| Co-authors: Deborah Steinthal, Scion Advisors® , Erica Valentine, Scion Advisors® and John Hinman, Hinman & CarmichaelLLP.
EXECUTIVE SUMMARY
“Over the next 24 months, consumer demand for wine will continue to grow globally and the United States consumer will be leading the way. However, the wine industry will see the fall out of weak players as the strong get stronger”, predict industry advisors, Steinthal, Valentine and Hinman.
The Great Recession (1) has accelerated the professionalization of the wine industry. Figure 1 illustrates how wine industry A-players are adopting new business practices at a faster rate, managing more strategically, and building more financially-viable businesses.
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Stronger Will Get Stronger
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Weak Will Drop Out
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Pruned, profitable product portfolios
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>$50 category takes long term hit
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Focused, differentiated brands
− Wine culture shifts as consumers seek closer social connections with their favorite brands.
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>100 ‘hobbyists’ quietly close doors
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Stronger, leaner teams
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1000 jobs lost
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Cash becomes king
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100s of equity lines close down
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More diverse sales channels
− 100’s of new retail private and control labels launch
− 100’s of new consumer channels launch
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1000’s of brands drop out of national distribution
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Selective growth thru acquisition
− Excess grape supply gets absorbed by $12-25/bottle wine categories, driving category quality up.
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100’s of properties sell and/or go into foreclosure
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Next generation owners step up
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Next generation owners drop out
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Figure 1 – Over the next 24 months: A-Players are Building More Financially-Viable Businesses
NEXT 24 MONTHS: KEY PREDICTIONS, THE NEW ROAD
Inspired by the Granholm judgment, the dream of deregulation has not played out in exactly the way the industry has anticipated. We predict that by 2012 stronger players will emerge with more financially-viable and technologically sophisticated wine businesses. They will provide better quality wine, even more suited to today’s emerging consumers and will be positioned to take advantage of emerging marketing channels. Rob McMillan, founder of the Wine Practice at Silicon Valley Bank, foresees rough seas through mid-2010 for producers with cash flow issues or strictly luxury-priced portfolios.
“For those willing to do the hard work required to sell though inventories over the next six months, their business should begin to stabilize by the end of 2010.” Rather than struggle through the current economic and industry challenges, more first generation, luxury brand owners will seek exit strategies by selling their businesses and properties rather than weather the storm.
The biggest industry challenges are still ahead. At greatest risk are wineries without scale in the national market (<250,000 cases) that continue to depend on traditional marketing models that rely on distributor sales forces. These smaller wineries’ primary hurdle is assessing how to profitably build sustained national sales volumes, with gross margins at least at 50% of sales revenues.
“National sales channels that contribute less than 50% margins are most likely not sustainable, especially since most wine business models are so dependent on capital-hungry assets“ says Hank Salvo, Scion Advisors Partner and former Robert Mondavi Winery CFO. Some will survive and potentially prosper by tightening their product portfolio, improving branding and upgrading their teams and business practices. Those most likely to prosper long term will radically change how they sell to the trade and consumers.
Looking ahead to 2012, five interlocking dynamics continue to be increasingly important to for winery CEOs to manage. These dynamics are straining both large and small players, forcing major operational changes along with new modes of marketing and distribution to better engage with consumers.
- Global grape supply pressures will exist: There is no substitution for brand strength. A-brands are defined by increasingly efficient supply chain practices; established, healthy distribution channel management; and strong cash flow disciplines. Global procurement management by large wine companies, in tandem with crop reductions caused by Mother Nature, have put grape supplies more in balance with normal market trends. This will help the path to stability for growers who are positioned to weather the drop in demand for the 2009, and possibly 2010, crops.
Contrary to industry predictions less than six months ago, oversupply is a reality everywhere and this is a trend that is expected to persist throughout the world. Pricing will likely continue to take hits. Growers that have catered to luxury wineries are facing drastic drops in demand. Over-leveraged growers will be in trouble when their grapes go unsold.
Large wine producers with global sourcing options will profit from the resurgence of the popular premium price point segment and are using new inventory tracking and transportation technology to profitably shift supplies from market to market. Smaller players will experiment with new sales channels that will maintain image and drive cash flow from higher volume and lower priced offerings. Banking pressures and cash-constrained businesses will limit the launch of secondary tiers, while fueling the production of private or control labels, a common trend during periods of excess supply.
- Consolidation will likely continue in all 3 tiers: Margins shrink on all sides; 85% of retail space will be occupied by 10 wine companies.
- Producers will learn to navigate a polarized wine market landscape: comprising the large - multi-billion dollar corporations on the one hand and the small to large privately held wine businesses on the other (see Figure 3) — each operating quite differently and playing to different margins. Major players Diageo and Constellation will continue to pull back from acquisitions, seek synergies from merging their multiple operating units in 2009 and focus on gaining greater control of their distributors and market efficiencies. The top 20 wine brands will use their market presence and line extensions (as well as new brands) to reinforce their value to national distributor portfolios. Says Chris Indelicato, CEO DFV, "Wine is a hard sell because of the required knowledge base: larger wineries that can afford to field sophisticated marketing and sales teams will continue to gain market share."
The cost of promoting smaller producers is simply too steep for larger distributors to afford. This is also the reason for the resurgence of spirits as a driver of distributor profit margins. Spirits are an easier sell and demand is driven by substantial producer investments in advertising and marketing.
Seeking national distribution muscle through an acquisition strategy, portfolio builders such as Bill Foley (see www.foleywinegroup.com) or Jean-Charles Boisset (see www.deloachvineyards.com) and focused private equity players such as The Vincraft Group – will buy more wine brands. According to Pete Scott, Vincraft CEO, “the acquisition of Kosta Browne Winery is just the beginning of a wine portfolio comprising small-scale ultra premium- or luxury-tier California wineries.”
Competition for consumer share of mind will intensify on the U.S. market: (1) Wineries in every state will create new tourism opportunities and reach more consumers with educational experiences; (2) Companies like Crushpad in San Francisco and (soon to be in) Manhattan along with City Winery, are building on a ‘consumer as producer’ trend, offering hands-on winemaking experiences; (3) Global competition from Australia, Chile and Argentina will only be tempered by a weakening dollar.
Many more wineries will experiment with evolving direct to trade and consumer channels and will continue to develop brands that are relevant to a new generation of consumers. New Web 2.0 tools will enable wine brands to connect to new consumer networks, build awareness and engage consumers – and learn to staff, drive strategy and ultimately monetize “social networking”.
Says Rachel Dumas-Rey, CEO of Compli - a leading beverage compliance services company: “Over the next 24 months, wineries that intend to survive and prosper will invest in the most efficient and productive direct shipping logistics solutions. Regulatory compliance is a moving target and so key to both top and bottom line growth.”
Distributor and Retail Consolidation: Next 24 months! (To be continued on November 2)
HOW TO PREPARE FOR NEW OPPORTUNITY
Rather than just “battening down the hatches”, well-positioned wine business leaders are supporting their crew with tools, training and other lifeline supports to ride out the storm. Strong and strategically-focused leadership is vital in steering wineries through these challenging times. Here are some important practices and strategies to consider. (Click here to read more)
STAY TUNED: for our next installments!
Week Three - MORE on NEXT 24 MONTHS: KEY PREDICTIONS, THE NEW ROAD (Week November 2)
About the authors
Deborah Steinthal (deborah@scionadvisors.com) is the founding partner of Scion Advisors, a Napa-based wine business advisory firm which enables clients to build more financially-viable businesses. She has been an executive across a variety of industries globally and helped companies transform from start-up through high growth, restructure due to poor performance and integrate new acquisitions.
Erica Valentine (erica@scionadvisors.com) is a senior associate of Scion Advisors. With over 15 years as a marketing executive at Constellation Wines and Seagram Chateau & Estates, and 10 years consulting with privately owned wineries, venture capital and web-based businesses, Valentine advises companies on how to differentiate and compete successfully in a complex marketplace, creating and implementing marketing and sales programs that work.
John Hinman's (jhinman@beveragelaw.com) experience spans the modern history of the wine industry and includes regulatory defense before state and federal government agencies, distribution litigation throughout the U.S., arbitration and mediation of relations between grape growers and wineries, and deep involvement in the direct shipping battles from the very beginning. He is founder of Hinman & Carmichael LLP.
(1) The Great Recession: Global economic meltdown started in Fall 2007 which saw the unraveling of financial institutions, collapse of the housing market and mortgage financing industry, a growing health care crisis and continued instability in war-torn countries. |
