Acquisition strategy in the wine industry – An overview


Important mergers and acquisitions within the global wine and spirits industries have been made over the last 10 years. Among  the wine industry’s big players, there is a sort of race going on where making and selling “wines and spirits on the global market” is crucial. We can argue that his strategy, adopted already 10 years ago, seems not to be really dedicated to the control of wine and spirits production volumes but rather to a sharing of the geographical market among leading companies in the global wine industry. The main key driver of M&A seems to be the first “to catch the cash”. Apparently, profit margins and cost discipline items don’t fit into M&A strategy in the global wine industry. The rationalization of time on the wine estates acquired cost structures and the forecasting of economic global recession, such as in 2008 have been badly managed. Unfortunately the time to consolidate and restructure through new acquisitions is short, competition is intense and enhanced by the oversupply of wine on the global market. In the meantime, wine consumption continues to decline in the big producer countries while the huge areas of growth are China and Hong Kong (Hong Kong is part of China now).

Main mergers & acquisitions over the last 10 years

If we look at the most important mergers and acquisitions within the global wine and spirits industries over the past 10 years along with their key drivers, we can argue that the trend has changed. Net sales growth by product and by region are certainly still promoted in an M&A strategy, but not only. The fair value of the  acquired company, based on the estimated cash generation potential and the time to pay back the acquired debt are becoming ever more crucial in the decision to acquire and/or merge with another company. M&A strategy seems today more oriented towards a consolidation of ownership in the global wine and spirits industries and it continues to help the big players in becoming the biggest selling companies for wine, beers, spirits and “soft drinks”. In 2009, United Spirits’ ’Bagpiper’ Indian whisky overtook Johnnie Walker scotch whisky to become the world leader in whisky sales. The leadership in a product segment by acquiring and enlarging wine and spirit portfolios is usually the key point to most M&A operations.

Diageo, the world’s largest producer of alcoholic drinks has acquired its leading position in the premium spirits segment, by volume, sales and operating profit, thanks to the purchasing of  Seagram’s from Vivendi Universal 2002. The Diageo group is the result of a merger between Guinness and Grand Metropolitan in 1997. The then recession obliged Diageo to exit the non-core business market of Top class Bordeaux. Pernod Ricard, the world’s leading spirit challenger of Diageo, have also made various acquisitions, such as the 32% of Seagram Business in 2002 and Allied Domecq in 2005, to finally focus its core business on fourteen strategic brands. In 2009, PR sold different brands including ‘Wild Turkey’ to gruppo Campari. LVMH, the world’s largest luxury goods company has created a diversified wine and spirit portfolio around a large portfolio of Champagne brands and top Chateaux in Bordeaux such as Chateau d’Yquem in 2004 and 50% of Chateau Cheval Blanc in 2009.  Historically, M&A strategies for wine producers have been done in  an attempt to achieve economies of scale in order to combat the sector’s higher cost structure when compared with the spirits industry.

To become the biggest wine-maker in the global market, by concentrating on ready-to-buy fine wines, was a strategy developed by Robert Mondavi in the 70s to give an alternative to the Bordeaux “en primeur” selling model. But the story shows that this objective was not necessarily supported by a merger strategy. Some acquisitions of vineyards have been made in the Napa valley to build up an RM brand in the premium wine market segment. Constellation Brands finally completed the acquisition of The Robert Mondavi Corporation in 2004, to offer an unmatched wine portfolio with an expanded fine wine offering, in addition to a broad portfolio of leading brands in the spirits and imported beer categories.

Key drivers in the consolidation of ownership

As well as the leadership in a global product segment through externally acquiring new brands, the control of potential economic returns in terms of sales in the main geographical areas (in the old world and new word including BRICs) is usually considered as a key driver in the decision to make external integrations by acquisitions or mergers with other competitors. Only in nations like China and the Russian Federation, where wine consumption is even higher than the domestic wine production (OIV 2010, Tbilisi), is foreign investment made through joint-venture and direct distribution (for example Domaines Baron de Rothschild-Lafite, Castel Group, Duval Leroy and Miguel Torres, in China). On the other hand, Chinese companies are looking for new acquisitions of best premium values, such as Chateau Laulan Ducos in march 2011 They are also looking mainly to the old world to appropriate themselves with the best know how and expertise in wine-making. The outstanding 2009 vintage helps Asian investments to rise thanks to a weak euro that ensure a continued interest.

During the last years, the macroeconomic panorama (credit crunch in 2007, currency depreciations of Sterling for example, rising fuel costs and other operative costs in wine production and distribution) and the relative uncertainty and climate change in 2007 and 2008 have all helped to create a new trend in the corporate strategy of the big players in the wine industry: the consolidation of ownership created in the past thanks to global M&A operations. Decreasing wine demand, as a result of the financial crisis and overproduction, have exacerbated pre-existing supply/demand imbalance, placing companies under financial stress and obliging them to consolidate their ownership, minimising cost in new acquisitions. LVMH sold Champagne Montaudon in December 2010 after having acquired it only two years earlier.

Various takeover opportunities were opened in the early post crisis period following the re-organization of their own internal wine and spirits units so that to separate clearly core and non-core business eventually to offset the non-core unit (for example Foster in 2011). New acquisitions are integrated in the strategic restructuring plans of the acquiring company and strategic partnerships are formed to share acquisition costs (included the debt acquired). In 2011, rumours suggested for example that Diageo and Bacardi may link up to acquire Beam Global. The big players are now seeking to shift their focus towards the development of more premium brands with higher margins by divesting many of their lower-end assets. As a consequence opportunistic bottlers and distributors are taking advantage of lower valuations to acquire premium wineries. Distributors, like Costco in US. are seeking to provide direct sales from wine producers through their wholesale chains and develop their own brands. Finally large wine producers are trying to acquire distributors such as Constellations Brands along with Spirit Marque One and Gruppo Campari who bought Daucourt Martin Imports, a French spirits distributor in the US.

Benefits for consumers

Consumer behaviours have changed after the recession and most of them (like in the US) have switched purchases to non-premium wines. Conversely, in Australia where wine is cheap and considered a commodity, wine consumption has remained stable despite the recession. Consumers didn’t trade down for cheaper wine brands or cut back their purchases. In Europe, the global financial crisis has obliged wine producers to offer substantial discounts on prices so as to offer quality wine products at an attractive price, as in the New World (US, Argentina, Chile, Australia and South Africa). Big players are being obliged to leave non-core businesses and run unit disposals, reinforcing their attention on premium brands.

As a result, “old world” consumers, used to purchasing essentially domestic wines, can now access  a larger portfolio of wines including new world wines as is happening in Italy, Spain and France. Conversely, consumers, collectors and investors from the Asian market can enjoy the availability of top class Chateau and high-end premium wines in the diversified portfolio of big players like LVMH. Cost cutting corporate politics and/or vertical integration towards the retail market, to control the entire value chain from the production to the distribution, give the opportunity to the consumer to access to discounted prices In this way wine producers provide direct distribution all over the world and eliminate intermediate commissions normally due to importers and independent local distributors. In the same way, mergers between distributors and the acquisitions of wineries by the off-trade companies help wholesalers to offer more attractive prices. To sum up, we can argue that: price, availability and product diversity are currently the main benefits to consumers in the global market.

In conclusion, we can argue that the M&A strategies adopted by wine producers are mainly focused on the brand’s cash returns and the likely premium of integrating price structures as opposed to the intrinsic quality of wine, its personality and geographical aspects you can find on the bottle. Consolidation of cross-border ownership and attention to cost production compel wine producers to create medium quality ready-to-drink wines for whatever drinker at a good price. Technological innovation substitute human savoir-faire and expertise in the vineyard and the cellar to guarantee to the consumer the international norms of quality around the world, eliminating the production of “atypical” wines. Moreover, this trend can push the main wine producers to put pressure on local appellation authorities, where wine production is based on indigenous grapes, as in Italy and Spain, in favour of an introduction of international grapes in the vineyard, hence giving more visibility to the characteristics of a wine to a larger community of consumers in the world-wide market.

Finally the consolidation of important wine distributors, and the vertical integration of the off-trade business segment as home consumption grows (for example in UK), place the medium and/or small growers in a delicate position, reducing more than ever their transaction powers in defining the price of grapes or bulk wines and  forcing them in the worst case, to sell the estate or to close it.