One week of merger mania in Californian wine has the industry braced for a major consolidation. Larry Walker investigates the dynamics driving the fever for US wine companies.

Three major acquisitions in the California wine business in the last week of August have left the industry holding its breath, wondering who will be next. It began with Australia's Foster's Brewing Group buying Beringer Wine Estate for $1.5 billion. Going almost unnoticed, on the same day, Canada's Vincor International bought R.H. Phillips for $92m. Two days later, The Wine Group bagged half a dozen of Sebastiani's high volume brands in a deal believed to be worth $300m-plus. The Foster's deal in particular is likely to prompt further consolidation, experts believe. It has been widely reported that two other Australian wine companies, Southcorp and BRL Hardy are interested in wineries in California.

Furthermore, Michael Mondavi, CEO of the Robert Mondavi Corp. has been visiting Australia, which, industry sources have said may be linked to deals with Southcorp or Hardy's. Given the mania for consolidation in other sectors of the drinks industry, notably beer and spirits, it was always likely that wine, to an extent, would follow suit.

But, Napa-based industry analyst Vic Motto of Motto, Kryla and Fisher, believes it is a response to falling sales in the other categories rather than a copycat reaction. "Even before Foster's bought Beringer, there were reports that they were seeing wine profits grow while they were losing market share in beer. It's a question of demographics. In the US the population of people between the age of 21-35 will be flat. Those people are mostly beer and spirits drinkers. Beginning this year, about 10,000 people in the US celebrate their 50th birthday every day. Those people drink two or two-and-a-half times more wine that the 21-35 year-old group."

Motto added that there were reports that Allied Domecq and Diageo were also eager to expand their wine holdings. Diageo, with the first ever drop in Guinness sales, may be looking at the same demographics that shows wine on an upswing, compared to beer.

"Another element is the opportunity for California wineries in the export market. They have barely scratched the surface there. There is great interest around the world, from a cultural standpoint, in the US and in California. There is no other consumer product that is so closely associated with place of origin," he said. Eileen Fredrikson of Gomberg, Fredrikson in San Francisco pointed out that the Australian connection was not an accident.

"Production has exceeded consumption in Australia for some time. The Beringer move is a natural extension of an export-driven wine policy. It gives Foster's an open door into the US distribution system for its family of wine brands," she said. She added that it isn't the first time that large corporations have been attracted to wine. There have been food and soft drink companies in the California wine business in the past, but they didn't have the patience to wait for the smaller return on investment that is common in the wine business. "The difference now is the new buyers know the wine business, they know what to expect."

Fredrikson said that with the increased marketing strength, it could make sense to think of national advertising. In the past, with 80% of all wine sales in 10 major metro markets, national advertising wouldn't work. "Now there will be upscale varietal wines from a number of companies in all markets." David Freed, chairman of the UCC Vineyards Group in Napa, said that the action was not over yet. "We are going to see a lot more acquisitions and mergers in the next 12 to 18 months. There's the Seagram wine and spirits division, Kendall-Jackson, Robert Mondavi. There's a lot more coming, not just in California but all over the world." He added that Jess Jackson, owner of Kendall-Jackson (KJ), had been edging toward an IPO for the past two years, but kept backing away.

"There is no doubt that Southcorp is interested in Kendall-Jackson," he said. Before the Foster's purchase of Beringer, it was believed that KJ and Beringer were on the verge of a merger. Sources believe, however, that Beringer wouldn't do the deal without Jackson giving up his Artisans & Estate division, a stable of up-market wineries, something he was unwilling to do.

Meanwhile, the Sebastiani sale of its high-volume, mid- and lower-priced brands (produced at Woodbridge in the Central Valley) and its retreat to premium Sonoma brands, could indicate that the family-owned winery didn't want to compete with global giants like Foster's in the world market. But it also demonstrates how the surge in premium wine sales is acting as a dynamic in the move towards industry consolidation. By selling its mass-market brands Sebastiani is reducing its annual production from around 8m cases to a mere 150,000, according to analyst estimates.

However, in a recent interview Don Sebastiani the company's CEO said: "The consumer is trading up and so are we. There's getting to be too much competition at the lower end, and the profits are higher in the high end." It is interesting to note, finally, that one aspect of the emerging giant wine corporations runs counter to a prevailing marketing trend, touched on by Vic Motto. This is of course the focus on "wines from a place" or the merits of terroir-driven wines over brand-driven wines.

It will be interesting to hear the CEO of a global wine company, which owns dozens of brands across three or four continents, discussing the importance of terroir.