June 21, 2017

News broke this week that Constellation Brands, the third biggest wine company in the U.S. market, had agreed to acquire the ultra-premium Napa Valley winery Schrader Cellars for an undisclosed amount.

The bulk of Schrader’s wine cost a minimum of $350 upon release, launching Constellation into a new level of premium wine offerings, despite spending $700 million over the past two years to acquire wineries including Meiomi, The Prisoner, and Charles Smith Wines, according to Wine-Searcher.

“As the three-tier market gets more and more competitive while the U.S. consumer continues to premiumize [sic], how do brands like Constellation stamp their mark on that segment,” wine industry analyst and CEO of Stonebridge Research Barbara Insel told Wine Searcher. “One step was buying Mondavi, but Mondavi is not at the superstar level, so how to further enhance the brand? In this crowded marketplace, there are too many brands and only a few have the following at the premium level to command space in the trade: Caymus, Silver Oak, etc. Shrader can, especially on-premise. There aren’t that many brands that have that following.”

Not Alone

Constellation is not the only player making recent high-profile deals in the premium wine space. In March of this year, E&J Gallo, the largest family-owned wine company in the world, agreed to acquire the 1,300 acre Stagecoach Vineyard – the largest contiguous vineyard in Napa Valley for an undisclosed amount.

The property, which is known for producing grapes that make some of the finest luxury wines in the world, is located in the Pritchard Hill Region and the Atlas Peak appellation. The property includes various soil depths, types, and microclimates and sells its grapes to more than 90 wineries, including Duckhorn, Caymus, Alpha Omega, and Pahlmeyer.

“It’s a significant investment for the Gallo family,” Roger Nabedian, senior vice president and general manager of Gallo’s Premium Wine Division, told Wine Spectator. “But it is exciting that we’re furthering our commitment to quality wine.”

Investors Also Eyeing the Premium Segment

Premium wine acquisitions are not only being sought as a means to growth within the industry, but as a means to return on investment by investors as well.

“There’s no question that the demand from consumers is for better wine, not for cheaper wine,” Rob McMillan, author of Silicon Valley Bank’s annual State of the Wine Industry report, told the Napa Valley Register. 

In August 2016, San Francisco-based private equity firm, TSG Consumer Partners announced it has agreed to acquire Duckhorn Wine Company (DWC) from GI Partners for an undisclosed amount.

The deal included all six of Duckhorn’s wineries totaling 600 acres of estate vineyards – Duckhorn Vineyards, Goldeneye, Paraduxx, Migration, Decoy, and Canvasback, and includes the famous Three Palms Vineyard in Napa Valley, California.

“Duckhorn Wine Company is one of the most respected wine portfolios in the world,” said TSG President Jamie O’Hara in a statement. “Duckhorn boasts six wineries that are all recognized as benchmarks for their regions and categories, and a world-class estate program spanning California’s Napa Valley, Sonoma County, and Anderson Valley, and Washington State’s Red Mountain.”

Three months later, Canada’s Ontario Teachers’ Pension Plan agreed to acquire Constellation Brands’ Canadian wine business for C$1.03 billion (US$780 million).  The sale was part of the group’s shift in strategy toward focusing on beer and premium drinks, two segments that offer higher margins and greater potential for growth.

Not Just North America

The shift in focus toward the premium wine segment is not isolated to North American markets. In December 2015, only one year after acquiring Peter Lehmann Wines in South Australia for $57 million, Casella Wines, the name behind the country’s top selling wine brand, Yellow Tail, further strengthened its position in the premium wine segment with the acquisition of Brand’s Laira winery from McWilliam’s Wines for an undisclosed amount.

“The acquisition perfectly complements our premium range of wines, extending our portfolio to include a reputable brand that represents the regional excellence of the Coonawarra,’’ John Casella, managing director of Casella Wines, told The Australian. “I believe we are well positioned to build on the investment McWilliam’s Wines has made in Brand’s Laira in the domestic and international markets…”

-Lynda Kiernan

Lynda Kiernan is Editor with GAI Media and daily contributor to GAI News. If you would like to submit a contribution for consideration, please contact Ms. Kiernan at lkiernan@globalaginvesting.com.