Morgan Stanley Sees More Growth Potential in Wine

FILED JANUARY 1, 2010

Dear Client:

Does wine have better future growth prospects than beer and spirits? Morgan Stanley thinks so after studying results from a consumer survey and wholesaler survey, along with GuestMetric’s on-premise data. In their survey, the majority of wine, spirits and beer wholesalers agreed that the wine and spirits categories offer solid, long-term growth but promotions, demand and inventories in Q4 have brought short-term risks particularly in spirits.

In a note to clients, Morgan Stanley executive director Dara Mohsenian acknowledges that wine industry growth has slowed, but also believes that the market underestimates wine’s growth potential. Why are they upbeat? Because “we think the recent wine volume slowdown has been driven by macros, which is a temporary phenomenon, while long-term secular growth drivers are still in place.” They believe concerns over pricing “are overblown” and that mix “should turn positive in 2010 and beyond...import pricing should rebound as importers take pricing to offset negative FX, and we discount concerns over Australian oversupply given that Australia is only 7% of US volume.”

Morgan Stanley predicts that wine volume will grow 3% and pricing will gain 1.8% in the next five years (2010-2014). They expect spirits volumes to rise 2.5% and price to grow 1.5%. And finally, domestic beer volumes should rise about 0.3% with pricing up 2.8%.

Wine has the most “favorable perception” among consumers when compared to beer and spirits. It’s considered healthier to drink, more sophisticated, higher quality and increasingly more popular. In their survey, 66% of distributors agreed that wine has the highest long-term growth potential in the US. Twenty-two percent thought beer has the most growth potential and 13% chose spirits.

Data from GuestMetrics found that wine is most sensitive to on-premise declines. Wine volumes declined -26% through October 2009 year to date in 11 key US markets that include Atlanta, Austin, Chicago, Dallas, Houston, Miami, LA, NYC, Phoenix, San Antonio and Washington DC. Imported beer’s on-premise presence fell -19% in volume, while spirits declined -12%. This means wine could have the most to gain once the on-premise improves. In its consumer survey, Morgan found that 31% of consumers would switch from beer to wine if their situation improves in the next 6 months. Sixteen percent would switch from spirits to wine.

DOMESTIC BEER HAS MORE FAVORABLE PRICING OUTLOOK. When it comes to pricing, though, Morgan Stanley believes domestic beer "has the most favorable pricing outlook," followed by wine and then spirits. As we noted above, Morgan believes wine pricing will improve because “consumer trade up will eventually rebound and a weaker dollar should drive higher 2010 import pricing.” Why? For one, premium wine “rebounded coming out of the last recession,” and “super-premium wine growth has recently reaccelerated in scanner data.”

SPIRITS HEAVILY PROMOTED DURING HOLIDAYS. Spirits, however, are reeling from heightened near-term promotions and recent inventory de-stocking, says Morgan Stanley. Interestingly, 100% of spirits distributors surveyed experienced an increase in holiday period promotions, while only 33% experienced an increase in promotion in the beer category. Yes, spirits is getting mighty aggressive on the pricing front. When asked if they believe higher spirits promotion are driving volume gains, 52% of distributors answered “no,” while 33% said “yes” and 13% said “not sure.” Meanwhile, 67% of distributors said retailers continued to de-stock spirits inventory over the holidays. When asked what change they expect in retailer inventory levels in 2010, 56% of distributors said “maintain current levels” and 44% said “reduce inventory.”

CONSTELLATION. Morgan Stanley currently rates Constellation Brands as “overweight.” They believe Constellation’s revenue growth potential is “under-appreciated,” particularly with its “leverage to high-growth wine and imported beer segments.” They also believe the US wine distribution changes and enhanced portfolio mix “should drive rebounding market share.”

BROWN-FORMAN. Meanwhile, Morgan rates Brown-Forman as “underweight.” They said that their “3.8% 5-yr revenue forecast is likely below market expectations, as we believe ad spend reductions will limit market share.” Note that B-F has shifted its advertising spend to the off-premise, which includes offering more value added packs. Recent scan data also highlights increased promotional activity.

BEAM GLOBAL. Fortune Brands was rated “equal weight.” Morgan projects 2.8% spirits profit growth over the next 5 years. “We expect FO spirits market share losses given its skew to low-growth categories and lower ad spending than peers.” Distributor surveys also point to increased promotion and inventory risks. Morgan noted that Beam’s new sales organization, increased ad spend and divisional reorganization “should all help drive improved results, but is partially offset by the halo lost without Absolut distribution.”

REMY RAISES PRICES IN Q3, SEES IMPROVEMENTS IN COGNAC

Growth in cognac was offset by declines in champagne and temporary declines in liqueurs and spirits in the third quarter for Remy Cointreau in the nine months to December 2009. Despite the difficult economic environment, Remy “resolutely continued to implement its price increases and product mix improvement policy” in the period. Organic revenue was down -4.5%.

The downward trend in cognac “slowed down significantly” in the US and Europe, while superior quality cognacs achieved the best performance overall. Champagne sales, “as anticipated, were affected by the crisis, but Piper-Heidsieck and Charles Heidsieck resolutely continued their pricing policy against a background of widespread price reductions,” said the company in a statement. They said that chamgpagne’s negative trend recorded in the first half of the financial year improved in the third quarter, likely helped by the holidays. Meanwhile, partner brands in the US “continued to grow” in the third quarter.

Remy's guidance is for slight organic growth in current operating profit at the end of March 2010.

WSD BRIEF:

DIAMOND OAK WINERY SOLD. Real estate developer Bill Harlon has purchased Diamond Oak in Calistoga from Dinesh Maniar, reports WineBusiness.com. Although the purchase price was not disclosed, public records show that Bill assumed more than $10 million in debt owed to Metropolitan Life Insurance Company. The title for the property was transferred back in late December. Dinesh filed a bankruptcy petition in September on behalf of Diamond Oak.


Until tomorrow, Megan

“By the time a man realizes that maybe his father was right, he usually has a son who thinks he's wrong.”
Charles Wadsworth

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