European wine category to continue M&A activity with eye on US market, Rabobank says

The EU will continue to play an important role in the global wine space accounting for 65% of wine production and 57% of consumption worldwide. ©iStock/sherragreen

The European wine industry has seen over 150 M&A deals since 2010, and a similar pattern is expected to prevail in the future, according to Rabobank.

It claims the consolidation occurring in the European wine industry has formed a clear trend with 'companies who have sat on the sidelines, not investing nor divesting, were the weakest performers.'

Rabobank’s most recent quarterly wine report looked at Europe’s three major wine regions, France, Italy, and Spain, dividing the market into five groups ranging from “dynamic asset builders” to “clear downsizers.”

“What we found is that the majority of the most successful companies were the ones investing and building up an asset base not just staying on the sidelines,” Rabobank global beverages strategist, Stephen Rannekleiv, told BeverageDaily.

The “maintainers” group, those who did not expand or downsize, saw revenue and EBITDA margins decrease over the seven-year period, according to its data.

“For them [those remaining stagnant] it is time to either pick a more coherent strategy or consider exiting the market,” he said.

Profitability of downsizing

While it was not surprising to see companies that expanded their asset base achieve above-average sales growth, Rannekleiv said, it was a bit unexpected to find that the clear downsizers saw the most improvement in terms of EBITDA margins.

Of the 20 companies with the best margin improvement, 40% were either downsizers or fixed-asset off loaders, Rabobank data showed.

“There’s a strong case to be made that moving to an asset light model is very successful,” Rannekleiv said.

For example, Constellation brands sold its Canadian wine business for $775 in 2016 to focus on its premium beer and wine portfolios. Since divesting a sizeable portion of its wine brands, the company has grown volumes of its five premium wine brands at an annual rate of 30% between 2013 and 2016.

However, even though there are clear “over achievers” of companies that choose to downsize, there are a number of players that have shifted leaner operating structure out of necessity due to struggling sales performance, Rannekleiv added.

US activity

“In the US you’re seeing continued growth in wine consumption but the consumer is moving away from lower-priced wines that were really the ‘bread and butter’ that built up companies like Constellation Brands and Gallo,” Rannekleiv said.

As consumer preferences premiumize, wines within the $10 to $20 range are seeing increased traction he said.

The average price of bulk Chardonnay produced in California has also increased roughly 57% between September 2015 and June 2017, contrasting with other regions’ prices, which have been stagnant or slightly down.

The US is also one of the largest wine growth markets with imports to the region increasing 2% in volume and 6% in value in the first three months of 2017. The rise is mainly driven by imports from France, a segment that has seen 12% increase with the popularity of Champagne and rosé. Imports of prosecco from Italy were also up 9% in Q1 2017.

“European suppliers look at the US market as one of the few areas of opportunity,” Rannekleiv said.

Within the US, domestic wines have also experienced noticeable success particular wines from California and Oregon, Rannekleiv added.

“California and Oregon wines are finding increasing interest abroad,” he said. “The cloud of Napa wines is making headways in other markets as well.”

Rannekleiv added that global wine inventories appear to be fairly stable and existing stocks in Europe will ensure adequate availability without major price hikes for the next few years.

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