The uproar surrounding the news report that Constellation Brands, once the second largest wine company in the United States, was trying to sell its remaining wine brands wasn’t surprising. But as shocking as the news may have seemed, it’s just one more sign that the US wine business has changed significantly over the past several years.
A sign of the times
“Call it the new normal,” says attorney Jason Canvasser with Clark Hill in Detroit, whose practice includes wine, beer, and spirits clients. “Yes, it was almost an 80-year-old company and that’s why so many people were blind-sided. But these days, that’s no guarantee for survival.”
WineBusiness Monthly reported earlier this month that Constellation was in negotiations to sell its remaining wine holdings in two parts; its lower-end brands to Delicato Family Wines and its premium labels to the Duckhorn Portfolio. Constellation’s wine assets are some of the best-known in the US, and include supermarket powerhouse Woodbridge, as well as Robert Mondavi Winery, The Prisoner, Schrader Cellars, Sea Smoke, and Simi Winery.
“We’re entering a period of contraction in the alcohol beverage industry, where companies are re-evaluating their portfolios and doubling down on their core strengths.”
The report, attributed to “several people with knowledge of the negotiations and potential buyers,” did not set a timeline or valuation for the deal. None of the companies identified in the story would comment to the magazine on the report, and it has not been confirmed.
But there have been rumblings about a Constellation divestiture since last fall, when several California wine country merger and acquisition executives said privately that they expected the company to shed its lower-priced properties sooner rather than later. In addition, Constellation executives had hinted at some kind of wine asset sale on an earnings call last summer.
“We’re entering a period of contraction in the alcohol beverage industry, where companies are re-evaluating their portfolios and doubling down on their core strengths,” says Bay Area attorney Rebecca Stamey-White, who works with a variety of alcohol beverage companies. “Constellation Brands’ move away from wine aligns with this trend, so, yes, I think we are going to see an uptick in M&A for sure. The ship is being right-sized. As it gets smaller, there’s going to be some reshuffling on deck, and not everyone will have a spot on board. But for those who do, there’s a chance to take on a more strategic role in navigating where the industry goes next.”
An 80-year streak ends
Constellation was founded in 1945 in upstate New York by Marvin Sands as Canandaigua Industries, and focused on selling bulk wine. One of its early products was a fortified wine called Richard’s Wild Irish Rose, reportedly named after Marvin’s son, Richard (once the company’s CEO and later its board chair). Its growth from the late 1990s to the 2010s was constant and sometimes meteoric. In the WineBusiness top 50 producer rankings, it spent much of the past 20 years vying with The Wine Group for the second spot behind Gallo, eventually reaching more than 50 million cases a year.
The growth was fueled by key acquisitions like Robert Mondavi in 2004, but it also snapped up Ravenswood, Clos du Bois, Blackstone, and Kim Crawford over the next decade. Eventually, it would add super premium brands like Meomi and The Prisoner. And money didn’t seem to be an object, either. It paid more than $1 billion for Mondavi and $315 million for Meomi, as well as the odd couple of hundred million for many of the supermarket brands.
And then it stopped growing, shifting its focus to Mexican and craft beer and legal marijuana. The last two, though, turned into colossal blunders, resulting in many hundreds of millions in losses before the company dumped craft brew Ballast Point for what may have been 10 cents on the dollar, and exiting Canopy, its Canadian weed business, which may have been almost as costly. More or less at the same time, it sold a hefty portion of its wine portfolio to Gallo, including Black Box, Clos du Bois, Estancia, Franciscan, Ravenswood, and Nobilio. In that deal, it also sent Gallo may of the brands it had owned since its Canandaigua days.
Facing the pain
“If I’m a business consultant, and I didn’t know anything about the history of the wine business, but just looked at it as a business, then I tell my client, ‘This is silly — why are you doing it?’” says Napa marketer Michael Wangbickler, president of Balzac Communications. “If you take a deep look at the margins, at the cost of goods, at the effort that goes into making and selling a good bottle of wine, and if you don’t do it because you love the wine business, then you really have to ask yourself, why are you doing it?”
He says Constellation’s potential exit seems to be no different from what previous multi-nationals have done over the past decade or so, including Brown-Forman, Diageo, and Allied-Domecq. When margins got too small and sales didn’t meet expectations, they got rid of their wine portfolios to focus on what they considered more profitable businesses.
Which leads to the next two key questions: What happens to California bulk wine and prices, already at near-decades lows, if and when Constellation leaves. And what — if any — will be the next corporate domino to fall?
First indications about bulk prices are not good, says broker Shannon Gunier, whose family owns North Coast Wine Grapes, as Constellation is one of the biggest bulk buyers in the states.
“My opinion is it's going to hurt the larger growers and bulk wine suppliers,” she says. “That tanker business is going to get a little dicey if one of the big guys like Constellation is no longer buying those quantities. Constellation has been a huge player for years and they will definitely leave a wake in their path of exit. I know they have been cutting back on grape contracts over the last few years and growers have already started to pull out fruit, which is going to level out the playing field ultimately.”
"Constellation has been a huge player for years and they will definitely leave a wake in their path of exit."
And the next domino? The analysts interviewed for this story agree that merger and acquisition activity may well pick up over the next 18 months, though none have any solid information about specifics. Generally, they say, look for deals in the middle tier, those producers who sit among the second dozen or so of the WineBusiness 50 rankings, who produce between one and two million cases a year. These companies may see an opportunity to buy a smaller producer that wants an exit, thereby adding market share or expanding its portfolio a quality label and at what might be a winning discount.
Or, says, Pat DeLong of Napa’s Azur Associates, the next big deal could come on the wholesale side. RNDC, the second biggest wholesaler in the U.S., facing the loss of several key liquor brands unrelated to Constellation, could look to deal for a smaller wholesaler to bolster its market share.
Finally, there’s one other reason why a potential Constellation deal was so unsettling to so many. Not only do many wine industry employees have Constellation on their resumes, but Wangbickler says the company gave many their first job in the business — including himself. And who wants to see a part of their past disappear like that?
