Constellation Sees "Upturn" in Premium Wine Growth

FILED NOVEMBER 1, 2009

Dear Client:

This is according to Constellation Wines US evp and cco, Jay Wright, who spoke at the company’s investor conference today. He noted that “wine growth has slowed a bit due to a challenging economic environment,” but that they’ve started to see some positive changes in the past couple of months. “The great news is within the past 6-8 weeks we’re starting to see an upturn in premium wine growth as it accelerates beyond value wines. To me this is a sign the economy actually may be on the mend.” This is like music to our ears and one of the first fully positive comments we’ve heard from an industry exec in quite some time. Constellation cfo Bob Ryder commented later in the call that “we expect the industry to return to more normalized growth rates after the economy stabilizes.”

Although some wine and spirits companies are looking to emerging markets to make up for lost sales, Jay said the US still has long-term growth potential because of pricing opportunities and growing consumption.

Constellation expects to complete its distributor consolidation by spring of 2010, resulting in exclusive relationships with distributors in 30 states. This marks one of the steps Constellation has taken to improve organic sales growth. Jay noted that Constellation is the second largest gross provider behind Diageo, and on leveraging “our clout and our scale” with distributors.

ROB SANDS DOESN’T EXPECT BIG HOLIDAY REBOUND

In an interview with Reuters, Constellation chief Rob Sands warned against being “over-optimistic” this holiday season. He doesn’t expect the holidays “to be awful, awful, awful -- but I don't think it will be great.” This is partly because he doesn’t expect a lot of growth on-premise in the near future, or at least until unemployment improves. The holidays of course are peak season for wine and spirits and Constellation, like other wine and spirits companies, may not see the growth they’d like to see.

Constellation is focused on selling assets in Australia but Rob said “it’s not outside the realm of possibility” when asked if he would consider making an acquisition. The company is more focused on improving organic sales growth, return on capital and building cash, so “it would be somewhat inconsistent right now with the other things we're trying to accomplish," Rob continued.

In a separate interview with Dow Jones, Rob said he would “look” at Ste. Michelle Estates of Altria Group ever decided to sell, although it’s not a must have. Altria said in September that it has no plans to put Ste. Michelle up for sale after acquiring it with the rest of smokeless tobacco producer UST.

Constellation has managed to cut more than $1 billion in debt since March 2008 by closing facilities, lay-offs and selling some non-key brands.

CAMPARI IMPROVES IN Q3

The company said their third quarter results ending September 30 were “satisfactory,” thanks to a “strong” contribution from Wild Turkey and a “significant” decrease in pressure from distributor and retailer destocking. Net sales grew 7.2% and organic sales rose 2.1%.

“In the existing business, destocking pressure, although not completely over, eased significantly. Regarding external growth, the main contributor was Wild Turkey, after its successful integration at the end of the first half,” said the company

“Moreover, the positive momentum of Wild Turkey and American Honey confirms the potential of the acquired business,” said Campari Group chief Bob Kunze-Concewitz.

UBS analyst Melissa Earlam noted: “In Q3 Campari’s organic sales significantly outperformed its peers (Diageo -6%, Pernod -4%, Remy -5%) which could be due to its lower price point portfolio or some selective brand restocking.”

THE AMERICAS (which make up 30.9% of total sales) posted a negative organic change of -7.4%, partially offset by a positive exchange rate effect (+4.4%) and a positive perimeter effect (+12.4%) due to the acquisitions of Wild Turkey, Destiladora San Nicolas and Sabia. The US market saw organic sales drop -6.8%, which was driven by destocking and offset by a positive exchange rate effect of 10.5% and positive perimeter effect of 12.3%.

SALES OF SPIRITS OVERALL (73.2% of the group’s total sales) grew 13% in the first nine months to October. The Campari brand declined -7% in sales due to destocking in Brazil, while Skyy Vodka grew 6.4% “thanks to positive performance in the US market, although destocking was a drag in the first half of the year.” X-Rated Fusion Liqueur registered good growth at 6.4%. GlenGrant grew by 1.5% at constant exchange, driven by a good performance in its key international markets.

WINES, which accounted for 13.8% of total sales, registered a decrease of -4%, due to the combination of negative organic performance of 8.6% and a positive perimeter effect of 4.6%, said the company. Cinzano vermouth drove the segment’s negative performance.

AUSTRALIAN WINE BIZ NEEDS TO CUT 20% OF VINES

It seems likely that the Australian wine industry will employ a tactic recently used by the Europeans: slash unprofitable vineyards. This could take place as early as 2010, according to a joint statement released this week from the Winemakers’ Federation of Australia, Wine Grape Growers’ Australia, the Australian Wine and Brandy Corporation and the Grape and Wine Research and Development Corporation.

Roughly 20% of their vines are in surplus, and at least 17% of vineyard capacity is uneconomic. The Australian trade groups noted that “structural surpluses of grapes and wine are now so large that they are causing long-term damage to our industry by devaluing the Australian brand...at least 20% of bearing vines in Australia are surplus to requirements.” Bailouts “are not an option,” they said. Instead, the solution lies in “individual growers and wineries from as early as the 2010 vintage.”

The groups’ “primary focus must be on helping businesses and regions to strategically and honestly assess their current and likely future position then make appropriate decisions.” Underperforming vineyards and wineries “may need to leave the industry; others may need to change what they produce and how they do it.”

It’s clear the Australians are eager to turn around their image and improve sales. Is it possible? It remains to be seen.


Until tomorrow, Megan

“All things must change to something new, to something strange.”
Henry Wadsworth Longfellow

--------- Sell Day Calendar ----------
Today's Sell Day: 8
Sell days this month: 20
Sell days this month last year: 19
This month ends on a: Mon.
This month last year ended on a: Fri.
YTD sell days Over/Under: -1

WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: megan@winespiritsdaily.com

© 2009 Wine & Spirits Daily, all rights reserved. May quote with attribution.

Follow me on Twitter http://twitter.com/WineSpiritDaily

Go back to listing Go to next article Go to previous article

Comments

Top Secret News Hotline:

Got wine and spirits news for WSD?

Submit Anonymously
twitter facebook