A Look at the Past and What's in Store for 2010

FILED JANUARY 1, 2010

Dear Client:

2009 was a strange year for the industry. The recession introduced a lot of changes as the “less is more” mantra gained, it seemed, more steam with each passing day. Even more than in 2008, we saw consumers staying home instead of venturing to restaurants, bars and nightclubs. We also saw them trading down at retail and buying less of our products in a shopping trip than they had in the past. As a result, a number of value brands gained traction while seemingly unstoppable giants lost some of their mojo. This prompted a number of changes in our industry, such as company restructurings/lay-offs and cuts in marketing spend that have opened new avenues in brand promotion. Here’s a look back at some of the biggest stories in 2009, when erratic consumer behavior made it very difficult for companies to gauge the industry and plan for the future.

Constellation Brands sells its value spirits brands to Sazerac for $334 million

Many states across the country raise taxes on spirits, wine and beer

Foster’s announces results of strategic wine review. The company said it would keep its troubled wine business but announced a number of key appointments, including a new managing director at Foster’s Americas. Recall that Stephen Brauer, who was the general manager of Pernod Ricard USA, took over Scott Weiss’ former post as MD at Foster’s Americas. Foster’s also announced intentions to sell 36 non-core vineyards and close or reconfigure 3 wineries in CA and Australia. Lastly, Foster’s separated its beer and wine salesforce. The market continues to speculate whether or not Foster’s will sell its wine unit in the near future.

Beam Global Spirits & Wine appoints new ceo Matthew Shattock

Pernod-Ricard sells Wild Turkey to Gruppo Campari for $581 million

Brown-Forman names Mike Keyes as president of its North American region

AmazonWine.com pulls out of the wine business before launching its site to consumer

Beam Global acquires Effen Vodka from Sazerac, which it originally purchased from Constellation along with the company’s other value spirits brands. In exchange, Beam sold the Old Taylor whiskey brand and inventory to Sazerac.

Constellation consolidates its wholesaler network. It strikes a deal with Southern Wine & Spirits (SWS) in nine markets, most notably in California, Florida, Illinois and Pennsylvania. Republic National Distributing Company (RNDC) joins with Constellation in eight markets, including Colorado, Louisiana, Texas and Washington D.C. Constellation signs with Young’s Market in Alaska, Washington, and Oregon. Lastly, National Wine & Spirits won Indiana and Johnson Brothers was signed in Iowa.

Southern and Glazer’s call off their joint-venture

Jack Daniel’s and Jim Beam announce they will not renew their NASCAR sponsorships in 2010

The FDA sends a letters to 30 caffeinated alcohol producers asking them to prove that their product is safe within 30 days.

Diageo Chateau & Estate Wines (DC&E) decides it will not distribute Bordeaux wine for the first time in 35 years due to oversupply.

Constellation names Jay Wright as president of Constellation Wines North America

Indiana grants Southern a wholesaler permit to operate in the state

One of the biggest rumors that continuously popped up throughout 2009 was that Diageo would acquire its remaining 66% stake in Moet Hennessy. We’ve yet to see this happen.

2010 CRYSTAL BALL PREDICTIONS

After the year we just had, it’s hard to know what to expect in 2010. We don’t believe that the wine and spirits industry will see a big turnaround until unemployment vastly improves – and that could take years. In all, we think this year will be a little better than 2009 but don’t expect big changes until perhaps the end of 2010 and into 2011 and 2012. After much thought and help from readers, here’s our attempt at 2010 predictions:

Trading up will see some improvements in wine. We expect premium and super-premium wine sales to improve slightly in 2010 and even more in 2011.

We expect that discounting will continue in 2010. More suppliers will find it necessary to drop prices despite fears that it could damage brand value.

The on-premise will see improvements in the second half of 2010 as employment gets a little better and consumers gain more confidence. The resurgence at the on-premise will create renewed interest in specialty cocktails and higher-end wine.

We expect lower priced spirits brands, especially vodka, will continue to outpace high-end growth. Consumers may not be quite ready to fork over the cash for $40+ spirits brands, but we expect those that deliver a strong brand message will see a turnaround towards the end of the year.

Small and innovative spirits brands with a compelling story will continue to gain traction in 2010. Just look at Firefly’s success last year.

Word of Mouth marketing will become an increasingly important strategy for wine and spirits companies, especially as marketing budgets tighten and more people join social networking sites such as Twitter and Facebook. We expect some of the larger companies to take notice.

Imported wines, particularly those from Italy, Australia and France, will continue to face problems in 2010. Meanwhile, US wineries and other countries that have offered low-priced and well marketed wines, such as New Zealand, Chile and especially Argentina, will continue to take share.

The Australian wine industry will continue searching for a united voice and solutions to its oversupply problem.

With some improvements in the credit market we expect to see more consolidation on the wholesaler and supplier front in 2010. We don’t expect a major brand acquisition, especially in the coming months, but may see some grabs for smaller players and brands. This could spell opportunity for some successful entrepreneurs.

2010 will see less consumers seeking fruity and sweet cocktails and instead looking for herbs and other ingredients with perceived health benefits.

SPIRITS GROW 1.4% IN CONTROL STATES IN NOVEMBER

Volumes of spirits in control states gained 1.4% in November, reports UBS analyst Melissa Earlam based on NABCA data. Rolling 12 month volumes grew 1.8% year over year from 1.3% in October. November dollar sales grew 1.9%, “implying +0.5% price/mix, which is weaker than October’s 2% price/mix,” said Melissa.

Diageo gained share in November with volumes up 2.4%. The company took share in vodka, gaining 9.1% compared to industry growth of 6.3%. Rum volumes grew 5.2% compared to industry growth of 4.3%; Scotch declined -1.7% while the category was down -2.4%; gin was down -1.7% compared to -2.1%; and Diageo’s cocktails grew 1.7% while the overall category declined -3.3%. Diageo, meanwhile, lost share in Canadian whiskey (-5.3% versus category
-1.7%), tequila (-6.6% vs 2.6%) and cordials (-4.6% vs -4.3%).

Pernod, B-F, Skyy Spirits and Remy Cointreau lost share in November. Pernod’s volumes fell -2.8% in November and only gained share in Irish whiskey where volumes rose 18% compared to the category gaining 14%. Pernod lost share in vodka with volumes up only 1.7%, followed by Scotch (-5.6%), gin (-6.6%), rum (2.6%), cordials (-9.3%) and cognac/brandy (-32% versus category -6%).

B-F’s November volumes fell -2%, while Skky Spirits’ volumes declined -5.8% and Remy fell -4.6%. UBS rates Diageo at “buy,” Pernod and Skyy at “neutral,” and Remy and B-F at “sell.”

WAL-MART MOVES TO DIRECT PURCHASING SYSTEM – IS ALCOHOL IN THE PLAN TOO?

An article in the Financial Times today highlighted a new initiative by Wal-Mart to cut supply chain costs by placing more direct orders from manufacturers and cutting out the middle man. No, the article didn’t touch on beer, wine and spirits but it makes you wonder – is our industry next? You’ll recall that 7-Eleven has explored a shared warehouse concept in California for beer, wine and coke bottlers that essentially adds a fourth tier to the distribution process. Then recently Costco stopped carrying Coca-Cola products for several weeks until the two companies came to terms on pricing. Although this would be a different concept, it shows that retailers are wielding more power and looking for ways to make their operations more efficient.

Wal-Mart plans to cut out billions of dollars of costs across its global supply chain by increasing “the proportion of goods that it buys directly from manufacturers, rather than through third-party procurement companies or suppliers,” said the article. The company’s long-term goal is to source about 80% of its purchases directly from manufacturers. Eduardo Castro-Wright, the head of Walmart’s US stores, estimates that shifting to direct purchasing could reduce costs by 5-15% across the supply chain within five years and potentially save $4-$12 billion.

By the end of 2010, Wal-Mart plans to directly purchase sheets and towels for its stores in North America, along with clothing from its private-label Faded Glory line and for licensed Disney character clothing. It also plans on directly purchasing fruit and vegetables from manufacturers for its stores in US, Canada and Mexico after testing a program with apples that reportedly saved them 10% in purchasing costs. It also expects to expand the direct purchasing program to other categories such as seafood, frozen food and dry packaged groceries.

WSD BRIEFS:

JOSE FERNANDEZ DIES. We again want to express our condolences upon receiving news this morning that Jose Fernandez, chief of Constellation Wines North America, died Friday (Jan 1) at the age of 54 after battling brain cancer. Jose was a 30-year veteran of the wine industry and joined Constellation in 2001. The company said he “played a key role” in the rapid growth of its wine business, including the acquisition and integration of the Robert Mondavi Corporation, Vincor USA and Beam Wine Estates. He was named ceo of CWNA in 2007.

TOTAL BEVERAGE SOLUTION ACQUIRES COLOMBO MARSALA. South Carolina-based Total Beverage Solution (TBS) has acquired Italian wine Colombo Marsala from William Grant & Sons USA. “With this addition, we anticipate doing over 150,000 nine liter cases of wine in 2010, along with our beer portfolio which is in excess of 900,000 case equivalents, and premium spirits which is approximately 10,000 cases annually. With the Colombo brand included, the company anticipates 2010 revenues to exceed $30 million,” said chief Dave Pardus


Until tomorrow, Megan

“Confusion is always the most honest response.”
Marty Indik

--------- Sell Day Calendar ----------
Today's Sell Day: 2
Sell days this month: 22
Sell days this month last year: 22
This month ends on a: Thur.
This month last year ended on a: Thur.
YTD sell days Over/Under: 0

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