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Three Biggest Wineries Take Half the Growth

Financial Symposium attendees hear details of who benefits most from ongoing sales boom

by Paul Franson
jay wright constellaton
Jay Wright, chief operating officer of Constellation Brands, discussed the company's plan to launch 50 new brands.
Napa, Calif.—The Wine Industry Financial Symposium held Monday and Tuesday was itself an indication of the health of the recovering wine business. Fully 330 lenders, growers, wine companies and suppliers attended the conference, up from 260 last year.

Vineyard executive David Freed started the symposium 21 years ago to improve communication between wine businesses and sources of capital. The only surprise this year was that more wine executives didn’t attend to gain valuable insights and rub elbows with bankers and other lenders who could make the difference between success and distress sales of their businesses.

The mood throughout was markedly more positive than last year. In presenting the results of his annual survey of wine industry leaders (see “Wine Executives Reveal Optimism and Concerns”), Robert Smiley from the University of California, Davis, Graduate School of Management said, “These are the most positive results I’ve seen for years!”

Freed, who runs the large Silverado Premium Properties vineyard operation, provided some of the most insightful comments to open the general sessions: “The recession is mostly behind us, and demand keeps growing, but supply appears constrained for a number of years to come. Having grape supply is becoming critical to success.”

The short supply will result both from increasing restrictions but also on a shortage of vines to plant. “The demand was a surprise to most nurseries,” he said, but some players forecast the shortage a few years ago and are ahead of the industry now.

‘Big three’ grew 8%
Freed noted that domestic wine producers are increasingly splitting into two segments: the top 16 to 20 who are good at building brands and producing efficiently in volume, and the rest, whom he said “exist in the luxury space.”

He noted that the big three—Gallo, The Wine Group and Constellation—grew 8% on a huge base of 150 million cases. “They represent in real terms almost half the industry’s growth.”

The next five players—Trinchero, Bronco, Treasury, Delicato and Kendall-Jackson—represent 51 million gallons and grew at 3.5%. “They were very successful, too,” Freed noted, with Trinchero doing an outstanding job.

He also noted that Kendall-Jackson had the lowest growth from that group, but conceded, “They seem to be managing for profitability.”

The next players—Don Sebastiani, J. Lohr, Bogle, Charles Krug (Peter Mondavi family), Diageo’s Beaulieu and Sterling, Korbel and Fetzer—grew 1.3%. That doesn’t leave much for smaller wineries.

In a panel discussion of lender representatives, Perry DeLuca from the Wells Fargo Bank Wine Industry Group assessed winery growth, too. He noted that it’s tied to increased retail sales, U.S. wine exports and California winery shipments, all of which have long-term trends going up.

DeLuca said the top 10 wine companies produced 222 million cases in 2011, up 7% from 2010. These companies have been making acquisitions, mostly with cash, to buy vineyards and winemaking facilities. Interest rates are very low, so money in the bank earns little, and these cash-rich wineries are investing in assets as a more likely way to make money.

Inside Constellation
One speaker on brand building was Jay Wright, the chief operating officer of Constellation Brands, who described how the giant wine, beer and now spirits company had switched from its aggressive acquisitions of the past to focus on profitable internal growth.

The company farms about 12,000 acres of vines, but that only represents about 10 % of its needs.

The company is launching 50 new brands while moving upscale. Among them are Primal Roo ts, a sweet red; Simply Naked unoaked wines; Dreaming Tree, made with musician Dave Matthews, and Thorny Rose, aimed at millennials. He also noted that sweet wines including Moscato and sweet reds are here to stay, and added that Malbec is hot, too.

He disclosed that Constellation is spending more than $10 million per year (more than 20% of its total marketing budget) on digital marketing.

Core wine drinkers
John Gillespie of Wine Opinions said his research has shown that 25% of the 228 million U.S. adult consumers are core wine drinkers and 19% are marginal wine drinkers. This totals 100 million wine drinkers compared to about 50 million (22%) who drink beer and/or spirits but do not drink wine and 78 million (34%) who do not drink alcohol.

Core wine drinkers make up 57% of all wine drinkers but account for 91% of all wine consumption. Among those core wine consumers, Gillespie has identified and analyzed high-frequency drinkers and high-end buyers.

The main delineation of high-frequency wine drinkers is their frequency of purchase by price point. More than one-third of them buy wine priced above $20 at least once per month. The remaining two-thirds of high-frequency wine drinkers buy wine costing more than $20 per bottle only occasionally.

However, 58% of the high-frequency, high-end drinkers spend $1,000-$5,000 on wine per year, while 7% spend more than $10,000.

Many of those avid wine consumers shop at Total Wine & More, the fast-growing retailer with 88 stores that expects to add 10 or 11 more in the next 12 months. Co-founder Robert Trone agreed with other speakers that it might be difficult to charge consumers more, now that they are used to the discounts of the continuing period of economic recovery.

Trone said he expected generally that margins will continue to compress at both lower and higher price points but that Total’s approach is to work with producers to build brands and make good margins on those brands despite the trend.

Headwinds and tailwinds
Danny Brager of Nielsen Co. identified “headwinds” the wine business faces, as well as “tailwinds.”

Headwinds start with the lethargic economy and fragile consumer confidence. On-premise growth is sluggish and trails off-premise buys. Retail prices are largely unchanged, but costs are rising.

The competition for adult beverages is intensifying. Beer and spirits enjoy accelerating growth rates, while wine is growing, but not faster than last year.

Wine companies are also not responding to the fast growth from Hispanic consumers, even though they now represent 16% of the U.S. population and could grow to represent 31% by 2050.

On the other hand, the wine industry is benefitting from some tailwinds. On-premise sales are growing once again, and flat prices and high promotion levels (discounts) are attractive to consumers.

Meanwhile, the price and mix of wines is moving up. All wine categories above $9 per bottle are growing, especially those above $20, while cheaper wines aren’t selling as quickly.

Brager observed that millennials are big wine fans and will soon have a big impact, while boomers continue to buy a lot of wine. Brands aimed at females are growing 48% and have 2% of the market.

Finally, he said many categories of retailers are adding wine to their shelves, from drug stores and dollar stores to convenience stores and mass merchandisers.

E-commerce continues to grow. Wines & Vines and ShipCompliant just reported direct-to-consumer shipments of $1.4 billion last year, up 10%, and it appears Amazon is about to start selling wine, too.

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Wine Industry Metrics
Off-Premise Sales » Month   12 Months  
February 2015 $643 million
$7,954 million
February 2014 $601 million $7,560 million
Direct-to-Consumer Shipments » Month   12 Months  
February 2015 $132 million
$1,823 million
February 2014 $126 million $1,598 million
Winery Job Index » Month   12 Months  
February 2015 275
February 2014 219 206
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