Thinking Outside the Bottle - Are Kegs The Future For Wine?
After Free Flow Wine’s business model stopped working, it reinvented itself. When it ran up against a Prohibition-era regulation, it convinced Florida to rewrite the law.
“Crushing it” doesn’t have the same meaning for entrepreneurs in Silicon Valley as it does in California’s wine country 100 miles to the north. In one of the world’s oldest businesses, innovation carries a stigma—considering how long it took folks to come round to the screw cap. “We’re surrounded by tech companies,” says Jordan Kivelstadt, the 32-year-old cofounder and CEO of Free Flow Wines. But the grape trampling racket? “Nothing is so unbelievably resistant to change.” So he and cofounder Dan Donahoe, 45, have learned to dip and drop with the best of them in tech land.
Free Flow is in the wine-on-tap business, though it doesn’t make, deliver or serve the stuff. Instead, it provides the means to get wine to thousands of restaurants around the country, suctioning up the product from vineyards on four continents into 5.16-gallon stainless steel kegs. It partners with distributors in nearly every state to ship 6,000 kegs a month to the likes of the Ritz Carlton on one end and P.F. Chang’s on the other. For this service, Free Flow expects to lose $1 million on revenue of $3 million this year. It’s an asset-heavy volume game: The company has to buy 2,000-4,000 kegs every month to meet demand. Still, it hopes for operating profits in a few months.
It took five ragged years to get to this point. Along the way the founders had to test the market for a new idea, raise $20 million or so in debt and equity, completely change the business model and—defying their board—hire a lobbyist to change a Prohibition-era law freezing them out of Florida, Free Flow’s second-largest market after California.
Donahoe has food in wine coursing through his veins (his grandmother was Julia Child’s best friend). Starting off as harvest help at Cakebread Cellars, he later built his own brand, Tierra, based on grapes that came from his father-in-law’s vineyard and its storied Clos du Bois. Donahoe was also a family friend of Kivelstadt’s, and lured him into the wine business, away from a consulting career—much to the chagrin of the younger man’s father.
Kivelstadt started as a cellar intern at one of Sonoma’s best wineries, Copain. From there he worked in vineyards in Australia and South America before returning to California to work on a bottling line—with its hundreds of temperamental moving parts. “Thing can go really wrong, really fast,” he says, recalling the day when a cork machine jammed, the gas cylinder leaked and the labels ripped off—and Kivelstadt got the idea for putting wines, which didn’t need to be cellared, straight into kegs. Donahoe loved it.
Their startup, Silvertap, was a keg-only operation using Clos du Bois grapes—a bit of an anomaly—headquartered in Donahoe’s San Francisco garage. “A lot of restaurants had never heard of wine on tap,” he says. “So we had to weave a story of quality, saying, ‘This is not crappy bulk wine from the Central Valley, this is premium wine from a single vineyard.’” Bay Area restaurants started buying the Sauvignon Blanc, figuring they could make more money by the glass than by the bottle.
As demand grew, nearby wineries wanted in, and Kivelstadt and Donahoe started kegging for them, too. But ultimately Silvertap’s success uncorked grumbling from Napa wineries that felt Donahoe was selling against them. So, why not change the model by becoming a packager for all labels, taking a cut from the wineries? Donahoe and Kivelstadt quietly sold off Silvertap for $250,000 and went into the logistics game.
Buying thousands of kegs is expensive, and the recent windfall wouldn’t cover it. “They had a vision of a national business,” says Albert Baldocchi, an independent director on Chipotle’s board who joined a $1.5 million round in 2012 that included Jeff O’Neill, founder of Golden State Vintners. “Chains would need that kind of support and capacity.” Chains like Marriott, which signed up for wine on tap in five locations and has plans for many more. “It’s almost like getting access to a barrel sample,” says Lou Trope, a Marriott vice president.
Before Free Flow could close a $16 million debt offering with Orchard Holdings, which handles family investments for Cintas Chairman Richard T. Farmer, it hit a wall. The new CEO of California Pizza Kitchen was pondering a deal to add wine on tap systemwide, starting with south Florida. But because the state had an 80-year-old law prohibiting wine in containers larger than one gallon, the chain decided it couldn’t achieve consistent quality, and dropped the idea.
That’s when Kivelstadt and Donahoe decided to try to change the Florida law. “My reaction was, could this little company afford to do it?” recalls Baldocchi. Other board members were less sympathetic, threatening to fire Kivelstadt if he spent six figures on a lobbyist—and failed to overturn the law. He went ahead anyway, hiring Slater Bayliss, a partner in the Advocacy Group, which specializes in politics and government affairs. The firm is also lobbying to change laws requiring a minimum charge for limousines on behalf of private taxi service Uber in Tallahassee.
Naturally, all the wine and spirits distributors “deployed their armies of lobbyists” to sabotage Free Flow, says Bayliss. “They’ve got these state-of-the-art warehouses run by robots that grab wine bottles and put them into trucks. A keg would have thrown all of that into a brave new world.”
Time for an end run. Instead of presenting a bill that would legalize all wine containers larger than a gallon, throwing distributors into chaos, Bayliss proposed making just a minor change to the law—permitting, by no mere coincidence, only 5.16-gallon reusable containers. “It came down to negotiating something that everyone could live with,” Bayliss explains.
Whattipped the scales? Support from folks like Eleanor Sobel, a state senator from Broward County who, as Bayliss says, “didn’t want containers piling up in landfill.” The bill passed a year ago.
But that selling point is potentially a huge problem for Free Flow elsewhere, where environmental concerns aren’t a factor. Plastic kegs—marketed as recyclable, rather than reusable—appeal to distributors because they don’t have to hassle with restaurants to return them. One thing in Free Flow’s favor, as Kivelstadt is quick to point out: The relative permeability of plastic. “Plastic breathes,” he says. “That’s the enemy of wine.”