Constellation's sell-off means more consolidation

This week, Constellation announced that it had sold 30 of its low-end wine and spirits brand to Gallo. What does this say about the US market? Jeff Siegel offers an analysis.

Constellation's sell-off means more consolidation

How serious is Constellation Brands, the third biggest wine company in the US, about slimming its portfolio to focus on more expensive wine, plus premium beer and spirits and legal marijuana?

So serious that one of the brands it sold to E&J Gallo in a $1.7bn deal this week was Canandaigua – the New York state winery that the Sands family founded in 1945 which evolved into Constellation, the almost $2bn company whose portfolio includes Robert Mondavi wine, Corona beer and Svedka vodka.

In this, Constellation (publicly held but still controlled by the Sands family) has acknowledged that its future will be much different from its past. Constellation’s success was built on the sales of a fortified wine called Richard’s Wild Irish Rose in the 1960s, and those sales paved the way for the company’s expansion to rival only Gallo and The Wine Group in the US. 

But Constellation officials have said repeatedly over the past couple of years that beer and marijuana show more promise than wine, as US wine sales by volume have gone flat and brands costing less than $10.00 in retail have gone even flatter. In 2018, Constellation made a $4bn investment in a Canadian cannabis company, Canopy Growth.

This latest sale will transfer 30 of Constellation’s inexpensive wine and spirits brands, plus wineries and production facilities throughout the country, to Gallo, the largest wine company in the US, home to Barefoot, the biggest US brand. 

Why did it sell Black Box?
Constellation announced last February that it wanted to sell just a handful of the less expensive wine brands, like Mark West, Cook’s sparkling, and Clos du Bois, and expected to get $3bn for them. That it got just more than half of that total, and had to clean house to do so, speaks volumes about how it sees the under-$10.00 US market and how little much of the rest of the industry is interested in that segment of the market.

Because Constellation did clean house. Many of the 30 brands are still well-known and consistent sellers, such as grocery store stalwarts Black Box, Ravenswood, Toasted Head, and Rex Goliath. Black Box, in particular, has been growing at double digits as part of a continuing uptick in premium box wine sales in the US, which have increased seven percent in the past year or so. Premium box wine, in fact, has been one of the few bright spots in the under-$10.00 market, as younger consumers seem more open to alternative packaging like boxes and cans.

Did Constellation have to sweeten the pot to get the deal done? It’s hard to see it giving up Black Box otherwise. Gallo, meanwhile, has solidified its hold on the US grocery store market, where Barefoot has finally surpassed The Wine Group’s Franzia brand to take the US lead. Several other Gallo brands are among the country’s top sellers, including the sweet red blend Apothic.

Even more consolidation
Gallo seems to be hedging its bets on premiumization, which it has invested heavily in over the past decade. That includes buying California sparkling house J, Orin Swift, home to a dozen or so $20.00-plus California wines, and the Locations series, which makes high-end wines in some of the world’s top appellations.

Gallo’s purchase also speaks to continuing consolidation in the US winery business, where the top 50 brands account for 90% of the wine made in the US and the top three control 55%. Increasingly, the US market is becoming grocery store oriented, with brands not from the top 10 producers relegated to specialty shops and independent retailers.

Jeff Siegel

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