Comment - Should Wine and Public Companies Mix?
Saying wine and shareholders don't mix is too simplistic
Can you match wine with public companies? That's the debate flourishing in the world's vineyards, following Constellation Brands' knock-down sale of its overseas wine operations.
Constellation's deal to sell Hardys to CHAMP Private Equity for a paltry AUD290m (US$290m) means that a family winemaker is again the world's largest wine producer. Privately-held E&J Gallo winery has reassumed the mantle, although Constellation still claims to be the biggest at US$5 per bottle and upwards.
As excess wine sloshes around the world unable to find a spare dinner table, those who argue that the sector is not cut out for publicly-listed companies have gained acceptance. There is sympathy with this view from all echelons of the wine industry.
Diageo's CEO, Paul Walsh, told just-drinks in 2008 that, in relation to wine, "fools and money can be easily parted". Last month, the chairman of Vinexpo, Xavier de Eizaguirre, told just-drinks that he has "always seen the wine business as a family business".
A top family-owned winery in Australia, Angove, upped the ante this week when its chairman, John Angove, told the Australian newspaper that "public shareholdings don't work" in wine. "Only crazy families will do it," he said.
It all seems a far cry from 2005, when the then CEO of Foster's Group, Trevor O'Hoy, eulogised the acquisition of Southcorp wine operations and the beginning of 'Brand Australia'. "This is the dream transaction," said O'Hoy, his company having spent AUD3bn on the deal. Foster's will do well to flog off the remnants of Southcorp for a respectable price this year.
The thesis is simple: public companies have a short-term outlook owing to their duty to increase value for shareholders on a yearly basis, if not quarterly in some cases. Privately-held companies, meanwhile, can take their time and see out the cycle of any tough period. Fair enough, you might say, wine is essentially an agricultural product and therefore supply can be unpredictable. It also requires a lot of upfront investment for little initial return.
However, couldn't you make a similar argument about, say, Scotch whisky or Cognac? Both have a time-lag on investment return and both are strongly linked to agriculture, yet both are proving extremely profitable for many. The market for Scotch is perhaps even more unpredictable than wine, because it will be three years and a day - at the very least - from when you make the spirit to when you can legally sell the liquid as Scotch. Public companies are, then, capable of planning long-term. Diageo has projections on global Scotch demand that stretch a good 20 years into the future.
The second argument against wine is that it's simply not profitable enough, and certainly not as profitable as spirits. "Some of these companies are looking for double-digit growth every year, but, in the wine business, it's a different story," said Vinexpo's De Eizaguirre.
Australia is, in many ways, the epicentre of the debate. Foster's, Constellation and, to a lesser extent, Pernod Ricard's Jacob's Creek have all seen their stars rise and fall with Australia's initial success and subsequent hardship in key export markets. Australian Vintage has had problems, too, but more recently appears to have put itself on a better financial footing than several of its rivals.
I'm not convinced that this is a problem of public versus private enterprise. Isn't the underlying problem that certain wine businesses and brands have been mismanaged?
I refer back to the Paul Walsh interview, in which he argued that excess vine planting in Australia during the country's boom years forced the sector to prioritise volume over price. Multiple retailers, naturally, were happy to oblige. Walsh added: "Also, they've line-extended brands down the price spectrum, whereas classic marketers have been taught to do it the other way."
There were also, I would say, unrealistic expectations about what could be achieved in wine, as is shown by the high price tags on the likes of Southcorp and Hardys. Constellation bought Hardys for more than AUD1bn and has since sold it off as part of a bundle of overseas wine operations for just AUD290m.
I'm sure this debate will gurgle on and a lot of people do need to look hard at the way the wine business currently operates. But, I think it's too simplistic to argue that publicly-listed companies and wine can never mix.
(NB: Updated after initially, and wrongly, stating that Australian Vintage is a private enterprise)
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