The wine industry in context
Though global wine production now actually exceeds consumption at 269 mhl (OIV, 2010 for 2009) compared to global wine consumption of 238 mhL (OIV, 2010 for 2009), important mergers and acquisitions within the global wine and spirits industries have been made over the last 10 years. Among the wine industry’s big players, there is a sort of race going on where making and selling “wines and spirits on the global market” is crucial. We can argue that his strategy, already adopted 10 years ago, seems not to be really dedicated to the control of wine and spirits production volumes, but rather to a sharing of the geographical market among leading companies in the global wine industry. The main key driver of M&A seems to be the first to “to catch the cash”. Apparently, profit margins and cost discipline items do not fit into M&A strategy in the global wine industry. The rationalization of time on the wine estates, acquired cost structures and the forecasting of economic global recession, such as in 2008, have all been badly managed.
Unfortunately the time to consolidate and restructure through new acquisitions is short, competition is intense and intensified by the oversupply of wine on the global market. In the meantime, wine consumption continues to decline in the big producer countries while the huge areas of growth are in places like China. In UK the decline in total alcohol consumption since 2004 stabilized in 2010 with an increase of 0.6% in total alcohol consumption.
Main mergers & acquisitions over the last 10 years
If we look at the most important mergers and acquisitions within the global wine and spirits industries over the past 10 years, along with their key drivers, we can argue that the trend has changed. Net sales growth by product and by region is certainly still promoted in an M&A strategy, but not only. The fair value of the acquired company, based on the estimated cash generation potential and the time to pay back the acquired debt are becoming ever more crucial in the decision to acquire and/or merge with another company. Today, M&A strategy seems more oriented towards a consolidation of ownership in the global wine and spirits industries and it continues to help the big players in becoming the biggest selling companies of wine, beers, spirits and “soft drinks”. In 2009, United Spirits’ ’Bagpiper’ Indian whisky overtook Johnnie Walker scotch whisky to become the world leader in whisky sales. Gaining leadership in a product segment, by acquiring and enlarging wine and spirit portfolios, is usually the key point to most M&A operations and may be more cost intensive for the spirits industry than the wine industry. In the beer industry, the Carlsberg/Heineken takeover of Scottish and Newcastle (S&N) in 2008 gave access to Eastern European markets for Carlsberg while Heineken gained access to the UK market.
Diageo, the world’s largest producer of alcoholic drinks has acquired its leading position in the premium spirits segment, by volume, sales and operating profit, thanks to the purchasing of Seagram’s from Vivendi Universal in 2002. The Diageo group is the result of a merger between Guinness and Grand Metropolitan in 1997. In march 2011 Diageo bought Turkey’s leading spirits producer, Mey Içki. The then recession obliged Diageo to exit the non-core business market of top class Bordeaux which gave higher profit margins than other “not so famous” outstanding wines but generated high fixed costs and relatively low cash flows coming from sales due to limited volumes of wines ready for the market. Pernod Ricard (PR), the world’s leading spirit challenger of Diageo, have also made various acquisitions, such as the 32 per cent purchase of Seagram Business in 2002 and Allied Domecq in 2005, to finally focus its core business on fourteen strategic brands. In 2009, PR sold different brands including ‘Wild Turkey’ to Gruppo Campari. LVMH, the world’s largest luxury goods company has created a diversified wine and spirit portfolio around a large portfolio of Champagne brands and top Chateaux in Bordeaux such as Chateau d’Yquem in 2004 and 50 per cent of Chateau Cheval Blanc in 2009. Historically, M&A strategies for wine producers have been done in an attempt to achieve economies of scale in order to combat the sector’s higher cost structure when compared with the spirits industry.
To become the biggest wine-maker in the global market, by concentrating on ready-to-buy fine wines, was a strategy developed by Robert Mondavi in the 70s to give an alternative to the Bordeaux “en primeur” selling model. But the story shows that this objective was not necessarily supported by a merger strategy. Some acquisitions of vineyards have been made in the Napa valley to build up an RM brand in the premium wine market segment. Constellation Brands finally completed the acquisition of The Robert Mondavi Corporation in 2004, to offer an unmatched wine portfolio with an expanded fine wine offering, in addition to a broad portfolio of leading brands in the spirits and imported beer categories.
Key drivers in the consolidation of ownership
As well as the leadership in a global product segment, through externally acquiring new brands, in terms of sales the control of potential economic returns in the main geographical areas (in the old world and new word including BRICs) is usually considered as a key driver in the decision to make external integrations by acquisitions or mergers with other competitors. Only in nations like China and the Russian Federation, where wine consumption is even higher than the domestic wine production (OIV 2010, Tbilisi), is foreign investment made through joint-venture and direct distribution (for example, Domaines Baron de Rothschild-Lafite, Castel Group, Duval Leroy and Miguel Torres, in China). On the other hand, Chinese companies are looking for new acquisitions of best premium values, such as Chateau Laulan Ducos in march 2011 They are also looking mainly to the old world to appropriate themselves with the best know how and expertise in wine-making. The outstanding 2009 vintage helps Asian investments to rise thanks to a weak euro that ensures a continued interest.
Over the last years, the macroeconomic panorama (credit crunch in 2007, currency depreciations of sterling for example, rising fuel costs and other operative costs in wine production and distribution ,such as dry goods and bottles) and the relative uncertainty and climate change in 2007 and 2008 have helped to create a new trend in the corporate strategy of the big players in the wine industry: the consolidation of ownership created in the past thanks to global M&A operations. Regarding the specific UK case, where the excise duties on alcohol are the highest in Europe, retail prices were increased in 2008, following the government’s decision to increase excise duties. Despite the general negative trend in wine consumption. In 2008, excise duties were increased by 9 per cent and the UK government introduced a “tax escalator” for drinks, to be 2 per cent above the rate of inflation for the next four years and so extended to 2015. in the March 2010 budget.
Decreasing wine demand, as a result of the financial crisis and overproduction, have exacerbated pre-existing supply/demand imbalance, placing companies under financial stress and obliging them to consolidate their ownership, minimising cost in new acquisitions. LVMH sold Champagne Montaudon in December 2010 after having acquired it only two years earlier. As reported last week, PR Chief executive Pierre Pringuet appeared to leave the door for a move for the spirits company, Fortune Brands, through the acquisition of the re-named spirits company Beam (spin-off of Fortune). The company is instead focusing its strategy on cutting debt to meet its own financial targets set for June 2012 and regaining its debt investment grade rating integrated in the book/value estimated by the stock-market. The consolidation of ownership passes to a new priority, which is for the big players to be quick in de-leveraging from past debt investments.
Various takeover opportunities were opened in the early post crisis period following the re-organization of their own internal wine and spirits units so as to separate clear core and non-core business in order to eventually off-set the latter (for example Foster in 2011). Global wine companies, such as Constellation, Foster’s and Gallo have restructured their businesses. For example, Constellation sold its UK and Australian assets, including moving jobs and money out of the UK. Rumours circulated on the move of Diageo headquarters from the UK. In that sense, new acquisitions are today integrated in the strategic restructuring plans of the acquiring company and strategic partnerships are formed to share acquisition costs (included the debt acquired). In 2011, rumours suggested for example that Diageo and Bacardi may link up to acquire Beam Global. The big players are now seeking to shift their focus towards the development of more premium brands with higher margins by divesting many of their lower-end assets. In any case, the big player’s consolidation of ownership is mainly sought through mergers and acquisitions.
As a consequence opportunistic bottlers and distributors are taking advantage of lower valuations to acquire premium wineries. Distributors, like Costco in US. are seeking to provide direct sales from wine producers through their wholesale chains and develop their own brands. Finally, large wine producers are trying to acquire distributors such as Constellations Brands along with Spirit Marque One and Gruppo Campari who bought Daucourt Martin Imports, a French spirits distributor in the US.
Benefits for consumers
Consumer behaviours have changed after the recession and most of them (as in the US) have switched purchases to non-premium wines. Conversely, in Australia where wine is cheap and considered a commodity, wine consumption has remained stable despite the recession. Consumers did not trade down for cheaper wine brands or cut back their purchases. In Europe, the global financial crisis has obliged wine producers to offer substantial discounts on prices so as to offer quality wine products at an attractive price, as in the New World (US, Argentina, Chile, Australia and South Africa). As a result, “old world” consumers, used to purchasing essentially domestic wines, can now access a larger portfolio of wines including new world wines as is happening in Italy, Spain and France. Concerning the UK market, known as the biggest market in the world among non-producer countries (UK wine production is residual on the global markets), virtually every consumed wine product is imported. If we look at the 2011 Vinexpo statistic data in terms of total UK wine consumption(still and sparkling), the main supplying countries are: Australia (2.6m hl in 2009), France (2.08mhl in 2009), Italy (1.66mhl in 2009), USA (1.52mhl in 2009) then comes Spain (almost equal to South Africa) with 1.19m hl in 2009. Moreover, from 2005 to 2009, growth in UK wine consumption was the highest among South African, Chilean and New Zealand’s wines. New Zealand moved into the top dozen exporters for the first time in 2009.
Conversely, consumers, collectors and investors from the Asian market can enjoy the availability of top class Chateau and high-end premium wines in the diversified portfolio of big players like LVMH. By 2027 China should rapidly become the world’s biggest economy, based on Goldman Sachs’s forecasting. On the other hand, 2010 Decanter.com reported that Hong Kong overtook London to become the second-largest wine auction market in the world, after New York, helped by the duty abolition on wine and beer in February 2008. China is becoming PN’s third biggest customer for spirits while today wine consumption represents only 5 per cent of total alcohol consumption. Most trading is done on the Bordeaux Index of London and Vinfolio (San Francisco) where we can see, at a glance, different Top Class Bordeaux and other outstanding wines belonging (or prey) to the global drinks companies (like Suntory holdings, Constellation brands and LVMH ). Looking at the LVMH fine wines portfolio, many of them, such as Chateau d’Yquem, Cheval Blanc, Dom Pérignon, Krug make up the index and are all traded there.
From a “wine for value” consumer point of view, cost cutting corporate politics and/or vertical integration towards the retail market made by the global drinks companies, to control the entire value chain from production to distribution, give the opportunity to the consumer to access a large selection of wines at discounted prices. In this way, wine producers provide direct distribution all over the world and eliminate intermediate commissions normally due to importers and independent local distributors. In the same way, mergers between distributors, as in August 2010 between the UK importer Enotria which bought Great Western wines, importer and distributor and the acquisitions of wineries by the off-trade companies, help wholesalers to offer more attractive prices. To sum up, we can argue that: price, availability and product diversity are currently the main benefits to consumers in the global market. Different “new world” wines have gained the attention of the “old world” wine tastes in recent years, as much as the Japanese whiskies in Europe positioned as medium-high end quality products on the market. Many wines produced in the New world, such as South Africa (with Chenin Blanc), New Zealand (with Sauvignon and Pinot noir) or Australia (with Shiraz) are new expressions of European ancient grape varieties and they are appreciated for their ready-to-drink profile and their relatively attractive price.
Furthermore, we can also say that the M&A strategies adopted by wine producers are mainly focused on the brand cash returns and the likely premium of integrating price structures, as opposed to the intrinsic quality of wine, its personality and geographical aspects found on the bottle. Consolidation of cross-border ownership and attention to cost production compel wine producers to create medium quality, ready-to-drink wines for whatever drinker at a good price. Technological innovation substitute human savoir-faire and expertise in the vineyard and the cellar to guarantee to the consumer international norms of quality, eliminating the production of “atypical” wines. Moreover, this trend can push the main wine producers to put pressure on local appellation authorities, where wine production is based on indigenous grapes, as in Italy and Spain, in favour of an introduction of international grapes in the vineyard, hence giving more visibility to the characteristics of a wine to a larger community of consumers in the world-wide market.
In conclusion, as home consumption grows (e.g UK) the consolidation of important wine distributors, and the vertical integration of the off-trade business segment, place the medium and/or small growers in a delicate position, reducing more than ever their transaction powers in defining the price of grapes or bulk wines and forcing them, in the worst case, to sell or even close their estates. In the meantime, the global drinks companies are consolidating their global position and tactically acquiring small units sold by competitors and/or wine producers. This is done with a view to maintaining the best cash value in wine sales and a diversified wine portfolio with a high quality level to catch the best market value. In an international context where 60% of the global spirits market is accounted for by seven companies, consumers have the opportunity to be easily oriented to the most suitable drink to buy when it belongs to the low-medium market segment. while outstanding drinks, which are mainly famous fine wines acquired progressively, will be reserved for the highest growth markets such as China, so excluding the “common” wine lover.
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