It is my habit to start the new year with my thoughts on what we should watch for in the coming twelve months.
Last year I wrote about the long-term effects of the recession on wine prices, the emerging quality factor in the wines of Portugal, the efforts underway to re-brand Australian wines, the problem of Cellared in Canada wines and their effect on branding Ontario as a quality region and, the evolution of the wine press from print to digital.
While my forecasts were directionally correct I was surprised at the speed with which the Cellared in Canada (CIC) issue caught fire and was brought to a medium-term resolution. Signage in LCBO stores was quickly amended to make it clear that the wines made by many Ontario wineries are made from “International Blends”. There is a four year timeline during which the benefits these wines have provided to the pre-1993 wineries will be phased out and in the meantime the Province of Ontario has defined higher Ontario content requirements for the blended wines and imposed a levy on sales of International Blend wines to support further development of VQA wine branding and sales.
The effect of the actions by the province has been to further splinter the already fragmented industry structure in Ontario with the CIC manufacturers establishing their own industry group, the Winery and Grower Alliance of Ontario.
All this is to say that we should see growth in VQA wine sales in Ontario over the next few years. This is positive news for our local industry and with time I hope we see the splintered industry come together to build a strong brand for Wine Ontario.
The backdrop for this preamble on Wine Ontario is the current state of the global wine market where there continues to be more wine produced than sold. France and Australia are the best recent examples of producing nations stepping up to the challenges of the wine glut but there is further need for pull-up schemes to continue on a wide scale if the glut is to be properly addressed.
An indicator of the severity of the situation is the degree of merger and acquisition activity now underway and rumored. A headline yesterday says it best: Constellation Brands Highlights World Wine Woes (just-drinks.com, January 5, 2011). This story describes the number of potential deals currently in play, including Brown-Forman considering unloading Fetzer; Foster’s possibly selling its Australian wine business for the right price, Remy-Cointreau looking for a buyer for its Piper – and Charles Heidsieck Champagne brands and so on.
On December 22, 2010 Constellation Brands, then the largest wine company in the world, announced the sale of 80% of its Australian, South African and UK wine business to an Australian private equity firm for less than 1/6 what it paid to buy BRL Hardy in 2003. The effect of this sale was to carve out ¼ of annual sales and reduce Constellation Brands to the number 3 position in global sales volume rankings. The rationale for the sale was to re-focus Constellation on higher margin businesses in North America and management reported today that the effect of the sale will be to improve the profitability of the firm.
The global wine business is highly fragmented and while many wine operations are held privately it is unclear what levels of profits are generated globally and by whom. The supply chain for production, distribution and final sale of wine is long and complex. This means that many players each take a small piece of gross profit as wine passes through their hands. As the global consumer market shifts to lower-priced wines in this extended – and possibly permanent – period of reduced expectations there is less money available for carving up. In all cases the margins are much lower than any public company financial wizard would tolerate
Publically-listed firms such as Constellation, Foster’s and Diageo have to answer to their shareholders and since they hold many stages in the supply chain they represent early indicators of the severity of the downward pressure on profits and margins in this highly competitive, fragmented industry which is struggling with over supply.
While these elements are at play there is another aspect of the market that is undergoing further change: the retail end of the chain. Costco, Tesco, Sainsbury’s, Champion, Carrefour are all putting continual pressure on suppliers to reduce wholesale prices, adopt low-carbon footprint packaging and take on more warehouse responsibility These are the giants of liquor and wine distribution and they have the buying power to call the shots in ways that even monopolies like the LCBO can’t. This mega-buying phenomenon and the power attached to it is the main reason the Quebec liquor and wine monopoly, Sociétié des alcools du Québec (SAQ), announced in 2010 formation of a buying subsidiary that will contract with buyers in Canada and elsewhere to form a buying entity with the scale to compete with the huge retail buyers in the USA, United Kingdom and France. This is big stuff and we don’t know where it is leading but it will continue to unfold over the next year
For me this is the story to watch in 2011. In the meantime consumers have much to celebrate: quality continues to improve, prices are attractive and there is more choice than ever before.
Happy 2011! May it be a vintage year in every way for you and your family.