Tag Archives: wine business

Why Big Wine will keep getting bigger

Big WineThink this year’s wave of Big Wine buyouts was impressive? Just wait. Big Wine is only getting started.

The wine industry is going through unprecedented consolidation, and even I’m surprised — and I’m the one who predicted it. That’s because three things have made this the perfect time for companies like E&J Gallo, Constellation, and The Wine Group to snap up smaller producers the same way a small child attacks Chicken McNuggets. This is a mixed blessing for the consumer, who will get increased access to well-made wine, but at the cost of much of the wine tasting the same regardless of where it’s from and who made it:

? Cheap money. Interest rates are not just at historical lows, but have been there for almost 10 years. That makes the cost of borrowing to buy a winery so low that even those of us who aren’t M&A geniuses understand how much sense it makes. Plus, rumors of an interest rate hike this fall may have spurred this summer’s wave of buying, so that Big Wine could lock in all that cheap money.

? The biggest wine companies are preparing for a world where we buy most of our wine at grocery stores, warehouse stores like Costco, and large chains like Total Wine. This will happen sooner rather than later (if it hasn’t already), and anyone who doesn’t understand how important this is is missing the biggest change in the wine business since the end of Prohibition. Big Wine wants product to fill all those store shelves, and the easiest way to do that is to buy another winery. Could the local wine shop, with someone who waits on you, become as quaint as the corner drug store and gas stations with attendants who clean your windshield?

? The end of the family winery era in California, which started in the 1980s and did much to make California wine some of the best in the world. But wine is not immune to the laws of family business, which say that any family business that lasts past the first generation is the exception. And most of the family wineries that have been sold in the past couple of years are first- and second-generation companies. As one banker told me, there are more wineries that want to sell than anyone can imagine.

The other thing about all these buyouts? That wine, despite what so many think, is no different from any other industry, and the same kind of consolidation that has transformed U.S. business since the beginning of the century — Heinz buying Kraft, for example — will transform wine. This is a change many don’t like and even more don’t understand, but it seems inevitable.

Update: Sweet red wine is taking over the U.S.

sweet red wineThe surprising thing about this month’s sweet red wine post is how muted the reaction was. Hardly anyone seemed surprised. Dismayed maybe, or irritated, but not especially surprised. That’s because the people who follow these things had an idea it was going on, and those who don’t — like most of the Winestream Media — don’t consider it important enough to be surprised.

And the wine drinkers buying all that sweet red? They weren’t surprised, dismayed, or irritated. They’re just happy someone is making wine they enjoy. Or, as a 30-something woman told me about her favorite sweet red, Cupcake’s Red Velvet: “It’s really good, and it’s really about the only red wine I like.”

The one thing most everyone agreed on? That the numbers, though imprecise, offered a real sense of how big sweet red has become — the fifth biggest category in U.S. wine sales, behind chardonnay, cabernet sauvignion, pinot noir, and merlot. Given its momentum, I wouldn’t be surprised to see sweet red pass merlot for fourth in the next couple of years.

So it’s not a coincidence that red blends accounted for 40 percent of all new wines over the past two years, compared to just 18 percent for chardonnay and cabernet combined, according to Beverage Media magazine. Yes, not all red blends are sweet, but sweet reds are at least two-thirds of red blends, based on data in the first post. This is another sign of how important sweet red has become.

How sweet is sweet? About 1.0 or 1.2 percent residual sugar, compared to less than .08 residual sugar for dry red wines. Other highlights in the wake of the first story, combined with additional reporting that I did:

• Consumers don’t necessarily see sweet red as sweet, says Christian Miller of Full Glass Research, who has probably studied this subject more than anyone in the country. ” ‘Sweet’ is not an attribute that large numbers of regular consumers use with regards to these wines,” he said. “They are more apt to regard them as flavorful or smooth or interesting. Many consumers jump back and forth between dryer and sweeter versions of these wines.”

• The wine industry remains uneasy about calling a sweet wine sweet, says Miller. “It’s possible that some of these companies have tested adding the word sweet to the label or description, and found it harmful. On the other hand, based on my experience in the wine industry, the number of decisions based on gut instinct, trade notions, or small unrepresentative samples is surprisingly high, even among large MBA-ish companies.”

• Since sweet red doesn’t depend on appellation or specific grapes, it can be made with fruit from anywhere in California, Or, as wine economist and author Mike Vesteth told me, sweet red can be made with all the merlot and syrah that wouldn’t be sold otherwise, and which costs less to use. Hence higher profit margins than more traditional wines.

Finally, no one — not even anyone at E&J Gallo, whose Apothic started all of this — expected sweet red to do this well. Gallo, I have been told, developed Apothic to appeal to Millennials, to compete with the Menage a Trois red, and to earn supermarket shelf space. That it might change U.S. wine never really occurred to anyone.

For more about sweet red wine:
The ultimate Internet guide to sweet red wine
What’s next for sweet red wine?
Wine terms: Sweet vs. fruity

 

Winebits 393: Meiomi sale, wine retailers, restaurant wine

Meiomi sale ? Winery consolidation continues: The wine cyber-ether was full of pontificating and prognosticating last week after Constellation Brands, third on the U.S. Big Wine list, bought pinot noir maker Meiomi Wines for $351 million. Most of the commentators were baffled by the sale price, which seemed like a lot of money for the winery, especially since it didn’t include any vineyard land. Still, it wasn’t that surprising, given that Constellation paid $160 million for Mark West, the $10 pinot noir, in 2012, in a deal that also didn’t include vineyards. Meiomi is on track to sell three-quarters of a million cases in 2015, making it the $20 version of Mark West (marked down to $17.99), and as such seems like a perfect fit for the strategy that most Big Wine companies are following. They’ll sell you an entry level product, and then they’ll sell you the next wine when you trade up, and they’ll make sure you will be able to buy both wines in a grocery store. In this, it’s no different than E&J Gallo buying J and The Wine Group buying Benziger — business as usual for Big Wine in the 21st century.

? Retailers and grocers: This otherwise run-of-the-mill post about a Florida liquor chain adding a couple of stores explained the expansion thusly: “[I]n a bid to keep the ever-expanding grocery store channel at bay.” Which means the owners behind Florida’s ABC Fine Wine & Spirits understand what’s going on, even if most wine writers don’t. Interestingly the chain is up to 140 stores, which is still 60 less than it had 15 years ago, and speaks to the power supermarkets have today in selling wine. One national wine retailer told me that grocers thrive on competition, which explains much of their success, and aren’t scared of it the way so many regional and local liquor chains are.

? Restaurant price gouging: One would not expect the New York Post, home to the legendary Page Six gossip extravaganza and headlines like “Four sex scandals rock one hanky-panky high school” to commiserate with anyone who buys restaurant wine. But reviewer Steve Cuozzo, in a story headlined “Restaurants overprice wine because they know you have no idea the pain” spared no punches. Restaurant prices “… can drive you to drink ? anything but wine, that is.” He does an excellent job of explaining the contradictions and discrepancies in restaurant prices, and you can almost hear a bit of sympathy. Almost, of course, because the piece ends with a restaurant charging $100 for a very ordinary $25 retail Bordeaux.

Big Wine strikes again

Big Wine

“Who do we want to buy next?”

That E&J Gallo bought J Vineyards, the highly-regarded California sparkling wine producer, last month was shocking, but it did make business sense. Gallo, for all its vastness, doesn’t make high-end bubbly and doesn’t have many successful restaurant wine brands, and J does and is. Plus, J owned 90 acres of prime Sonoma vineyards, making the deal even sweeter for Gallo.

So how to explain this week’s news that The Wine Group, second-biggest to Gallo among U.S. producers and with even less of a critical reputation, bought the fiercely independent and much beloved Benzinger Family Winery? The Wine Group has never shown any desire to make wine not sold in grocery stores, and its two biggest brands are Franzia and Almaden, the five-liter box cash cows.

Call it one more step in the Big Wine-ing of America:

? The increasing consolidation in the U.S. wine business, something I wrote about at the beginning of the year. It is getting harder and harder for wineries that make less than one-half million cases to find distributors and space on store shelves. Benziger makes less than 200,000 cases a year, which wouldn’t even make it the biggest producer in Texas, and J sells only about one-third of that. Said the owner of a leading California independent: “My guess is that a winery really needs to be above 200,000 cases to really get the attention of a distributor. But maybe 500,000 is the new 200,000?” A distributor told me: “There are too many labels fighting for too few spots on the shelf or wine list. It ?s crazy.”

? Family and independence, two hallmarks of the California wine business since the 1980s, aren’t enough anymore. These are just the latest sales involving long-time family wineries, which saw an opportunity to cash out to avoid succession problems, solve family disputes over winery operations, or to take advantage of Big Wine’s deep pockets. Sale prices weren’t disclosed, but one report said the J deal may have been worth as much as $90 million, which would make the Benziger price well into the hundreds of millions of dollars. Even of the sale price was half of that for each, which is probably more accurate, that’s a winning payout.

? It’s all about the land. Benziger, with sales of less than $10 million, is so small compared to the multi-billion dollar Wine Group that there is almost no way it could affect the parent’s financial performance. This makes the deal even more baffling, unless it was for the 200 or so acres of quality Sonoma vineyards that were part of the sale.

Will Big Wine run their new companies successfully? Certainly, if success is defined by profit. Otherwise, expect the new owners to do what new owners always do, despite best intentions and protests to the contrary — cut costs, eliminate unnecessary products (so say good bye to J’s lovely pinot gris), and “rationalize” operations. Gallo and The Wine Group won’t ruin J and Benziger the way Sears destroyed mail-order clothing retailer Lands’ End, but they won’t be the same wineries they were before the sale. That’s something we’ll have to learn to live with, because consolidation is going to be with us for a very long time.

More about Big Wine:
? How to buy wine at the grocery store
? Downton Abbey claret ? wine merchandising for dummies
? Big wine tightened its grip on the U.S. wine market in 2013

Wine trends in 2015

wine trends in 2015Wine trends in 2015 will be similar to wine trends in 2014 — wine drinkers will see more wines they’ve never heard of and we’ll be able to buy those wines at more places than ever before, including and especially grocery stores. Along the way, Big Wine will continue to get bigger, and even wine writing could see significant changes, as those of us who don’t have money behind us will stop doing it.

? More private labels. Retailers love private labels, like Trader Joe’s Two-buck Chuck or Costco’s Kirkland, because it gives them a product no one else has and because they make more money than with national brands. Case in point: The Total Wine chain sells many national brands at its cost, and makes its money on its Winery Direct private labels. We’ll see more private labels because retailers are desperate to boost margins at a time when they can’t, for whatever reason, raise prices. Nielsen reports (and I’m going to write more about this later this month) that private label wine sales were up 11 percent last year, compared to 3.5 percent for all wine.

? More chains. There has never been a national wine retailer, which has made perfect sense given three-tier and that there are 50 booze laws for 50 states, including some that don’t allow chains. But these companies are expanding despite the legal obstacles. Total Wine expects to double its sales to $3 billion by 2019, opening 12 to 15 stores a year, and Canadian retailer Liquor Stores N.A. wants to add to stores and states to the 36 locations it has in Kentucky and Alaska. My guess? That the chains will slowly move into as many states as possible, changing the laws when necessary. Theu’ll offer better prices and force independents to get better, which is what happened in the pet business. Petco and PetSmart didn’t crush the independents when they opened 20 years ago; in fact, independents still account for about 90 percent of all pet stores, though only about one-third of sales.

? More grocery stores selling wine. This will change the wine business as we know it, despite repeated failures to get grocery store sales in Pennsylvania and New York. Supermarkets want wine because it’s more expensive than most of what they sell, and it helps them offer one-stop shopping. Plus, they have the financial clout to change laws in states that forbid grocery store sales, most recently in Tennessee. Again, this will pressure independents, who won’t be able to compete on price and will have to redouble efforts to offer quality service.

? Consolidation. Big Wine will continue to buy smaller companies and increase its market share, with deals like this. In this, it will solidify its hold on retailer shelves, making it more difficult for smaller wineries with limited distribution to be sold in all but the most progressive independents. I’d guess that as many as three-quarters of the wines in a typical grocery store come from the six biggest wine companies, and that percentage will only get bigger.

? Internet wine writing shakeout. Last fall’s news that Vinous bought Stephen Tanzer’s International Wine Cellar is the biggest development in wine writing since the Internet. It means someone has figured out that the only way to make money with wine writing on the Internet is to target the five percent of Americans who buy wine that costs more than $20 and that the only way to target them is to get big to compete with the Wine Spectator and the Wine Advocate. That’s not good news for those of us who don’t target that audience and don’t have the deep pockets to get big. Think of it as the wine writing equivalent of what Big Wine is doing, and wonder how many independents who are on the Wine Web Power Index will be there in five years.

Wine prices in 2015

wine prices 2015The 2014 grape harvest in most of the world is finished, which raise the next question: What does harvest mean for wine prices in 2015? The answer is surprisingly complicated, depending on which region the wine is from; how expensive it is — or isn’t; and whether we buy it from a big or small retailer. But if the answer is surprisingly complicated, it’s not unexpected.

That’s because the wine business continues to adjust to the changes it has seen over the past decade, and which were exacerbated during the recession. Most of the predictions you’ll see, now and into next year, don’t take into account these changes. Which is silly. The days when the wine business was made up a handful of important producers in each country who sold to mostly local retailers through small, family-owned distributors are gone and may never return.
I’ve spent the past couple of days contacting people who follow this stuff — consultants, retailers, distributors, and producers, and their answers are consistent, depending on their role in the business. In short, almost everyone wants to raise prices next year, especially after almost 10 years of flat prices. But most won’t be able to do it:

• The wine most of us drink, in the $10 to $15 range, probably won’t cost more next year, though quality might suffer as producers look for less expensive grapes in order to increase margins. Said one distributor: “The well-known brands, especially those in the big chains and grocery, have to be more careful. If you are in the $10 to $15 retail range you can slide around some, but don ?t break $14.99.”

• The cheapest wine, $8 or less, almost certainly won’t cost more next year, and in some cases may be even less expensive. That’s because, as several people told me, there is so much of this wine and so much competition that producers don’t want to raise prices for fear their customers will go elsewhere.

• Expect to see lots of one-off brands and more private labels around $15. That will be a function of plentiful harvests in much of the world, including the third biggest ever in California, and more grapes means more opportunity to do these very profitable wines. Why $15? That’s the price that producers want consumers to trade up to.

High-end wine will almost certainly increase in price. As one consultant told me: “High-priced wines are cutting back on the discounts and second labels, that they offered in the recession. In addition, their consumer demand can support some price increases, since they sell a higher proportion to high income, wealthier consumers who have recovered much better from the recession.”

• Prices for wine from places like Australia and parts of Italy, which have fallen out of favor with consumers, won’t go up. They’re having enough trouble selling wine now.

• The biggest retailers, like Costco, Total Wine, and the grocery stores, will exert more pressure than ever on prices. Said the consultant: “Terms like ‘synergy’ and ‘economies of scale’ in wholesale and retail are sometimes code words for ‘beating the crap out of your suppliers.’ ” Which means the same wine could cost 10 or 15 percent more at smaller retailers than at the bigger stores next year.