Constellation's Bob Ryder Talks Wine, Spirits and Beer

FILED SEPTEMBER 1, 2009

Dear Client:

The big focus for Constellation continues to be growing its premium portfolio, paying down debt and improving organic growth – so don’t expect any major acquisitions anytime soon. CFO Bob Ryder told listeners at the Barclay’s Back to School consumer conference that acquisitions are not “top of our priority.”

“We’re doing more dispositions than acquisitions and we’ve paid down a boatload of debt that I think all of you are very happy about...We have a lot of opportunity to improve our organic business model and acquisitions can be very distracting.”

They may look at acquisitions once they’ve put a handle on their organic business, and it seems wine would be the most obvious choice. “I would be very surprised if we did a spirits acquisitions. I would be amazed if we did a beer acquisition.” Any future acquisitions (which would be years out) would be more “tuck in” acquisitions in North America that are “pretty highly synergistic” and at a reasonably lower EBIT multiple. He pointed out that there haven’t been as many wine deals go on lately because “the market might be self correcting.”

PROBLEMS WITH UK AND AUSTRALIA. The UK and Australian markets remain challenging. UK retailers continue to offer extremely cheap private label wines and the government has adopted consistently larger tax increases. Australian growers are still grappling with oversupply. As a result, Constellation is starting to look at these businesses together and is essentially running them as one operating company. Constellation’s main focus is “to generate cash, improve margins and variablize the business model” in both countries, said Bob.

“The biggest issue is there are just too much Australian wines on the market. We really don’t see that repairing itself in the near future. You have very aggressive retailers in the UK that really don’t like you bringing up price and they have a lot of leverage in negotiations, again, because there’s a lot of excess supply. And the UK government which is funding a lot of their treasury deficits by continually increasing the duty on wine.”

“The retailers are pretty happy with that. The UK government is pretty happy with that. I don’t think the Australian farmers are very happy right now but they’re very slow to react because the thing that has to self correct here is they have to rip vines out of the ground...that will be slow to come.”

As a result, Constellation “is trying to sell any asset we can” in Australia but so are Constellation’s competitors.

CONSUMPTION CONTINUES TO GROW. Bob noted that “wine consumption in our core markets continues to increase with new wines generally outpacing old world wines.” He said that the US wine market remains healthy overall especially in food, drug and mass merchant channels (or the off-premise). The recession has prompted consumers to turn to “trusted brands,” which Constellation has benefitted from. Recall that Constellation produces over 45m cases of wine in the US, including 18 of the top 100 table wines. Their average retail prices fall in the $5-$20 range at retail. Svedka, which the company acquired in March 2007, “has been a great success story.”

CONSOLIDATED DISTRIBUTOR NETWORK. Bob explained that the distributor consolidation was a way for the company to monopolize on its size and simplify distribution. In the past, Constellation had about 8 sales forces with each group visiting about 2 distributors per states. This added “a lot of complexity and a lot of opportunities for our sales guys to be competing against one another...we realized there was probably a better way to do this,” said Bob. First the company exited the value spirits business and opted to keep just two brands (Svedka and Black Velvet).

“Our whole focus was how do we leverage our scale...we said ‘you know what, we have a lot of scale with our US distributors’...so we said we think a better strategy for us is to go to one distributor per state.” This opened a “bidding war for distributors per state.” Constellation was “looking for dedicated head count against our brands, so they won’t be selling any other brands they’ll just be concentrating on Constellation brands...we want additional promotional spending that comes out of your pocket and goes against our brands. The big thing we wanted to get was much more alignment between our goal and the distributor goals.”

He said that in the past there weren’t major ramifications if distributors didn’t hit Constellation’s annual goal. “Well as the biggest guy on the block here, we don’t really like that,” said Bob. “We want you waking up focused on our brands versus what we consider these lower scale less important brands.”

“If the distributor doesn’t hit our annual sales plan, some kind of pain occurs for them and it’s mostly financial pain. Most likely money comes out of their pocket and either goes into our pocket or goes against our brand.”

TRENDS IN BEER WINE AND SPIRITS. Wine was “probably the big winner” before the recession with significant trade up. The spirits business also experienced significant trading up and all the high end brands “were growing great.” Beer, meanwhile, “wasn’t doing that much.” Since then “beer has gotten much stronger” but there’s been a negative mix shift as people are buying cheaper brands. Premium spirits “really took a dive” but “our spirits are actually doing fine” because vodka is doing great and Svedka is at a good price point. “Beer was the big winner, spirits probably got the biggest whack and wine was probably the most stable,” although wine priced below $5 are doing much better than they have historically. Wine above $5 is still growing but not as much, he said. Value wine, beer and spirits, meanwhile, has really taken advantage of the situation and are priced “pretty aggressively,” said Bob. “That has hurt our beer business because we’re sort of at the top of the pricing tier.”

CONSUMERS MORE OPTIMISTIC THIS HOLIDAY SEASON

New research from Information Resources (IRI) shows that consumers are entering the holiday season more hopeful and confident than they were last year. Consumers concerns about gas prices, bills, job stability, rising food prices and the recession are seeing a decline in how much they’ll affect consumer spending this holiday season. Instead, consumers are becoming more strategic in their shopping by making lists and keeping a budget in mind. Drinking and eating at home will continue along with private label purchases and bargain hunting.

Nearly two-thirds of consumers plan to eat their holiday meals at home, half plan to dine at their friends' homes and holiday parties, and almost all plan to consume alcoholic beverages in their friends' homes or holiday parties. More than 94% plan on spending no more than $500 on food and 90% plan on spending no more than $200 on holiday beer, wine, and spirits purchases.
And since more consumers are making their purchasing decisions before they ever leaves their homes, CPG and retail need to act quickly in developing “savvy marketing” and value strategies, says IRI.

CALIFORNIA WINES GAIN TRACTION ABROAD

California wine is gaining even more traction oversees. For the first time, California wines surpassed French wines in value in the UK, taking the second spot behind Australia. In 2008, one out of every five bottles (or 43.5 million cases) of wine produced in California were exported to other countries, reports Wines & Vines based on figures from The Wine Institute. More California winemakers also shipped their wines in bulk to be bottled in other countries, mainly European countries and Japan. The amount of California wine shipped in bulk was up 14% in 2008 to over 50%. By contrast, wine bottled and then exported accounted for 48%, a decrease of 2%. The U.S. holds more than 10% of the Japanese market in bottled wine, which is led by France and then Italy. In bulk wine, the U.S. claims 26%. Japanese consumers are most interested in wines selling for $16 to $24 per case FOB, and there's high demand of popular-priced Pinot Noir and Viognier.

Europeans reportedly view American wines in a better light now that Obama is the president, but Chile remains the top New World wine country. This is mainly because Europeans favor wines priced below $6 where California wines are not as strong.

PERNOD LAUNCHES NEW JAMESON AD CAMPAIGN

Pernod is launching a new television ad campaign for its highly successful Jameson Irish whiskey. An article in the New York Times notes that as more television stations (even local CBS and NBC affiliates) have reversed their stance on spirits commercials, brands small and large are getting in on the action. The article says that improvements in tracking the age of the audience are another reason stations are loosening up. Recall that at least 70% of viewers must be 21 years or older. The four big networks, ABC, CBS, Fox and NBC, still refuse to air liquor commercials but broadcast and cable stations more than make up for the gap.

Pernod Ricard plans to double its ad budget for Jameson, to an estimated $12 million to $14 million, which includes about $9 million for television. The rest will be spent on ads in print, online and outdoors as well as for commercials on radio. Jameson’s new tv spot is expected to air in early October.

"We really need to expose Jameson to a broader audience," he added, "to maintain the growth rates we've been fortunate to achieve in the last few years," said Jeff Agdern, vice president for marketing of imported whiskey and Cognac at the Pernod Ricard USA.

He noted the brand was largely built on premise by bartenders. The tagline reads: “Taste above all else” and centers on fictionalized character John Jameson.

“FIRST TIME OFFENDER” BILL AWAITS GOV’S SIGNATURE

The California assembly unanimously approved a bill Wednesday that would require first time offenders convicted of driving under the influence in Alameda and three other counties to install an ignition interlock device. The pilot program would start next July and run until 2016, at which time it could become statewide law. Gov. Arnold Schwarzenegger has not yet decided if he’ll sign the bill, according to a spokesperson.

Depending on the gravity of the situation, drivers could be required to use the ignition interlock device from 5 months to more than 3 years. Right now it’s up to California courts whether a first time offender has to use the device.

TOP 100 WINES GAIN SHARE IN RESTAURANTS

The top 100 wine brands did better than you might expect in restaurants last year, according to a report by Restaurant Wine. The U.S. on-premise market shrunk -5.5% in volume in 2008, but the top 100 wines gained 0.5 share points. Volumes of top wines declined -3.5%. Not surprisingly, 83 of the 100 wines were varietals. Riesling dominated growth, up 16.7% in volume. Together the top 100 wines account for nearly 43% of all wines sold in the US on-premise. For the first time, Kendall-Jackson became the most popular wine in US restaurants.

WSD BRIEFS:

CONSTELLATION TO CLOSE WIDMER IN 2011. Constellation said today its closing its Widmer winery in Naples, New York in 2011, expand its Canandaigua facility and donate the Widmer buildings and vineyards to Rochester Institute of Technology. Widmer current employs 55 people and Constellation is “optimistic” that they’ll keep most of the employees. Recall that Constellation cut 30 jobs last year at the winery.

INDUSTRY VETERANS TO FORM WINERY ACQUISITION FIRM. Industry veterans Mario Zepponi of The Zepponi Group, Joe Ciatti (founder of Joseph W. Ciatti) and Matt Franklin, formerly a managing director with San Francisco’s Demeter Group, to form a wine industry mergers and acquisitions firm. The new partnership, Zepponi & Company, will provide transaction advisory services including mergers and acquisitions, valuation and business strategy services to the global wine industry.

COGNAC FERRAND has promoted Guillaume Lamy to Vice President North America, Cognac Ferrand, effective immediately. He’s been with the company for 10 years and will continue managing its relationship with importer W.J. Deutsch & Sons on Landy Cognac. Recall that W.J. Deutsch began importing Landy last month along with the rest of Cognac Ferrand’s brands.

AL CAPONE DISTRIUBTION has appointed Matt Owens state manager of Illinois (formerly of RNDC New Mexico) and promoted Kyle Roberts to state manager of Florida (formerly of RNDC Florida and current state manager of Illinois).


Until tomorrow, Megan

"If I had asked people what they wanted, they would have said faster horses"
-Henry Ford

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