The global wine industry remains highly fragmented. In a recent Euromonitor International global briefing, entitled 'How Wine Companies Can Become Global', Jeremy Cunnington looked at why, and whether it can change.

Recent corporate developments have made wine even more fragmented following Constellation Brands’ divestment of its UK and Australian operations. In 2010, including that divestment, the top 10 wine companies accounted for 13% of global wine volumes, exactly the same as in 2005. In 2010, the leading company, E&J Gallo, accounted for just 2.4% of global volumes. This compares unfavourably with beer and spirits, in which the leading 10 players accounted for 61% and 26% of global volumes, respectively.  

Wine companies not all that global 

Many of the leading wine companies are reliant on a small number of markets. For the two largest wine companies, only around 5% of their volumes derive from outside their three largest markets.

The leading market for all top four wine companies is the US, primarily due to it being the domestic market for all of them, except Treasury Wine Estates (formerly Foster’s Group). Indeed, domestic markets were the largest for seven of the top 10 wine companies in 2010 while, for all except Bacardi, the UK was one of the three largest markets. 

The dangers of too narrow a geographical spread can be seen with Constellation and Foster’s Group (now spun off as Treasury Wine Estates). This has led to difficulties for both. These companies grew primarily through acquisition, focusing on a number of core markets through heavy investment and a series of major acquisitions focused on deepening their positions in a number of key and similar markets, the US, the UK and Australia. All three have suffered due to either recession or heavy discounting, or a mixture of both. 

These two companies were paying for the brand equity of their acquisitions. However, it turned out that there was very little of it, with brands proving to be replaceable as consumers switched, with price playing a vital role. 

M&A activity to be limited

The large amount of overlap in terms of geography and brands means that there is little opportunity or point in these companies making acquisitions to strengthen their positions in the market. 

Any mergers and acquisitions are likely to be relatively small as companies look to gain a stronger foothold in key markets, such as Viña Concha y Toro acquiring the Fetzer Vineyards from Brown-Forman in 2011 or Campari’s acquisition of Odessa sparkling wine group in Ukraine in late 2008

Geographical diversity and narrow brand portfolio key to growth

The key for any company to grow its volumes is not the depth of presence it has in markets but the broadness of its geographical spread. Companies need to focus on a small number of brands, at the right price points for their markets. By limiting the number of brands, they can limit production costs and focus resources on developing distribution and building brand image. 

Concha y Toro saw very strong export growth between 2005 and 2010, with volumes up by 90% over the period. This was driven by both a strong emphasis on key export markets such as the UK and the US as well as expansion into new markets.

The company has sensibly developed a strategy where it has focused its resources on strong potential export markets, such as the UK and the US, and then, as revenues allow, has looked to push into new markets. This was done in the UK by setting up its own distribution operations in 2001 and by teaming up with a strong US wine importer, Banfi Vintners.

Concha y Toro further deepened its presence in the US in 2011 following its acquisition of most of Brown-Forman’s wine operations in the country. The company has enhanced its distribution presence in a market dominated by domestically-produced wine through the setting up of a distribution JV with its long-term partner, Banfi.

At the same time, the company has pushed its brands in other markets using strong third-party producers, such as V&S/Pernod Ricard in Sweden. When the company has achieved sufficient scale in terms of volumes or sees the potential for growth in those markets, it then sets up its own distribution operations, such as Brazil in 2008 and Scandinavia in 2009.

This type of strategy is being adopted by a number of other leading wine companies, such as E & J Gallo and Treasury Wine Estates. Thus, wine company growth will primarily be organic and will take time due to a combination of factors, including many companies starting from a relatively narrow geographical spread, the relative weak equity of wine brands and the lower margins on wine than other alcoholic drinks categories, thus reducing the amount companies can sustainably invest. Consequently, for any company to reach the 5% mark will take a long time, if it can be done at all.