Constellation Brands, the second largest wine company in the world, may be hedging some of its oenological bets in favour of legal marijuana and premium beer.
That’s the analyst reaction to reports at the end of October that Constellation – which started in 1945 making Concord and Kosher wine in upstate New York – wanted to sell $3bn worth of its wine assets. Reuters, which first reported the news, said Constellation wanted to offload California brands Clos du Bois and Mark West, as well as Arbor Mist and Cooks sparkling wine.
The analysts emphasised that Constellation wasn’t turning away from wine. Rather, it was adjusting its brand portfolio to take advantage of wine premiumisation, to appeal to younger consumers, and perhaps to free up cash to further its move into cannabis. It made a $4bn investment in August to acquire more than one-third of Canadian marijuana producer Canopy Growth, with the opportunity to buy more than 50% of Canopy over the next three years. Medical marijuana producer Canopy wants to move into cannabis-infused beverages and sleep aids.
Movement in the market
“Constellation has been pretty good at identifying long-term consumer shifts and reacting – buying and exiting assets,” says Rob McMillan, executive vice-president and founder of Silicon Valley Bank’s Wine Division in Napa. “They are shedding some wine assets and some point to that being an end to wine and a nod to cannabis and beer, but I think it’s more to do with shedding lines that aren’t in line with premiumisation strategies. Arbor Mist and Cooks wouldn’t seem to fit.”
McMillan says the wine sales fit into what Constellation has done with beer: “They were way ahead of the pack in identifying the growth in US Hispanic population and their influence in alcoholic beverage sales. That proved out with their Mexican beer investments in Modelo and Corona.” Today, Constellation is the third-biggest beer company in the world.
Cooks, the second biggest selling sparkling brand in the US, has shown sluggish growth over the past couple of years, despite double digit sales increases for higher priced bubblies. “If you look at the brands they want to sell, you’ll see they don’t fit the current growth categories, wine that’s priced above $11.00 a bottle,” says Peter Stoneberg, managing director of investment bank Dresner Partners. “In fact, those brands are even underperforming their categories.”
Analysts say the moves are in keeping with the company’s acquisition of high-end wine labels like Meiomi, which it bought for $315m in 2015, and The Prisoner, acquired for $285m in 2016. Adds McMillan: “The recent follow-on investment and rebranding of the Franciscan winery property into The Prisoner would suggest this move is more about focusing on brands that favour their premiumisation strategy and the next wine consumer currently under 40.”
Hence, Constellation doesn’t see as bright a future for $10.00 grocery store brands like Clos du Bois and Mark West, even though it bought Mark West for $160m in 2012 in one of its first premiumisation acquisitions. The fruit-flavoured Arbor Mist, meanwhile, is part of the slowest growing segment of the US wine business: wines costing less than $5.00 a bottle.
“If you look at Constellation’s history, they have bought, built up, and sold off brands to move into other areas – beer via Ballast Point is one example of buying and growing,” says California wine marketer and producer Andy Abramson. “So to see them take money off the table by selling off successfully grown brands to move into the new sector with that war chest is history repeating itself. And the writing has been on the wall for some time with Constellation and Altria [parent to Chateau St. Michelle and others] making their moves in the cannabis world.”
Everyone’s trading up
The other question? Does anyone want Clos du Bois, Mark West, Arbor Mist, and Cooks? “I think they’re going to have a difficult time finding a buyer, and especially at that price,” says Stoneberg. “That’s the big if. Will it be a sale to a wine company? But I can’t think of too many wine companies that will want the brands – they’re also concerned with brands in underperforming categories. Or will it be a bargain sale to a private equity company? In which case, the new owner will go in and clean up the bottom line and end up reselling the brands.”
