Ste Michelle: Volumes Gain 0.4%, Hurt by Destocking

FILED APRIL 20, 2011

Dear Client:

Net revenues for Ste. Michelle Wine Estates grew 6.3% in Q1 (3 months ended March 31), "due primarily to higher premium shipment volume," said parent company Altria in its quarterly earnings report. So it sounds like they are seeing an uptick in demand for their higher priced brands.

Wine shipment volumes grew 0.4%, "benefiting from higher off- and on-premise channel volume, partially offset by changes in trade inventories." This marks a notable drop off from Q4 2010, when volumes grew 10.8%. So what happened? The company believes that in the first quarter of 2011, wholesalers depleted inventories that were built in the fourth quarter of 2010. And because wholesalers increased inventory levels in the first quarter of 2010, it created a "difficult" shipment comparison.

Both Chateau Ste. Michelle and Columbia Crest had a tough quarter, with volumes declining -4% and -2.6%, respectively. However, Ste. Michelle's other wines grew 8.1% collectively. As measured by Nielsen scan data, Ste. Michelle volumes grew 2.3% in Q1 at the off-premise. This lagged total wine industry growth of 3.2%.

So while the company reported declining volumes for Chateau Ste Michelle, SymphonyIRI food and drug store scans showed strength in the quarter. Dollar sales in the 12-weeks ended March 20 grew 5.5%, while volumes gained 6.4%. Prices were down by -9 cents a bottle. However, growth was slower in the 12-weeks compared to the 52-weeks and the 4-week periods, where sales and volume growth was higher.


Recently, distillers have put more focus on reinvigorating Canadian whisky, which as the New York Times said in an article yesterday, "has an image problem." As Scotch and bourbon "were reframed as elite, cultured drams," and Irish whiskey "won new measures of respect and popularity," Canadian whisky "remained the unglamorous workhorse of the whisky world." Ouch. But in recent years Canadian whisky "has been taking baby steps out of the shadows," as the category has started producing more small batch and single barrel offerings.

One problem, according to Canadian distiller John Hall, was that "ownership in Canadian whisky went to international companies." But the category also needed some new flavor. As owner of Forty Creek Barrel, he was one of the first to begin aging his Canadian whisky offerings for 6-10 years, rather than the 3 years required by Canadian law.

Companies like Sazerac and Brown-Forman have followed his lead by releasing their own premium Canadians. Sazerac's master blender, Drew Mayville, told the NY Times: "Bartenders aren't looking for that bland drink. The trend is for more flavorful, vibrant whisky." So he produced Caribou Crossing Single Barrel and Royal Canadian Small Batch, both small batch offerings with "sleek packaging." Similarly, Chris Morris, master distiller for B-F, introduced Collingwood in February. He endeavored to "walk that line" between attracting new consumers, while not alienating traditional Canadian whisky drinkers. And aside from launching new brands, companies like B-F and Diageo are adding line extensions with Canadian Mist Black Diamond and Crown Royal Black.

EVIDENCE OF A RESURGENCE. Recent Nielsen scan data in food, drug and liquor stores shows that Canadian Whisky is gaining momentum on a rolling basis. In terms of dollar sales, Canadian grew 1.4% in the 52-weeks to March 5, 3.2% in the 13-weeks and then 4.1% in the 4-weeks. Meanwhile, volumes grew 0.2% in the 52-weeks, 2.5% in the 13-weeks and 2.8% in the 4-weeks. So while shares are flat across the board, the category seems to be improving.


CONSUMERS CHOOSE MALIBU CRANBERRY CHERRY. Malibu Rum ran a contest in December allowing consumers aged 21 and older to vote on the next flavor. With the final vote tallied, Malibu Cranberry-Cherry received 62% of the vote, beating Citrus and Mint. It will be available at retail beginning in May, with a suggested price of $9.99/750ml.

Until tomorrow, Megan

"A rumor without a leg to stand on will get around some other way."
John Tudor

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