Just a few years ago, Constellation Brands -- then operating as Canandaigua Brands -- was still associated primarily with mass-market wine labels like Almaden, Inglenook, and Taylor. While those are still an important piece of its business, Constellation has been transformed by a spurt of acquisitions and alliances undertaken by Chairman and CEO Richard Sands, 51, a son of company founder Marvin Sands. These deals have given Constellation a major presence in middle- and upper-tier California wines, such as Ravenswood and Simi, and fast-growing "New World" wines from Southern Hemisphere countries like Chile and South Africa.
The latest acquisition is by far the biggest: a $1.4 billion cash-and-stock transaction to buy Australia's largest vintner, BRL Hardy. This move vaults Constellation (STZ) past E&J Gallo to become the largest vintner in the world, with $1.7 billion in annual wine sales.
BRL was no stranger to Constellation: Since August, 2001, the two had operated a joint venture, Pacific Wine Partnership, worth $120 million in sales, which allowed Constellation to import some of BRL's Australian and New Zealand wines.
IN THE SPIRITS. The new deal, announced Jan. 16, calls for BRL Managing Director Stephen Millar to stay on in Australia as CEO of Constellation Wines, reporting to Constellation Brands President and COO, Robert Sands (Richard's brother). The transaction, to be financed with a recently inaugurated $2 billion credit agreement, is expected to close in April.
Constellation is a significant player in other alcoholic-beverage categories, too. Through its Barton unit, it holds rights to import Grupo Modelo's popular Mexican beer, Corona Extra, to the western half of the U.S. It also manages a diverse portfolio of spirits brands like Black Velvet Canadian whisky and Fleischmann's brandy.
Throw in a successful track record of developing popular new brands, such as the Arbor Mist line of fruit-flavored varietal wines in the U.S. and the Stowells of Chelsea line in Britain, and Constellation has proved it can successfully play in all parts of the business.
BusinessWeek Marketing Editor Gerry Khermouch recently discussed the BRL Hardy acquisition and the wine business with Richard Sands. Here are edited excerpts of the conversation:
Q: At a time of rapid consolidation at the supplier, distributor, and retailer levels, is sheer mass an important goal in and of itself?
A: Increasing one's size in a strategic fashion is important. What we have tried to do is to stay ahead of the consolidation curve. I wouldn't go out and just buy anything. Over the past several years, we have demonstrated a highly disciplined approach to acquisitions. In fact, we take the acquisition process so seriously that it has become a core competency.
Q: Your Pacific Wine Partners joint venture with BRL Hardy was developing nicely, and sales of brands like Banrock Station seem to be growing briskly. Why not let that unfold a while longer before an outright merger?
A: We certainly could do that. But for a long time, we have been interested in greater participation in the Australian wine category. But we wanted to participate as a brand owner, not just an importer/distributor, and we wanted to participate globally, not just in the U.S.
Before we did PWP, we went to Australia to look at a wide array of opportunities, from small companies to large companies. It was definitely the case that BRL was the best opportunity for us. BRL needed our distribution strength, especially in the U.S., but it had a very broad portfolio and a nice global spread of business in addition to the U.S. We would have bought them then if they were interested, but they were interested in doing a joint venture in the U.S. to get our distribution power and to participate ultimately in some California brands.
Q: What changed their minds?
A: They have seen the global consolidation at all levels and had envisioned being the world's largest wine company, just as we had. We both realized it would be easier to make that happen together than apart. In addition, we knew each other well by then and had confidence our operating styles were compatible, if not identical. Both of us have unusual operating styles within the beverage-alcohol business in that we are both very decentralized in our approach.
The impact [of the deal] is quite obvious in Australia or New Zealand. But look at other markets of critical mass for wine, like Germany or Japan. These are very important opportunities that each company had been exploring.
The problem is, how do you control your route to market? You can partner with an importer, do a joint venture, buy a distributor/importer, or put in your own sales force. But at the end of the day, you don't get a satisfactory return because there isn't enough size to warrant the investment.
By bringing these portfolios together -- Chile and California from our side and Australia and New Zealand from their side -- it's the same investment but double the reward. So you will see us aggressively developing our business in Europe and Japan, sizable wine markets that have tremendous growth opportunities, particularly for New World wines.
Q: How is the effort to sell Wall Street on the deal? Any concerns expressed about the debt load or management issues?
A: Wall Street is familiar with BRL and BRL management, which has a good-size investor base here in the U.S. and has spent a lot of time educating that investor base on the Australia and New Zealand wine business. I'd say Wall Street views the two companies as extremely complementary and well-fitting and culturally a great match.
Q: And the debt load?
A: No concern has been expressed, and there are simple reasons why: We're using equity in the deal, our debt statistics pro forma for the acquisition are not extremely high, and we've had a great history of bringing those credit ratios down very rapidly because of high cash flow. We generate, without the acquisition, about $150 million of cash flow a year. That's a big number.
Q: I've picked up some expressions of concern within your domestic wine operation that, following the merger, it will be reporting to Australia, where BRL's Stephen Millar will take on a role as CEO of Constellation Wines. How are you working out the lines of authority?
A: Right now, four parts of our wine business report separately and individually to [President and COO] Robert Sands: Canandaigua Wine, our popular/premium wine division; Franciscan Estates, our fine-wine division; our U.K. division, which is part of Matthew Clark; and our rest-of-world wine sales.
Those four pieces, along with BRL's New Zealand, Australian, and rest-of-world wine business, its European wine business, and its U.K. wine business, will be coordinated by Steve, especially from a strategic and business-development perspective. Steve will work closely with Rob, keeping an eye on major activities of all the wine divisions in his role as strategic leader coordinator of the wine business.
The heads of the divisions will retain responsibility for their own business from a production and markets perspective. Their lives are not going to change much. Now, however, there will be an umbrella worldwide strategy to help align everybody to one common goal. Take Constellation Wine's [President and CEO] Jon Moramarco: Steve won't tell him how to run his business, but he may suggest which of Jon's products will have a better global reception and should become priorities. Some parts of the wine business will be merged, mainly in the U.K., where we have much less broad of a portfolio. Pacific Wine Partnership will be left intact.
Q: Now that you're well-covered in every key region of wines, any thought to expanding the beer business, given how imports are still increasing in both price and demand?
A: We believe that spirits, in the U.S. especially, will continue to be a very important consolidating category with opportunity, and we'll continue to take advantage of those as they present themselves.
With regard to imported beer, we have tremendous growth from the Modelo portfolio, and we'll continue to invest in that. Where we do not have Modelo, east of the Mississippi, where we have brands like Tsingtao, Peroni, and St. Pauli Girl, we will try to expand that national portfolio.
Typically, such expansion doesn't take the form of acquisitions -- rather, we develop new agency relationships. In the U.K., especially at the wholesale business, there's great potential for further consolidation because it's an extremely fragmented business. So we'll continue to pursue the creation of scale, breadth, and growth by acquiring outside the wine business and -- if the right strategic opportunities present themselves -- within the wine business.
Q: In the U.S., per-capita wine consumption has stalled lately after a steady surge. What would it take to ramp it up again?
A: The reason it has stalled is because of economic trends, and it hasn't caused a sales decline, just a decline in the upward momentum. That suggests when economic trends right themselves, and it could take some time, we'll see the upward momentum return.
Further, the socio-demographic trends, with a large number of younger people coming out of their earlier drinking years into their middle drinking years with more disposable income, is favorable to all alcoholic beverages but to wine in particular. We will have that echo boom start taking up the slack in about five years. But I really believe the 50- to 60-year-old group has been impacted by the economy. There just aren't that many stockbrokers and investment bankers out there able to drink every night on expense accounts.
Q: You hear a lot these days about vintners' need to do a better job on the marketing and branding side. You've had some outstanding successes on a mass scale with the likes of Arbor Mist and Stowells of Chelsea. What's your view?
A: The wine business from a brand perspective will always be a fairly fragmented business. Some people select wines the way they choose clothes, and you just can't wear the same thing as the next guy. That's why wine is very much like fashion and fragrances: They aren't the Coca-Colas in terms of branding.
So you have to make sure your brand is in the selection pool of consumers -- it's not an exclusive category, the way people drink either Coke or Pepsi. People are going to drink 8 to 10 different wines, and if you can have 4 of your brands in their selection pool, you're going to do better than the next guy.
The traditional packaged-goods brand-building concepts aren't what this business takes, and for the most part, we're on the right track in that wine is about how you feel about yourself. Wine is an aspirational drink, and your brands have to help build that aspirational feel. We're heading in the right direction.
It's a mistake to try to build mass brands and focus on mass marketing. That takes the mystique out of wines. The consumer doesn't want a mass brand, and anyway, each state has a different set of marketing, pricing, and distribution laws, so it's very hard to truly mass-distribute and mass-market.