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Split in Mondavi empire is a telling one

Robert Mondavi's family is giving up corporate control of their trademark winery. That, and the winery's decision to split into "luxury" and "lifestyle" divisions, signal where the U.S. wine industry is headed.

The American wine industry has grown from bastard stepchild to global powerhouse. Robert Mondavi and his family deserve a good share of the credit.

Mondavi helped demonstrate the potential of California grapes by producing world-class wines, and more than once applied a dash of marketing savvy to bring otherwise alien wine — sauvignon blanc, say — to American palates.

This has not been without its share of upheaval. In the wine world, the Mondavi family's internal turmoil is legend: not only between Robert and brother Peter, who owns the Charles Krug winery, but between Robert's own sons too. As the family tried to sort out its differences, the Robert Mondavi name has come to front a $500 million, publicly traded company that sells everything from $4 white zinfandel under its Woodbridge label to $150 bottles of Opus One, produced in partnership with France's Rothschild family.

So while many found it sad, it was no surprise last Friday when the company announced the family would trade in its special shares for regular common stock and would give up its 85 percent of voting rights, ending up with something under 40 percent — a minority stake that leaves the company's corporate masters in control of its future.

They'll maintain a role, but the Mondavis — including 91-year-old Robert — will no longer control the company that made them a household name.

Yet equally notable was the announcement that Mondavi intended to split itself into two very different divisions, one to market "lifestyle" wines under $15, the other to produce more expensive "luxury" wines.

"It has become increasingly clear in the new wine environment that $50 Napa Valley Cabernet and $6 premium wines require different business models," Hall said in a statement.

A sign of the futureThe company declined a request for additional details, but this Solomonic split has been a long time in coming. Relations have grown increasingly tumultuous among the Mondavi clan. After years of fighting between Robert's sons Michael and Timothy, Michael was ousted in January from his post as chairman and his other son, Timothy, was demoted to "winegrower" and then took a hiatus from the business. 

For its new chairman, the board chose an outsider, Ted Hall, lending weight to longtime speculation that Mondavi might turn fully corporate and streamline itself to compete with competitors like Constellation Brands and Gallo.

The split may signal the industry's future, but it is hardly the first time that corporate interests have trumped family pride in the wine business. At 11 million cases a year, Beringer Blass little resembles the winery started by the Beringer brothers in 1876.

"They're responding to what's happening in the marketplace," says wine consultant Robert Nicholson of International Wine Associates. "It's not dissimilar to most other ... consumer goods businesses."

But it's hard to see how Robert Mondavi himself is comfortable with the mass-market brand that now bears his name. Though the Woodbridge value brand is now marketed on its own, with Mondavi's name in faint ink, that name still packs a marketing punch.

Perhaps the Mondavi family will walk away from the lifestyle portion of the business and focus on fine wines. The only problem, according to D.A. Davidson & Co. analyst Tim Ramey, is that the luxury end of Mondavi's business — while high-profile — is perhaps 10 percent of total revenues.

"It strikes me that a $51 million division is not a very big business," he says.

Lifestyle drinkersThe Mondavis seem committed to luxury wines, and obviously have the cash and the clout to run a niche business, but the winery they built may be headed the other way.

While lots of money is spent, and lots of words written, about luxury wines, the average U.S. wine drinker is choosing from the supermarket shelf. The real money is in corporate winemaking, which less resembles artisans standing over their barrels than huge vats full of scientifically engineered, mass-produced wine sold as a commodity, like so much Coca-Cola.

It's nearly impossible to sell these two types of wine the same way. Lifestyle wine is all about bulk sales, which may be why Mondavi's chief marketer will head up the lifestyle division.  It requires a different mindset and skill set to sell bottles of Mondavi's $40 Oakville Cabernet to top sommeliers than to persuade Safeway to stock Woodbridge in an end-of-aisle display.

Mondavi's cheap labels have been overshadowed by even cheaper competitors, though things may be looking up. The California grape glut that led to the proliferation of Charles Shaw (aka, "Two-Buck Chuck") has tapered off, which means the real competition is going to be in the $6 to $10 range against upstarts like Australia's Yellow Tail.

"Somebody had to lose to make Two-Buck Chuck in that the winegrower had to sell their product at a massive loss," Ramey said. "That business model never was longterm viable."

Holding on to luxuryStill, corporations can successfully manage luxury brands. Franciscan Estates, now owned by Constellation, sells plenty of $35 Cuvee Sauvage chardonnay.

Perhaps the Mondavi winery can finesse both halves of the business, and explain to customers who associate its name with $40 wines why it's not a diminishment of the brand to have lots of $10 Mondavi Private Selection on the shelf."They make the best jug wine and they make the best fine wine," says Fred Rosen of Sam's Wine & Spirits in Chicago, who has retailed Mondavi wines for decades. "As long as we get opportunity to buy the good stuff from their different departments, we really have no problem."

Whatever the outcome, and whatever the Mondavi family's role in it, Robert Mondavi's dream of an America of wine drinkers has been largely realized.

What remains in the balance, as the Mondavi winery struggles to revive a largely flat revenue stream, is the fate of the top-notch wines that Mondavi prided himself on creating as a symbol of the potential of American winemaking.