Booming Wine Region Enticing Investors as Ontario Relaxes Lawsby
Rising exports, lower loonie and new rules driving growth
Asian demand helping red and ice wines replace sweet fizz
Row after row of delicate young vines line the long driveway leading to Peller Estates Winery in Niagara-on-the-Lake. It’s a cool spring morning and the expansive lawn in front of the winery is edged by a patio that will host parties and tastings all summer.
John Peller, chief executive officer of Andrew Peller Ltd., is jovial as he surveys the vines that helped turn the company into Canada’s biggest publicly listed winery. Peller, 59, credits his Hungarian-immigrant grandfather for his foresight.
“When my grandpa started the business in 1961, he had this vision of bringing the culture of wine and food from Europe to Canada and we laugh because it was the right vision, but he was 30 years too early,” Peller said in an interview at the winery last month.
That vision is paying off now for his grandson, who took over the family business in 1994. Andrew Peller stock is trading near its record as a cheaper currency and looser liquor regulations draw investors to Ontario’s booming wine industry. Constellation Brands Inc., the Victor, New York-based beverage company, announced last month it was exploring an initial public offering of some of its Canadian wine business, Vincor Canada, the largest producer in the country.
“If Vincor does go public, it’s going to have a halo effect to our brand and to anybody that wants to invest in the industry,” Murray Souter, CEO of Diamond Estates Wines & Spirits Ltd., said in his office in Niagara-on-the-Lake, located on the south shore of Lake Ontario about 50 kilometers (31 miles) south of Toronto.
Once derided for sweet fizzy brands such as Baby Duck and Moody Blue, the region’s wares are gaining international appeal, led by rising Asian demand for ice wine and red table wines.
Canadian wine regions, which also include British Columbia’s Okanagan Valley and Nova Scotia’s Gaspereau Valley, exported C$66.3 million ($51.8 million) worth of wine in 2014, up 137 percent from 2010, according to data collected by the Canadian Vintners Association. The Canadian dollar dropped 9.4 percent against its U.S. counterpart in the half-decade through 2014.
Peller, which has about a 14 percent share of the country’s market, was named Canadian Wine Producer of the Year in 2015 by the U.K.-based International Wine & Spirit Competition. “We’re 100 percent confident that we make wine as good as anywhere in the world,” Peller said.
It’s the unique micro-climate of the Niagara region, bordered by Lake Ontario, that allows Peller to grow premium grapes including cabernet sauvignon, pinot noir and chardonnay, he said. Niagara is one of the few regions in the world that can produce ice wine, and the lake keeps winter temperatures above -20 degrees Celsius, the vulnerable point for the other varieties, he said.
"It’s one of Mother Nature’s challenges and little miracles -- they draw you into the areas that are more difficult, but if you survive there you get greater quality," Peller said.
Diamond Estates, the only other publicly traded wine company in Canada, has seen about a 30 percent increase in debit- and credit-card sales from U.S. visitors over the past year, Souter said. He estimates the company’s exports will be about C$3 million this year and will almost double next year.
Ontario’s wine exports are increasing as the provincial government loosens the Prohibition-era liquor laws that govern domestic markets. Grocery stores will begin to stock Ontario wine starting in the autumn, the first time sales will be allowed outside government-run liquor stores and specialty wine stores. The five companies that hold almost 300 private wine store licenses, including Constellation and Andrew Peller, are also being encouraged to carry product from other wineries.
Diamond Estates is considering a third equity sale as the company makes plans to expand its wine-making facility and build a new retail store, Souter said.
Peller said while the current stock price has made issuance “more attractive as a compelling alternative,” the company has opted to borrow in the past because equity markets want quicker returns than the wine industry can offer with its long-term horizon.
To be sure, Ontario’s wine industry is still a minnow compared with international counterparts. France’s Burgundy wine region had international sales of 777 million euros ($889 million) in 2015, according to the area industry group. Canada had 0.24 percent of the world’s wine production in 2014, versus France’s 16.5 percent, according to data collected by the Wine Institute, a California wine advocacy and policy association.
Ontario wine sales rose 22 percent in four years to C$2.41 billion in fiscal 2014-2015, according to data from the Liquor Control Board of Ontario. Sales excluding exports of VQA Ontario wines, which are high-quality wines guaranteed for their origin, increased 1.9 percent in a year to C$314 million, according to Vintners Quality Alliance Ontario.
After a 79 percent increase over the past year which took the stock to an intraday record C$29.45 at the end of March, Andrew Peller has a market value of C$424 million. It closed at C$29.19 Wednesday. Shares of Diamond, which has a market value of C$10 million, closed at 10 Canadian cents.
The companies’ small size hasn’t deterred Stephen Takacsy, chief investment officer at Montreal-based Lester Asset Management, which holds Peller and Diamond Estates in its C$260 million portfolio. He likes Peller for its strong, accessible management and growth trajectory. He also said Diamond Estates is a good growth story with new management doing a “great job.”
“It’s really the fastest growing segment of the beverage industry,” he said “If you look at the aging population, the baby boomers like me, we’re drinking a lot less beer and a lot more wine now.”