Grape 14

THE BOLD, THE BIG, THE BEAUTIFUL

Alex Dale looks at the emergence of a new international wine business model of size, quality and branding.

Whoever said small is beautiful didn’t have the conquering of this planet’s wine markets in mind. In recent years, big business has found a new opportunity: to globalise wine brands, put hard cash and marketing teams behind developed networks and take huge market-share from the unsuspecting amateurs who innocently thought they knew the market. The remarkable development of Australia as a big wine player, the relative (and temporary?) decline of a regulation-jammed Europe, and the flexing of American money muscles – these are changing the world of wine forever.

There was money to be made. Besides, the large international brewery and spirit groups had begun to feel the impact of wine sales. To protect and even increase their market share, the global brewers and distillers therefore also targeted the wine industry. The extent of their ambitions has only recently unfolded, as take-overs, consolidations, mergers and acquisitions have accelerated.

But how was a sophisticated, marketing-driven, brand-dominant sector to effectively penetrate a highly fragmented industry like wine? A different dynamic from Europe’s was required. So flip the globe over, and you’ll land in Australia. Very fitting. A dynamic, quality-conscious, reliable, understandable and market-driven industry was building-up a massive head of steam. A pragmatic regulatory environment, a relatively weak currency and a business-friendly culture also adding to the attraction.

The first label to make a real impact was Jacob’s Creek (this Orlando Wyndham brand is owned by none other than Pernod Ricard, one of France’s most successful spirits groups). Lindemans and Penfolds (both owned by Aussie wine giant Southcorp) by no means overshadowed, whilst Wolf Blass (acquired by Australian brewing colossus Fosters) converted the planet to shiraz. BRL Hardy successfully stamped its mark internationally too. A market-driven, consumer-friendly, branded wine culture was being born in Australia, and the international brewers and distillers were interested. The rest is history.

Oz wizardry

Australia gobbled-up marketshare just about everywhere A united industry strategy, a committed and successful generic promotional campaign, a sexy and appealing ‘Brand Australia’, and a whole new generation of consumers developing an Aussie wine drinking habit. The repercussions throughout the planet have been tremendous. Wine styles are adapting almost everywhere to greater consumer-friendliness; retail networks redesigning their entire purchasing programmes; the specialised media on the whole lauding the revolution; and the supermarket consumer lapping it all up. Of the top 10 selling brands in 2001 in the UK, two were Californian, one South African – seven were Australian. Australian market share is significantly on the increase in many countries.

Success led to considerable brands emerging in Australia, and consolidation. In the 1980s and early ’90s acquisitions and mergers gathered pace, giving critical mass to a number of existing firms, and building the base of today’s industry. The solid foundations were there for the big guys to later either muscle in – as brewers Lion Nathan have done recently, or to spin-off other activities and focus on wine, as Southcorp has done. The general momentum, coupled with some astuteness, enabled other companies (such as Yalumba) to restructure themselves significantly and refocus – away from predominantly fortified and bulk wines, to premium quality, branded wines. An entirely new wine-focused business model emerged, with quality and branding its trademark.

Such evolution fitted well into markets, like the important UK one. Supermarkets and a few wine chains were gobbling up market share. The profile of the dynamic, modern, sizeable Australian producer perfectly matched that of the modern supermarket giants.

The Australian industry has matured considerably. It has not been satisfied with claiming the modern mass production sector, but has been successful in also increasingly stealing the ultra-premium limelight, and firmly ensconcing itself in the traditional market (top merchants, restaurants, etc). The multiple branded group strategy makes sense. From brands such as Lindemans, Hardy’s, Jacob’s Creek, Pen-folds, Rosemount, Banrock Station and Oxford Landing at the foundation, to the likes of the iconic Grange at the summit, Australian groups have captured substantial market-share, and penetrated all key segments. For a company like Southcorp, for example, there are remarkable synergies gained in marketing, distribution and sales through a mix that combines the largest export chardonnay brand (Lindemans) with one of the most respected New World wines (Penfold’s Grange).

Importantly, the Australians ignored the cut-throat commodity end of the market, leaving that to the poorer European wine regions and ‘third world’ producers like South Africa, Chile and Argentina. Why commit resources, capital and infrastructure to an unprofitable segment, where undercutting was the only way to beat the opponent? Pragmatically, they left the bun fight to the production-driven regions, and got on with focusing their marketing on where the long-term money was. Australia’s average retail price point in the UK market is way above that of France, South Africa, California – in fact everyone else, except New Zealand.

The giants move

The new millennium has seen significant repositioning going ahead in the international wine industry. Australia is the most active centre of this transition, again thanks to its brand and market-driven ethos, the size of its existing groups and their export strength. There has also been the creation of new, diverse portfolios through further mergers and acquisitions (Banksia, Petaluma and others). There is little doubt that Australia is the hotbed of the international wine industry.

What is becoming clear, however, is that the giants are only rolling up their sleeves!

Something else is happening, though. Currently, every wine-producing New World nation shows the UK as its prime export market, except for Chile (where it’s the second). Now, all eyes are turning to the US market, with its huge, affluent population, and growing wine consumption.

When (US) Beringer was acquired by (Australian brewers) Fosters in 2000 it proved that even the mighty could be swallowed. This master stroke gave Fosters access to the US market, via a powerful and successful network, with a major domestic US brand driving it. Remarkably, Fosters announced that last year its wine division Beringer Blass contributed more profit to the group than its brewing division. It also announced that Beringer Blass has a billion-dollar kitty for more acquisitions, mentioning that Australia would probably not be the target this time; more likely it would be North America or Europe.

The international jostling for position has not stopped for a moment in the past year or so (see box on previous page). Big business and the financial sector are taking notice of the modernisation and the globalisation of the wine industry – notably in Australia. In a nutshell, Australian wines are setting the momentum in the globalisation of wine brands, and the US market has emerged as the prime target for future growth and higher profitability.

Interestingly, the merging orchestrations of the mass market operators are having a curious spin-off effect. Dedicated wine lovers are looking increasingly outside of the big brands for individuality and personality. That’s providing an environment for smaller, quality producers to emerge. The catch now is to see if they too will seek to grow as their success amplifies (and thus set themselves in the same arena as the groups). Will they be snapped up by these same groups, recognising the need in their portfolios for more iconic wines, or will they remain pure and thrive in their niche? Let’s drink to the latter.

RECENT MERGERS AND ACQUISITIONS

	Southcorp and Rosemount merged.
	UK-based Allied Domecq acquired New Zealand’s foremost wine brand, Montana, in pitched corporate battle with archrival, brewer Lion Nathan. Fosters acquired Matua Valley, also in New Zealand.
	The latter retorted with the acquisition in Australia of Banksia Wines late last year.
	Lion Nathan acquired control of the Petaluma group – no doubt the founding motions in the formation of a substantial international wine brand portfolio
	Allied Domecq appears not to be taking this lying down, and has just increased its shareholding in Barossa wine business Peter Lehmann, giving rise to speculation of a platform for a take-over bid.
	As I write, two of Australia’s top six wine companies, McGuigan leading Simeon, have announced a merger. The MD of McGuigan Wines commented: ‘Very simply, today big is beautiful in the wine industry because the success of the Australian wine industry and its long term future rests on our ability to compete internationally.’
	In what is probably a defensive move, US wine giant Kendall Jackson acquired in late 2001 a foothold in Australia, buying almost 200 hectares of prime vineyards in McLaren Vale. It is launching its Yangarra brand from there, to add to its stable of international brands.
	Hardy’s have been in talks with various possible ‘partners’ in the USA.
	Brown Forman (owner of Jack Daniel, Southern Comfort, Fetzer, Bonterra and many others brands) is said to want to expand its wine portfolio.
	Mondavi of the USA has partnerships with various ‘family-owned’ wine businesses in different parts of the globe.
	France’s LVMH (owner of Louis Vuitton, Moet, Pommery and Mercier Champagnes, Hennessy Cognac, Cloudy Bay in New Zealand and Cape Mentelle in Western Australia, amongst others) added Mountadam from South Australia to its elite portfolio last year. They seem untempted, however, by large-scale acquisitions, and continue to focus on the ultra-premium.
	With Orlando Wyndham the larger French presence in Australia, most ‘European’ action in the reconfiguring of the Australian and New Zealand wine industry seems for now to be going the way of UK-based Allied Domecq.
	The worlds largest wine company, Gallo, is somewhat noticeable by its relative inaction in the globalising game. Its Garnet Point brand is a seemingly half-hearted concession to the market, as it combines US product for certain wines, with Australian product (made by Hardys) for others – all within the same brand and range.
	Diageo seems to be the other hesitant giant in all this. Disposal of its Malibu brand, in order to satisfy regulators (following the acquisition – in conjunction with rival Pernod Ricard – of Seagram’s former spirit business), coupled with the likely disposal of its fast food chain Burger King, seems to be its current priority. That would leave the group with essentially no debt – and poised to take a big punt at the wine industry…?

British-born, Burgundy-influenced Alex Dale has wide-ranging involvements in wine, including partership with Ben Radford in Radford Dale.

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