tourism will grow where it remains “cool” (virtuous?) to visit with the winegrowers with shared values of collaboration, transparency, authenticity, vulnerability, respect, and care for the land, wildlife, and each other.  We are going to get more than our state’s share of climate refugees who can afford to move west and north.

For the U.S., retailers and restaurants will continue to consolidate, shrink the wine sets in favor of other beverages like liquor (as laws change), benefit from the lax enforcement of tied-house laws with distributor and giant producer schematic and reset services, and shift away from independent brands to shelving and displaying their house brands (increasing their margins from 13% to 21% Costco or 25%+ to 35% Krogers for example).  Generally, branded wine producers (independent or not) will shrink back to their regional markets (just as the craft brewers have already done) with a few well-positioned brands excelling nationally (perhaps with a strong, geographically-designated brand 😃).

Distributors will continue to lose political strength in the states as more small and mid-sized wine producers grow, increasing winery market access opportunities (England didn’t go through Prohibition and suffer wholesaler political spending.  That country has a number of breweries that own hundreds of neighborhood, on-premise establishments - Heineken owns over 2,800 pubs there).  In Oregon, Washington, and California, we deliver directly to our outlets and restaurants capturing a 72% GM with the benefit of wine club membership that increases revenue at lower customer service costs.  We have over 10,000 wine club members total.

The future looks like we could be happier - with more responsible alcoholic beverage consumption and financially and environmentally sustainable producers.  Entrepreneurs and professionals dedicated to fine wine and other craft beverages will continue to find many opportunities to take care of their families and communities.

TOM: Thank you, Jim. Here’s hoping 2023 and forward is exactly as you see it.