A New Constellation Emerges

FILED SEPTEMBER 1, 2009

Dear Client:

In the past six months Constellation has streamlined its company by combining its wine and spirits sales and marketing teams and beefed up its presence with distributors by consolidating in 19 states. It also managed to cut out a large bulk of costs by selling its value spirits brands to Buffalo Trace Distillery, and closing some “underutilized” facilities in California and New York state. In its second quarter conference call today chief Rob Sands and cfo Bob Ryder seemed confident as they enter a new stage for the company and the oh-so-important holiday selling season.

THE ONE MARKET MOVE. Arguably the biggest step Constellation took over the past six months was moving to a one distributor per state model in 19 markets. This took effect September 1, and over the next 12 months Constellation plans on transitioning the remaining 11 states “where it is feasible,” said chief Rob Sands. “By this time next year we anticipate that the distributor network consolidation will be complete in 30 states which represent two-thirds of Constellation’s total US wine and spirits volume.”

These new fully dedicated distributor teams are comprised of 900 sales people in 19 states and are completely focused on Constellation.

TRANSITION CALLS FOR INVENTORY INCREASE. To help ensure a smoother transition and “maximum levels of customer service with retailers,” Constellation increased distributor inventories beginning in September, which is when old distributors began transferring inventory to the new distributors.

“Normally we build inventory in the third-quarter for the holiday season and this year we did that inventory build in the second quarter,” said Rob.

CONSOLIDATION TAKES “TEMPORARY” TOLL ON SALES. The inventory increase helped boost net sales up 3% in North America and benefit price/mix artificially with “shipments being higher in premium products,” said Bob.

However, if you exclude those benefits, North American wine sales would have decreased mid-single digits, which was well below the rest of the market. IRI data in the 12 weeks saw all table wine sales grow 4% in the US, with the mid-priced segment growing in the mid-single digits.

When asked later why Constellation experienced market share erosion in the quarter, Rob pointed to the pullback in promotional activity over the summer and the impact of the distributor transition:

“It was largely related to pullback of promotional activity over the summer season and impact that our distributor impact and activities had leading up the appointment of the exclusive distributor in the 19 markets... As you can imagine, as you’re in the process of terminating some distributors and them becoming aware of the fact that they might be terminated they’re going to have less focus on our brands. We cut back on promotions so clearly sales growth was affected during that period.”

“We now have our new network or our reconfigured network in place. Our people are focused, distributor people are focused, and we’ve got exclusive distributor sales people. More resources are being applied to benefit the holiday season. We’re quite hopeful you will see some of those sales trends start to turn around,” he continued.

HOLIDAY PROMOTIONS. By cutting back promotion in the summer, Constellation now plans on shifting promotional dollars to the second half of the year. The holidays are expected to be especially competitive this year to which Rob says Constellation is well prepared.

“You will see some intense promotional activity around spirits and I think you’re going to see that around the super- and ultra-premium brands, the $30, 750 ml type products...wine of course is a lot different than spirits. It’s a highly fragmented category. There aren’t a lot of big players, and it’s sort of centered below the $10 range so you’re not going to see the same concentrated promotional activity that you’re likely to see in spirits. Yeah I think there will be some promotional acceleration of promotional activity on wine around the holiday season but we’re very well positioned without having to drop prices to promote on a very competitive basis,” said Rob.

“We’re in a much better position than most companies to execute with the chains on promotional activities and to make sure we’re getting floor displays, feature ads, merchandizing. This is all the kind of stuff that we’re in a strong position to execute whereas many of our competitors who are small companies really don’t have the man power or clout with distributors...so they might promote, you might see some discounting, but it doesn’t mean they’re going to get the floors or the benefit and essence of their promotional activities.”

HARVEST SLIGHTLY LARGER THAN ‘08. The California grape harvest is about 60% complete. Constellation currently estimates that the 2009 harvest will be similar to slightly larger than last year’s harvest. Rob noted that the growing season was fairly even, cool on the coast and warmer in the interior region. In all, they expect quality output.

Grape prices have softened due to the recession and a slightly larger crop. In all, the trends should keep “supply and demand generally in balance.”

When asked if lower grape prices are a good opportunity for Constellation to be more opportunistic, Rob replied: “In general we are in a position where we can take advantage of opportunistic buys and we will if we need to. In general our supply and demand situation with grapes for all the various US appellations is pretty well balanced and we’re in pretty good shape in that regard.”

SVEDKA HAD ANOTHER GREAT QUARTER with double-digit sales growth. Constellation was successful in further expanding its distribution in the quarter.

FOSTER’S THE NEXT “TAKEOVER TARGET?”

Australia’s Business Spectator is reporting that Foster’s Group is “the next likely takeover target” in the global beverage industry. “We've been told that a deal is imminent for Foster's and if true then yesterday's sale of the Cumbandry vineyard near Mudgee in NSW could be the first part of a complete sale of the old Southcorp assets, something seen as a precondition to a deal.” They also view Anthony Heraghty’s departure (head of global marketing) as a sign that a deal could be imminent.

We aren’t so sure that these two occurrences are the immediate predecessors of a major acquisition. True, Foster’s could be bought in the future but the current economic environment doesn’t exactly help and Foster’s likely has a lot more work to do before someone is willing to purchase its wine and/or beer units. Note that it’s still having trouble selling its other vineyards in Australia, and has a competitor in Constellation who is also selling vineyards to boot.

And finally, the beer and wine units have yet to be separated globally. Currently there is a separate sales team for beer and wine but they share the same delivery truck. If a buyout were to take place, Foster’s would have to renegotiate its $2 billion debt and divide it among the wine and beer businesses.

According to the article, ING analysts have named Foster’s beer unit as a top target along with Grupo Modelo, Efes Breweries and Beijing Yanjing Beer Group. Molson Coors and SABMiller are other possible contenders.

CA CHARDONNAY FACES “IDENTITY CRISIS”

Is California chardonnay having an identity crisis? That’s what Chicago Tribune writer Bill Daley asked himself after some recent tastings of 2007 and 2008 vintages. WSJ critics Dorothy Gaiter and John Brecher also recently blasted California chardonnays by claiming “too many were stupid, insulting wines.”

Bill deduced that either chardonnay producers are trying to taste less like chardonnay and more like other white varietals, or that “serious winemaking” in California is still relatively new and “perhaps California chardonnay just needs time to mature.”

WSD BRIEF:

DIAGEO LAUNCHES WILY JACK. Diageo has launched a new line of wines on the market called Wily Jack. The 2008 Chardonnay, 2007 Cabernet Sauvignon and 2007 Zinfandel have a suggested retail price of $8.00. In a statement, the company said in addition to “excellent wine and great value, today’s consumers are gravitating to entertaining packaging and non-traditional marketing.”


Until tomorrow, Megan

“Dreaming permits each and every one of us to be quietly and safely insane every night of our lives.”
William Dement

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