Consolidation – How far should we go?
At this year's London International Wine & Spirit Fair, Skalli & Rein, in conjunction with just-drinks, hosted a seminar to discuss the implications of consolidation within the wine industry. Chris Brook-Carter listened to an eminent panel discuss one of the most significant trends facing the business, with some intriguing conclusions.
Just as a matter of interest, if you were to go to our search function on the just-drinks site and type in the word "acquisition" you would be faced with 1190 articles from the last three years. "Merger" clocks up over 500 entries and "acquire" over 800. Few within the wine industry, I think, would doubt that consolidation has been one of the most - if not the most - talked about trends the wine industry has faced in recent times.
And yet, talk to one of my colleagues from our automotive magazine about how consolidation is driving the wine industry and all you'll get is a sort of condescending smile.
The fact of the matter is that while the top five car producers in the world control close to 53% of the global market, none of the top five players in the wine industry make more than 1% of the total industry revenue. "Jesus, that's not consolidation, that's fragmentation," was the reply from the automotive editor when he learnt this.
Given this enormous discrepancy, the difference between what has gone on in the last five years - which has already changed the landscape significantly - and what could potentially happen over the next decade is startling. The question must therefore be asked, how far will the wine industry go? And, indeed, how far should it go?
These are questions a panel at last month's London International Wine and Spirit Fair tried to shed some light on at a seminar organised by the wine data company Skalli & Rein.
As with all these things, the exercise threw up more questions than answers. "The only predictable thing is unpredictability," said Hazel Murphy, formerly of the Australian Wine Bureau and now an independent consultant. However, like all her peers on the panel, she believed that mergers and acquisitions would continue, given that growth will increasingly come from the battle for market share rather than market growth, as the US and UK in particular mature as markets.
That said, the general consensus was that consolidation was neither the only player in town nor necessarily a good thing for the industry, which was intriguing, given the vast majority of rhetoric from the city and the larger players that seems to always suggest that bigger is better.
"If consolidation was the only player in town you would end up with one supplier supplying one retailer - that's not going to happen"
Meanwhile, back at the seminar, his colleague at E&T David Combe, formerly of Southcorp said: "Over the last six years, consolidation has been seen as the means to combat consolidation of the customer. Has this actually worked or was it a monumental con by the retailers so they could have bigger suppliers?
"There is no evidence that [consolidation] has helped in the battle against retailers," he continued, citing the merger of Southcorp and Rosemount as an "unmitigated disaster".
The pressure on suppliers from retailers to provide ever-bigger portfolios at ever-reduced margins has no doubt played its part in the belief the companies must get bigger in order to survive - 75% of the UK's 110m nine-litre case market is now going through the multiple sector. But Alan Cheeseman, the former Sainsbury's wine buyer, refused to believe that the blame could be left solely at the feet of the supermarkets. He argued that strong retailers and strong suppliers resulted in a profitable industry.
"There is a word not heard enough and that is 'no'," he said. However he did concede there were practices that have given retailers a bad name including unrealistic margins. "It's an unwelcome side of our trade and the downside of consolidation."
As head of Australia's International Wine Investment Fund, previously BRL Hardy's principle shareholder and therefore primary benefactor of Constellation's takeover offer, you would think Chris Day would be the strongest advocate of further rapid consolidation.
When accepting Constellation's A$10.50 (US$6.40) a share bid in March, Day called the offer a " knockout price". And the IWIF has investments in companies from all round the world.
But speaking at the trade fair he made it clear he believed the wine industry was "not a global industry and never will be".
"Wine is only partly FMCG, he added. "
"I don't believe the wine industry can produce a Coca-Cola. This is not bad, it just means that you are servicing the consumer"
He did believe, however, that the wine industry landscape would still undergo a dramatic change. There are going to be five to 10 "mega wine companies" within the next decade, he said. These are multi-platform companies, supplying from a number of different countries but through a common route to market. Companies such as Beringer Blass, and Constellation Brands, to an extent, already fit the bill, but could be joined by the likes of Gallo and Rothschild. At present these group's controlled 5-6% of the market, said Day, although in his opinion that figure will triple in the next ten years.
Underneath this level the industry will produce a whole class of producers in one country but across a number of regions. These would be "not all things to all people" but just Australia or just Spain for example. There are likely to be 200 to 500 of these businesses each worth around £40m to £500m.
Further down the ladder will be the "medium wine groups" - single or multi region companies "but not all things in that country". Day foresaw 10,000 to100,000 of these worldwide.
Finally there would be the small wine companies. There would be around 1m of these fighting for 15% of the market, which Day described as "not much to live with".
That consolidation will continue seems inevitable, but the wine industry's unique position, straddled somewhere between agriculture and the FMCG industry will limited the scale and number of acquisitions below the levels seen in spirits or soft drinks, the panel seemed to broadly agree. Clearly too, consolidation is not going to suit everyone and Combe even asked whether we would soon be experiencing deconsolidation.
"If you squeeze the fruit of consolidation hard enough new seeds will be born," concluded Franklin Tate.
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