The Business, London, Abigail Townsend Column
By Abigail Townsend, The Business, London
Dec. 15–Struggling to find that perfect Christmas gift? A Vivat Bacchus hamper may be what you are looking for. For £45,000 ($92,768, E62,923), the London restaurant has filled its box of treats with culinary delights, from Royal Beluga Caspian Caviar to 500g of Elba White Truffles. But the hamper’s main draw is its wines: Chateau Lafite-Rothschild 1986, Chateau d’Yquem 1959, Romanee Conti 1970 DRC (which on its own costs £15,000) and a 1986 Chateau Petrus, to name but a few.
At first glance at least, it is the Old World wine industry summed up in a (presumably) wicker basket: venerable French houses, famous vintages, a range of grape varieties and sky-high prices. What it is not, however, is representative of the modern wine industry. That was more properly exemplified last month, when Constellation Brands, the American listed drinks group with a market cap of $5bn, swallowed the wine unit of rival Fortune Brands in an $885m deal.
Constellation is already the world’s largest winemaker; once completed, the deal will give it access to the premium Clos du Bois label and boost its California vineyards by 13 percent, or 1,500 acres. Robert Sands, Constellation’s chief executive, said the acquisition aided the company’s strategy of “further premiumising” its products, while the brands “fit really well with our portfolio.” Chateau Lafite-Rothschild it ain’t.
The wine industry — once dominated by small, independent producers in France, Italy, Germany and Spain — has undergone a revolution in the last two decades. New World producers from South Africa, New Zealand, Australia and America, once also-runs, have burst onto the global stage, and turned the wine market into a mass market.
Previously, you needed expert knowledge about different vintages, regions and houses to buy wine, and there were just a few, normally poor quality, branded wines — Blue Nun or Mateus Rose, say.
The rise of the New World did away with that. It introduced wine as a marketable product. Branded wines became affordable, approachable and of increasingly good quality. New World wines have jaunty names, so shoppers no longer need to be experts in vintage, regions or even, in truth, the grape — you just pick up a bottle of your favourite brand from a vast list: Jacob’s Creek, Turning Leaf, Oyster Bay, Penfolds, Blossom Hill and many others.
A growing number of wine labels are now owned by traditional spirits companies. The wine brands of Constellation — which also owns Diamond White cider and a host of big name American spirit brands — include Australia’s Banrock Station, Hardys and Barossa Valley Estate; it has been on the acquisition trail for some time, snapping up Mondavi, a high-end Californian producer, in 2004 for $1.36bn.
The second-largest wine group is Foster’s, the Australian drinks business that recently sold its eponymous lager brand in Europe to Scottish & Newcastle, the FTSE 100 brewer, to focus on its wine operations. Among its many brands, Foster’s — which last year reported net sales of AUS$4.8bn (£2.05bn), around half of which came from wine — owns Wolf Blass, Rosemount and Penfolds.
In Europe, Britain’s Diageo, with a market cap of £27.8bn, is the world’s biggest spirits company; originally rather sniffy about wine, it now has a stable of brands, owning Blossom Hill and Le Piat d’Or alongside Guinness, Smirnoff and Johnnie Walker. Pernod Ricard, the French drinks group that acquired Allied Domecq two years ago in a £7.6bn deal, making it second only to Diageo, owns Jacob’s Creek; its champagnes include Mumm and Perrier Jouet.
The other big European player is LVMH, the French luxury goods house. Its portfolio includes premium champagnes — Moet & Chandon, Veuve Clicquot and Krug, for instance — and wines, such as New Zealand’s Cloudy Bay and even French houses like Chateau d’Yquem, the famous dessert wine found in Vivat Bacchus’s Christmas hamper.
Of all of these companies, Diageo has arguably the weakest wine operation — its biggest wine, Blossom Hill, is a not a premium brand like, for example, Clos du Bois; the latter’s top-end positioning and high-margins help to explain why Constellation paid such a topping price for the Fortune wine arm, and why a luxury goods company like LVMH has such an extensive drinks business.
Part of the reason Diageo brings up the rear is that it came to wine later than most. Its reticence was understandable, however. When rival Allied Domecq first started making significant moves into wine, the City was horrified. From 2000 onwards, its chief executive at the time, Philip Bowman, spent around £2bn building up his wine business; he was accused of overpaying, especially after a drawn out battle for the New Zealand business Montana, and of moving into an unstable agricultural business.
Bowman persevered because he felt he had little choice. Allied Domecq had great drinks brands, such as Beefeater and Malibu, but with so much of the global market sown up by Diageo, there was little room for growth. So Bowman turned to wine. By the time Allied Domecq was sold, in 2005, the wine operations were one of its biggest draws; Diageo moved swiftly to pick up Montana when Pernod Ricard had to sell it for competition reasons.
Branded wine sits well in big drinks companies. Sales channels are already well-established and economies of scale can be brought into play; costs are heaviest in distribution and marketing. Wine is essentially an agricultural product and as such subject to uncontrollable vagaries; making it part of a diversified drinks group makes a lot of sense. For instance, a record drought has gripped Australia recently, meaning the 2008 grape harvest will be slashed, on top of an already lower 2007 harvest. The country’s 2008 vintage could be as low as 800,000 metric tons, compared with 1.4m tons this year; the normal output is around 1.9m tons. Compare this with just a few years ago, when some grapes were struggling from a production glut and over-supply, putting downward pressure on prices.
Labour costs also tend to be higher with wine than for other alcoholic drinks, because growing and processing grapes is far more labour intensive. And much grape production, even for giant drinks companies, remains decentralised — one of the reasons Constellation was happy to pay quite a toppy amount for those 1,500 acres in the Fortune deal.
Yet the rewards from entering the wine business are considerable. In America, drinkers will consume around 304m nine-litre cases by the end of this year, according to Impact Databank, a 5 percent rise on the previous year and the 15th consecutive annual gain. According to International Wine and Spirit Record, total world consumption of still light wine is forecast to reach 2.395bn cases this year, rising steadily to 2.514bn by 2011. In Britain, wine is now the most popular alcoholic drink, accounting for roughly a quarter of all spending on alcohol.
Which also means the market is now big enough to encompass Old World as well as New World producers. Indeed, as the New World upstarts crashed the party, they helped broaden the market, making it big enough to encompass both Chardonnay fans and claret fanatics. At the top end of the market, demand is strong. Scare stories constantly circulate about the threat of champagne shortages, as growers in the Champagne region, east of Paris, struggle to meet demand from the growing ranks of the world’s mass affluent.
The rise of the New World also forced traditional players to shake up their business models and look at how they approach customers. Baron Philippe de Rothschild, for instance, relaunched its ailing Mouton Cadet Bordeaux a couple of years ago to cash in on the trend for good quality branded wines.
Top-end wines, which tend to be Old World — though by no means exclusively so — are also increasingly sought out as investments. Liv-ex is an electronic market for fine wine, and its Liv-ex 100 fine wine benchmark index, for instance, is 94 percent weighted to Bordeaux wine. The index is up 41.2 percent in the year to date, outperforming many asset classes across Europe and America, including stock markets, hedge funds and private equity. Whether this surge in the price of fine wine turns out to have been a bubble about to burst will probably become clear in 2008 as the global financial markets continue to suffer.
The wine industry has changed beyond recognition in a remarkably short period of time. Giant drinks companies dominate what was once an elitist industry. Specialist consumers are now in the minority, largely replaced by a mass market. Uncontrollable variables, such as weather and supply, must be accommodated. But within the confines of a large drinks company, they are easily managed — and worth it in such a booming market.
On closer inspection, that £45,000 hamper is perhaps not that dissimilar to the modern wine industry after all. On top of the French classics, one soon realises its basket of wines also includes plenty from the New World. That Vivat Bacchus is a London-based South African restaurant, and hence a perfect product of globalisation, just adds to the picture. It certainly confirms how far the cultural revolution sweeping through the once staid world of winemaking has already come.
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