Big US vintners scaling back
Brown-Forman has put its wine operation up for sale, and Constellation Brands is selling most of its non-US business.
You'll want to study the business very carefully, because some big players are trimming their businesses or getting out of it.
Brown-Forman (BF.B), best known for its Jack Daniel's whiskey, is putting its entire wine business up for sale. This includes six California wineries that make cabernet sauvignons, chardonnays and other varieties and Korbel California Champagnes.
At the same time, the Journal said Constellation Brands (STZ), the largest U.S. wine producer (yes, bigger even than Gallo) may be selling most of its non-U.S. wine operations to what the paper calls "an unknown buyer," perhaps as early as this week.
The reason both companies are in the mood to sell: The wine business has been struggling with weak sales and big price pressures.
The wine industry in the United States and Australia is vulnerable to the normal problems of agriculture: drought, rain, frost and pestilence.
It is vulnerable to chronic market gluts because so many people are attracted by the romance and what they believe is the glamour of making wine.
Brown-Forman wants to focus on the liquor business, which also includes Southern Comfort and Finlandia vodka.
Constellation wants to concentrate on high-end brands. It generates more than 90% of its revenue from moderately priced wines such as Clos du Bois and Blackstone, the Journal said.
Constellation became bigger than Gallo after it bought BRL Hardy, a big Australian winemaking company. But the business suffered from a strong Australian dollar, drought and too much supply in Britain, Australia's biggest export market.
It started to reorganize the business in 2008, selling three wineries, totaling 23 vineyards. It cut product lines and 250 jobs.
Brown-Forman shares were up 0.9% to $70.61 Monday. The shares are up 32.3% this year. Constellation shares were off 1% to $21.92. But they're up 37.6% on the year.
It is the glut of high quality juice on the market that is going to chase the corporate types out of the business, but that's fine, they were only in it for relatively fast money and the appreciation of the real estate, and that attitude doesn't fit with the wine business model. If you wish to survive in vinticulture you better have deep pockets and deeper desire.
What to do with all that spare grape juice? How about starting a high end vodka company, or moving towards port and brandy. Spirits have always been an important side business to consume juice and create a long lived alternative product that is desireable....although it may seem strange to get a nice brandy or vodka from Australia or South Africa or Texas, why not? It worked fairly well for Leland Stanford after he finally figured out he couldn't grow decent grapes in Chico, so he became a huge brandy maker!
Diversification of product beyond the basics is always important, but it is rarely included in the strategic planning of an wine enterprise....sometimes this is all the business you may have, especially in times like the present....in fact Korbell started out in a totally different business of making redwood cigar boxes, and ended up in the grape trade, why shouldn't a wine enterprise find itself able to make a pardigm shift as well?
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