Accolade's sweeping changes

The new owners of Accolade are making fundamental business changes. Jeni Port asks whether these will pay off.

Houghton’s Wines, Western Australia’s oldest winery, has been put up for sale.
Houghton’s Wines, Western Australia’s oldest winery, has been put up for sale.

0n June 1st last year, private equity investor The Carlyle Group acquired one of the world’s biggest wine companies, Australia’s Accolade Wines, for A$1bn ($710m).

Within months of closing the deal, it was clear there would be less emphasis on premium fine wine, as there had been under CHAMP Private Equity, the previous owner. A long-time Accolade employee says the change in focus became clear during a meeting with the new executive team headed by Ari Mervis, a former CEO of Carlton & United Breweries. “I remember they asked questions like, ‘With St. Hallett’s, why does it have to be Barossa? It could come from anywhere. It’s a brand,” he says.

It is no longer business as usual for the wine group, headquartered in Australia, which sells more than 50 brands, including Hardys, St. Hallett, Grant Burge, Arras, Petaluma and Knappstein, many of which are historic Australian names. Under CHAMP, the fine wine team focused on the A$15-plus premium wine segment. Under the new management, wines such as St. Hallett’s top-tier Barossa Valley reds no longer seem high on the agenda. Within months of The Carlyle Group takeover, the Australian-based fine wine department was closed. More closures and job losses followed.

Premiumisation logic

In 2019, many agree the premium wine sector is the place where the world’s wine producers need to be. Demand for quality wines is one of the major drivers of growth. In Australia, the value of quality wine exports jumped 20% to A$2.76bn in 2017-18, with China leading the demand followed by other major markets such as the US. Wine Australia says the industry recorded its highest average value since 2009, with an increase of 9% to A$3.24 per litre.

The strong performance encouraged Wine Australia’s chief executive, Andreas Clark, to predict a continued focus on the promotion of quality wines overseas, as the segment was enjoying “robust” growth in nearly all price points above A$1.00 per litre. 

Accolade Wines has a presence in 20 of Australia’s “premium wine regions”, according to The Carlyle Group website. In March, it put the Knappstein winery in the Clare Valley up for sale. In April, it was the turn of Western Australia’s oldest winery, Houghton Wines. 

The winery closures follow what Accolade says is an ongoing review of its winemaking and production facilities Australia-wide. A report on its “global business services” is expected to take months to complete, but chief financial officer Mike Walsh told The Australian Financial Review that a number of jobs may be moved to “external service providers”. The company says the global review aims to ensure that “we are ideally positioned to meet the needs of our customers, to adapt to changing market conditions and to take advantage of opportunities”.

In March, the company also dismantled its Warsaw-based EMEA (Europe, Middle East and Africa) business unit of about 30 people. Some will have the opportunity to reapply for jobs in the unit, which will return to the UK. Mervis outlined reasons for the closure via press release: “The UK is our biggest international market,” he said. “By leveraging the scale and commercial execution resources of the Accolade business in the UK we will be better placed to pursue the clear growth opportunities we see in the UK, European and EMEA markets.”

The closure of the fine wine unit and the dismantling of EMEA is a surprise move at a time when Accolade’s main competitors are moving in the opposite direction. Constellation Brands has just sold 30 low-end wine and spirit brands to Gallo in a $1.7bn deal (subject to regulatory approval), while Australia’s biggest wine producer, Treasury Wine Estates, has signalled that it intends to divest labels producing sub-A$10 wines and increase production of premium wines.

“I will say that at a time when consumers are paying more for the wine they are drinking, it defies logic as to why a wine business would focus on its commercial brands only,” says Toni Carlino of Wine Marketing Hub, who has advised major Australian wine companies.“It is the commercial segments that are in decline.”

However, wine marketer Peter McAtamney of Wine Business Solutions sees some logic. “Accolade’s low-cost strategy makes sense if you look at the UK market in isolation,” he says. “They can produce 100 cases per minute at their Bristol wine bottling factory and are responsible for one in five cases sent to supermarkets. They can therefore beat any competitor on cost.”

However, timing is everything and wine producers everywhere are nervous about the UK market, which is facing an uncertain future, to say the least, due to Brexit. On figures supplied by McAtamney, some 3,000 attendees at Prowein 2018 deemed the UK to be the world’s least desirable market. He believes Accolade’s “biggest and best” opportunity lies with the Australian market, which is healthy and enjoying growth in the premium wine sector. “There is plenty of premium growth opportunity for those who know how,” he adds.

The question is, does the new management at Accolade Wines have the knowhow, and if so, why close the fine wine unit, which employed five people? Accolade stresses their jobs can be done as well by the sales and marketing teams. But the company is also shedding senior winemaking staff. Accolade’s chief winemaker and global wine director, Paul Lapsley, a 40-year company veteran, will retire in November. The senior winemaker at Hardys Tintara, Paul Carpenter, has also flagged his intention to leave. 

The men are winemakers with Hardys, which produces wines at all price points, from a stunning A$250 165th Anniversary Edition Cabernet Shiraz down to Stamp of Australia at A$7 a bottle. “[Management] considered Hardy’s a much more commercial brand,” says one former employee who doesn’t want to be named. “There had been a pretty clear strategy in place on the way Hardys could work, but the view [by the new executive team] was that Hardys was commercial and should play in that space. In one respect it probably made sense because once Accolade bought Grant Burge and Fine Wine Partners, all of a sudden it had a number of premium brands all in that A$15-plus range.”

Hardys has always played a central role in the evolution of Accolade Wines. The company was formed by Thomas Hardy in 1853 but it was the purchase of the Tintara Winery in McLaren Vale in 1876 that created the basis for a successful business run for generations by the Hardy family. Through vineyard development and winery acquisitions, it became one of the biggest wine producers in Australia. In 1992, with global aspirations, it merged with Riverland-based producer Berri Renmano to form BRL Hardy. In 2003, it was acquired for A$1.9bn by international beverage company Constellation Brands. However, national over-production at a time of falling global demand led to write-downs and staff lay-offs. 

It was Constellation’s 2011 sale of the group to Sydney-based CHAMP for A$290m which led to the creation of Accolade Wines. Constellation retained a 20% interest in the business. In 2015, Accolade bought Grant Burge Wines, reportedly for upwards of A$50m, and in 2016, acquired Fine Wine Partners for A$100m, gaining four new wineries – Petaluma/Croser, St. Hallett, Knappstein, Stonier – and 20 agency partners. The acquisitions were a clear signal that there were sweeteners in place for an impending sale. Two years later, Accolade was sold to The Carlyle Group. Constellation also sold its 20% interest.

Predicting the pay-off

The usual investment window for a private equity company like The Carlyle Group is five to six years, and in that time profits need to be made. Where is the revenue going to come from? The company says it has a “strategic agenda to premiumise the business”.

At present, about 30% of Accolade’s production is in cask wine and sales are in decline. This segment, however, might yet provide a glimmer of hope. It is where the quickest return is to be had. Cask wine – indeed all low-end commercial wines – do not require expensive vineyards, winemakers or oak. If you’re not trying to build a brand for the long term, which private equity companies have rarely been interested in doing, then a focus on the commercial end makes sense.

And the Australian wine industry in general and Accolade Wines in particular might be well placed to take advantage of Brexit if the British pound drops and the price of French and European wines rise. It’s a big maybe, especially as Brexit adds uncertainty to the market.

Industry observers, who spoke off the record, worry that Accolade brands with strong market recognition and value, such as St. Hallett, Petaluma and Hardys, will be overworked, with prices halved and production doubled or tripled. External forces might just encourage it. The temptation to source grapes for St. Hallett from outside the Barossa Valley could rise this year following a lighter than expected 2019 vintage. Production will be down, possibly providing the right moment, and excuse, to source grapes further away from St. Hallett’s traditional heartland.  

These are brands of quality and history. If they were to be damaged for short-term gain, it would be a long-term loss for Australian wine.  

 

Jeni Port

 

This article first appeared in Issue 2, 2019 of Meininger's Wine Business International

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