Is Constellation in Trouble?

The wine giant is restructuring in a bad economy, but insists it's all according to plan
Jul 14, 2009

When Constellation Brands reported in July that its first-quarter profits slid 85 percent, Wall Street was actually happy. The world's largest wine company by volume, which owns brands such as Mondavi, Clos du Bois and Ravenswood, beat analysts' expectations amid a sour global economy.

It was the latest in a series of good news/bad news announcements from the upstate New York-based company which, after a decade of growth and acquisition, has been restructuring. Supervalue brands like Almaden and Inglenook have been sold, production facilities in the United States and Australia have been put up for sale, winemaking has been consolidated, vineyards have been divested and 400 people, or about 5 percent of Constellation's global workforce, will have been laid off by the end of the year.

Some in the industry worry that the steady stream of announcements coming out of corporate headquarters is a sign that one of the wine world's biggest companies, an important barometer of the industry as a whole, is in trouble.

But in interviews with Wine Spectator, company executives insist they're just using the recession as a chance to streamline and continue their restructuring. "We're cleaning up the portfolio," said Jose Fernandez, president of Constellation Wines U.S. "And catching our breath."

And Wall Street and industry experts appear to believe they're on the right track so far. Tim Ramey, a wine-industry analyst with investment firm DA Davidson & Co., said the reorganization came as no surprise. "It's not the economy," Ramey said. "It's a strategic move. They're exiting the value end of wine and spirits, which was once their core business. What the company looked like eight years ago is 100 percent different."

And more important to consumers, Ramey said, wine drinkers will feel little if any effect. The company's shift into premium wines still mirrors consumers' changing tastes. While the recession has led many wine lovers to trade down, pricewise, they're not switching to jug wines.

Constellation was once better known for brands like Paul Masson and flavored wines like Arbor Mist, but in 1999 that all changed when it paid $55 million for Simi and $240 million for Franciscan Estates. Those were the company's first steps toward building prestige, since it was clear even back then that generic jug sales were on the decline.

The buying spree continued in 2001 with Ravenswood ($148 million), in 2003 with Australian wine giant BRL Hardy ($1.1 billion), in 2004 with Robert Mondavi Corp. ($1.3 billion), in 2006 with Canadian powerhouse Vincor International ($1.3 billion) and Fortune Brands' wine business in 2007 for $885 million. Along the way it also bought a 40 percent stake in Italian producer Ruffino.

"Our focus has been to build the world's most-powerful portfolio of premium wine blends," said CEO Rob Sands.

But along the way, Ramey said, Constellation built a huge debt load, which has been exacerbated by the bad economy. Just as the company was winnowing its low-priced portfolio, wine drinkers began trading down for value. Sands argued that consumers continue to trade up to higher priced labels, just at a slower pace, and that the bad economy is a short-term problem. Ramey agreed.

The United Kingdom and Australia markets continue to be a particular challenge. In the U.S., sales remain solid for mid-priced brands such as Clos du Bois and Blackstone and established labels such as Mondavi and Simi.

As the economy begins to turn around, Sands believes there is room for Constellation to begin expanding again, perhaps buying wineries and brands in areas such as Europe and South America, but he doesn't believe it will match the pace of the mid-2000s. He added that he's happy with the current portfolio, and as for future sales of wineries or brands, "I wouldn't expect too much more of that kind of thing."

That may calm the nerves of some in the wine business, and perhaps consumers as well.

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