In 1858, Gundlach Bundschu began a California wine legacy. 168 years later, pandemic fallout, heavy debt and a changing market have pushed the historic winery into bankruptcy

A California winery founded in 1858 finds itself having to rethink its very survival in the current environment, which has undergone a significant change from the last time it expanded.

Gundlach Bundschu Winery, one of the oldest family-owned wineries in Sonoma, has sought Chapter 11 bankruptcy protection while trying to reorganise more than $37 million in debt.

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The filing comes after several difficult years for the US wine industry, but the company's financial problems have a more specific origin. A major acquisition financed with debt in 2020 was intended to strengthen the family's business.

Instead, the deal was followed almost immediately by the COVID-19 pandemic and a prolonged shift in the wine market.

Since then, the firm has saved millions of dollars in costs and downsized its staff considerably. Nevertheless, such measures have proved insufficient for dealing with the current debt situation.

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What the winery now aims to do is find a way out of debt through judicial restructuring and possibly even bring a new investor on board.

For a business whose history predates California's modern wine industry, the filing represents a difficult financial chapter. It does not, however, mean the winery has stopped operating.

A 2020 expansion met a wine market no one expected

The financial decisions that eventually brought Gundlach Bundschu to Chapter 11 were made at a very different moment.

In 2020, the family completed a significant acquisition using debt. The intention was to create a larger and more resilient wine business, building a platform that could support future growth.

Then the pandemic changed the economic environment almost overnight.

Wine tourism was disrupted. Tasting rooms and restaurants faced restrictions. Hospitality businesses that traditionally buy and serve wine experienced severe interruptions. Consumer behaviour also shifted.

The problem for Gundlach Bundschu was that the disruption did not end when pandemic restrictions were lifted.

The US wine business entered a period of weaker demand, changing drinking habits and excess inventory. Distribution has also become more concentrated, making the route from winery to consumer more challenging for some producers.

Tourism and contract production, both important parts of the wine economy, also declined.

For a company carrying substantial acquisition debt, those changes created a difficult combination. Revenue opportunities were under pressure at the same time that financial obligations remained.

What had been intended as a growth strategy became increasingly difficult to sustain under the market conditions that followed.

The winery cut $6 million but the debt remained

The company had not reached this state of bankruptcy without taking steps to cut down on its costs.

In the 36 months before its bankruptcy proceedings, it claims to have saved more than 40% on costs amounting to around $6 million.

The number of its employees decreased from 102 to 63.

Those cuts point to the extent of the effort to adapt the business to lower revenue and a more difficult operating environment.

But there is a limit to what expense reductions can accomplish when a company is carrying a large amount of secured debt.

According to court records and company statements, Gundlach Bundschu is seeking to restructure more than $37 million in total debt. Approximately $35.5 million is secured debt, with Tiverton Advisors and American AgCredit among the lenders involved.

The Chapter 11 process provides the winery with a framework for addressing those obligations while continuing its operations.

That is different from a straightforward liquidation.

In the meantime, the company will be able to continue doing business even while settling the debts and thinking about restructuring.

For a winery, this is essential thing. Vineyards cannot just be turned off during the process of negotiations about money. Grapes need constant care, and relations with clients and wine clubs, wholesalers, and guests should be maintained as well.

Why the wider wine industry is under pressure

The financial problems faced by Gundlach Bundschu can be linked to the shift that is happening in the wine industry in general.

For many years, the Californian wine industry enjoyed high levels of tourism, good demand from consumers and a great tradition of visiting vineyards and tasting wine.

These factors have become more unpredictable lately.

Wine consumption in some parts of the US market has decreased, and consumers have altered their habits and tastes in terms of drinking wine. This is especially true for young people who drink other drinks such as beer and spirits.

At the same time, wineries have faced excess supply in some segments. Producing wine is not an industry where supply can always be adjusted quickly. Grapes are grown seasonally, vineyards require long-term investment and wine can take years to move from vineyard to bottle and eventually to the consumer.

Distribution presents another challenge.

Consolidation among distributors can affect the bargaining position of smaller and mid-sized wineries, while declining tourism can reduce the number of visitors buying wine directly from producers.

Contract production has also weakened, removing another potential source of revenue.

For an established winery with a large physical footprint and long-term assets, adapting to those changes can take time.

Gundlach Bundschu's case shows how those industry pressures can become particularly difficult when combined with acquisition debt.

What happens to Gundlach Bundschu after Chapter 11?

The immediate future of the winery will be shaped by the restructuring process.

The company expects the bankruptcy proceedings to potentially lead to a new partnership or ownership structure involving a family-oriented investor.

The aim is to preserve the winery rather than abandon the business.

This makes a difference to Gundlach Bundschu because the value of the company depends on far more than what the financial statements currently show. The company has its own vineyards, facilities at the winery, brand recognition and its own family history.

The winery was founded in Sonoma back in 1858 and, consequently, represents one of the oldest family-owned wineries in California.

Nevertheless, being old is not enough to avoid financial problems.

The company has already done much to cut costs. This bankruptcy proceeding will help solve the problem of outstanding debt and save the company at the same time.

Tasting rooms are still working, vineyards are functioning, and people who subscribe to the wine club are still getting their service.

This means that visitors won't get a Chapter 11 proceeding like they get when visiting a restaurant or a store.

Behind the scenes, however, the company faces a significant financial reset.

The challenge will be to build a business model that works under today's wine-market conditions rather than those that existed when the 2020 acquisition was completed.

A historic winery is now facing a very modern problem

In the current case of Gundlach Bundschu, there exists an apparent irony.

Here is a winery that has lasted for 168 years yet is facing issues that have nothing to do with the struggles their founders knew when they started out.

The winery is currently facing issues of debt financing, shifting demographics of consumers, consolidations of distributors, post-pandemic tourism and competition from a variety of drinks.

All these factors are altering the economics of wine both in California and the rest of the US.

Thus, the bankruptcy of Gundlach Bundschu is telling two stories at once.

The first is about a specific family business that took on substantial debt to expand, only to encounter an extraordinary economic disruption and a weaker wine market.

The second is about an industry being forced to reconsider some long-standing assumptions about who drinks wine, how much they drink and how wineries reach them.

Neither issue is answered by the winery's filing for Chapter 11 bankruptcy protection.

Rather, it allows time for the Gundlach Bundschu to deal with its debts and find a structure that can sustain the business in coming years.

Until then, the historic Sonoma winery continues in business.

The future of the winery depends on whether it can find a way to lighten the load of its previous financial decisions to build on what matters: its land, its brand and its customers, founded in 1858.