Is the "Golden Age" of Spirits Over?

FILED NOVEMBER 1, 2009

Dear Client:

Could it be true that “the golden age of growth in the US spirits market is unlikely to return?” This is according to a new report from Barclay’s Alex Oldroyd, who believes “the industry is unlikely to return to its previous attractive growth rates and unlikely to regain its premium valuation.”

According to Alex, spirits companies should consider investing more dollars in marketing after “a period of lower marketing and heavy price promotion.” Some factors not in spirits’ favor include: (1) continuing pressure on price and mix”; (2) further volatility in inventories, which “may lead to a more muted rebound from destocking than the market anticipates.”

Not surprisingly (due to its size), Diageo “is the most exposed to structural slowing in the US.” Alex believes Diageo was hurt by trends stemming from the recession in the US, such as trading down and drinking more at home, and that the company’s expectations for the current quarter may be overly optimistic. Paul Walsh has admitted himself that they weren’t prepared for the high level of de-stocking from distributors since last January. And although emerging markets are helping Diageo make up for losses in the US and Europe, Alex notes that the US in particular is likely too big to be ignored. Over the past three years the US has generated 40% of Diageo’s profit growth.

WINE’S SUMMERTIME REPORT CARD

Table wine volume sales were up slightly this summer (1.8%) compared to last year, while dollar sales gained 3.8%, according to IRI food and drugstore scan data in the 20 weeks ending October 4. Volume growth was seen in the majority of the price segments in the table wine category, with only the two most economy segments showed slight declines in volume. Table wines priced below $3 were down -2%, and box wines priced below $2 were down 2.6%. The two segments with the strongest volume sales growth were the $2+ box wines (+19.1%) and over $20 table wine (+14.4%). Meanwhile, the .75LT size, which is over 40% of the table wine category, grew more than 3 times the rate of total table wine, with 6% growth.

THE TOP 15 BRANDS BY PRICE:

UNDER $5. Sutter Home posted the most growth over the summer, while Livingston Cellars took the biggest hit out of all the price groups. Franzia box wine grew 0.9% in volume from the same period last year, gaining over 28,000 cases. Carlo Rossi grew 1.6%, or almost 25,000 cases; Sutter Home grew a whopping 10%, 114,000 cases; Peter Vella box wine declined -7.6%, losing a little over 82,000 cases; and Livingston Cellars dropped -11.8%, down over 132,000 cases.

BETWEEN $5 AND $11. Not surprisingly, Barefoot sold more cases than everyone, including this price group, while Fetzer declined the most out of the $5-$11 price group. Barefoot grew 19.5% in volume, gaining over 166,000 cases; Yellow Tail gained 0.8%, or almost 7,000 cases; Woodbridge by Robert Mondavi declined -1.6%, down 13,000 cases; Lindemans rose 0.3%, or 1,133 cases; and Fetzer declined -3%, losing almost 10,000 cases.

BETWEEN $11-$15. Sterling Vintners posted the most volume growth out of this category, while Kendall-Jackson Vintners Reserve posted the biggest decline. K-J Vintners declined -12.7% in volume, losing almost 42,000 cases compared the prior period a year ago. Clos Du Bois was down -1%, almost 2,200 cases; Sterling Vintners gained 40%, up almost 4,400 cases; Francis Coppola grew 18%, 14,600 cases; and Rodney Strong rose 15.1%, 11,700 cases.

$15+ BRANDS. La Crema took the biggest dive, down -9.5%, losing 7,000 cases. Frei Brothers, meanwhile, gained 13.7% and 3,700 cases. Simi grew 5%, 1,400 cases; Santa Margherita grew 4.4%, 1,238 cases; and Sterling Vineyards grew 0.8%, 219 cases.

SAINT JAMES CO ACQUIRES SAPPHIRE WINES

The Saint James Company, which specializes in the acquisition and distribution of New World wines, says it has acquired Sapphire Wines, LLC, owner of the Eos Estate Winery and Vineyards in Paso Robles, California. Sapphire Wines was formed in 2007 with the acquisition of the Eos Estate Winery, and Carneros Creek and Wildhurst earlier this year. Eos has been producing wine 1987 and is best known for its Zinfandel, Petite Sirah wines and "Tears of Dew" Late Harvest Moscato.

Richard Hurst, chief of The Saint James Company, said: "The Sapphire portfolio has grown by no less than 15% in the last year, and represents an excellent complement to our Koala Blue brand from Australia. The Eos Estate Winery is one of the largest in the Central Coast area, and Sapphire’s established distribution in the US provides a strong launch platform for those other New World wine businesses that we have agreed to acquire. We look forward to working with the existing Sapphire management team as we transition the business to Saint James."

AUSTRALIANS PROPOSE 5-YEAR DRAFT PLAN

The Australian wine industry has developed a five-year draft plan in South Australia to help battle over-production, waning global demand and falling prices. ABC.net reports gross revenue from wine production in the past fiscal year was $2.5 billion, down -21% on the year before. The draft plan aims to develop a secure and skilled workforce, identify infrastructure needs and areas where vines could be grown. It will also push for a reduction of trade barriers to maintain and develop export markets. The industry will review this draft plan each year “to take into account any changing circumstances,” says executive Brian Smedley. The plan is open for comment until Tuesday.

WHOLE FOODS “TURNS THE CORNER” IN Q4

Whole Foods chief John Mackay says sales have “officially turned the corner” after being hit hard by the recession last year following years of uninterrupted growth. Sales in the 3 months to September 27 jumped 2.3% to $1.8 billion, while comparable store sales decreased -0.9% versus a 0.4% increase in the prior year period. Identical store sales, excluding eight relocations and two major expansions, decreased 2.3% versus a 0.5% decrease in the prior year.

For the first five weeks of the first quarter of fiscal year 2010, total sales increased 5%. Comparable store sales increased 1.6% versus a 2.1% decrease in the prior year, and identical store sales increased 0.4% versus a 3.3% decrease in the prior year.

Whole Foods said it is “pleased” with its sales trends quarter to date, although “increased price investments could negatively impact our sales going forward, and with no anticipated positive change in the economy over the short term, the Company believes it is reasonable to expect sales results for the fiscal year in line with or slightly better than these quarter-to-date results.

For the fiscal year, they expect sales growth of 5% to 8%, comparable store sales growth of 1% to 4%, and identical store sales growth of 0% to 3%. The Company expects to open 16 new stores, 10 of which are expected to open in the first half of the year.

WSD BRIEFS:

NEW RULES FOR SCOTTISH WHISKY. New rules outlawing the bottling of single malt whiskies outside Scotland will come into force November 23. It also bans the use of the term "pure malt" and introduces improved labeling of products. The Scotch Whisky Association (SWA) called it landmark legislation.

OREGON WINE GRAPE GROWERS have reported very good yields, volume and quality this year although the numbers are not yet final, according to the National Oregon Agricultural Statistics Service. The Willamette Valley is expected to see higher yields in 2009 compared to last year.

COSTCO NET SALES GREW 7% in October and 5% in the 9 weeks to November 1. Comparables sales for the 4 weeks grew 2% in the US, while sales for the 9 weeks were flat.


Until tomorrow, Megan

Love is or it ain't. Thin love ain't love at all.
Toni Morrison

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