Opportunities for Constellation Brands

It was big, it was complex and it caught the attention of the global media. On March 27 2003, chairman and chief executive Richard Sands of Constellation Brands​ unveiled a deal that saw the US alcoholic beverage company become the largest wine producer in the world. Constellation Brands jumped into Australia's fast growing premium wine ranks, acquiring BRL Hardy for US$1.1 billion and gaining upscale labels such as Hardys and Banrock Station.

For now, Constellation Brands's position as the world's leading wine producer remains fairly secure, having stolen the title from its US rival and closest competitor E&J Gallo​. However, competition between the world's two largest wine players will undoubtedly remain tight and, with increasing consolidation in the wine industry, E&J Gallo's established name and financial muscle might well give the company the upper hand in making acquisitions and alliances in a bid to gain growth.

To maintain its new-found number one position, Euromonitor believes Constellation Brands will have to continue the policy of acquisition that it has pursued in recent years. While rewarding overseas captures remain increasingly common as the wine industry continues to be relatively fragmented, the test will be to see where Constellation Brands chooses to take itself in the next deal.

Germany number one market opportunity​

Germany remains one of the company's number one market opportunities, according to Euromonitor. At nearly 27 million litres in 2002, Germany continues to register relatively low levels of per capita consumption compared with other markets, offering the potential for strong growth ahead.

Of the main western European wine producing countries, Germany is set for the most rapid expansion at almost 2 per cent compound annual growth in the medium term, compared to declines of 1.4 per cent and 2.1 per cent in France and Italy respectively. Such growth is likely to be led by the ongoing increase in demand for red wine, underpinned by consumer awareness of its well-documented health benefits when consumed in moderation.

In an interview with Euromonitor, a company source at Constellation Brands confirmed the company's attraction to the German market. "We believe Germany is an important market because it is one of the largest wine drinking countries in the world and we see similarities between Germany and the UK ten years ago,"​ he said. The only uncertainty lies in whether the company will find a route to market through acquisition, a distribution agreement or through organic growth.

Growth potential in Asia​

Elsewhere, Euromonitor sees further potential coming from the Asian market, including China, which is forecast to see a 27 per cent climb in wine volumes between 2002 and 2008, albeit from a lower base. Growth in China will be driven by increasing consumer health awareness, in terms of recognition of both the positive effects of red wine consumption and the detrimental effects of long-term consumption of high-alcohol alternatives such as spirits.

While Constellation Brands recognises the growth prospects of the Asian market overall, the company does not yet see China as a priority market for acquisitions due to its relatively small middle class population. Instead, countries such as Japan have been identified as having more immediate potential. Here, the appeal of the growing range of white wine on offer to those unfamiliar with wine drinking is predicted to be one of the chief drivers of steady future growth between 2002 and 2008.

Asked if Constellation Brands would consider making further acquisitions in its key markets, the US, the UK and Australia, the company source said: "In our three core markets there could be some opportunities, but we believe the opportunities will have to be real gems. It maybe a premium wine that sells just 20,000 nine-litre cases a year and needs someone to help take it to the next level. It will have to be something to really fill our gap."​

Taking on debt not a problem​

That Constellation Brands will continue to be a predator in the ever-consolidating wine industry is inevitable. However, its recent acquisition spree calls into question its short-term ability to compete for new purchases.

Prior to the BRL Hardy acquisition, Constellation Brands already had a high debt/equity ratio and has saddled itself with further debt as a consequence of the acquisition. Although the company has a policy of not paying dividends to shareholders and ploughing profits back into its business, in the short to medium term its high level of debt may make it difficult for the company to summon up the resources for bids.

The Constellation source disagreed, however. "There are a lot of companies that carry a lot of debt, like Diageo and Coors. However, our business is a stable business generating a lot of cash flow. We don't lose sleep over our debt position and when we do leverage up, we bring that leverage down very quickly."​