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Slowing Sales Focus Eyes on Gallo-Constellation Deal

by Peter Mitham
September 16, 2019
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Sonoma, Calif. -- Wine sales in the first six months of 2019 point to a flattening of growth, but opportunities remain for wineries willing to work with the changing environment.

“We’ve been seeing a flattening of the wine business,” said Jon Moramarco, editor of the Gomberg Fredrikson Report and managing partner of market research firm bw166, during a Webinar Sep. 19 that reviewed sales data from the first six months of 2019.

Growth in wine consumption is now keeping pace with growth of the legal drinking age population. It’s not outpacing it, and is also vulnerable to the cost-consciousness younger drinkers have been exhibiting. Wine, he noted, costs an average of $2.20 per serving, almost double the cost of beer and spirits, which average $1.30.

“Wine unfortunately has lost a little bit of share, it’s now at 17.6% share,” Moramarco said. “The reality is there’s not as much growth, so everybody has to work a little harder.”

California wineries in particular have to hustle. While a small-volume region such as Oregon is leading growth, with case sales rising 16% in the first six months of this year versus a year ago, California lost ground despite case volumes being virtually even with last year.

It’s a similar story within California itself: the state’s smallest producers notched growth of 2% to 34.2 million cases in the first half of the year, while the seven largest producers saw sales drop nearly 2% to 92 million cases.

“There’s still growth for the smaller companies, but … it’s becoming a bit more competitive out there,” Moramarco said.

Delicato Family Vineyards and the Wine Group saw the strongest growth in the period, at 6% each, while Constellation saw case shipments drop more than 8%.

Drawing on conversations with those in the industry, he said the weak performance by Constellation reflects the impact of a regulatory review by the Federal Trade Commission of a proposed sale of 30 lower-priced brands to E. & J. Gallo Winery. The delay has given wholesalers more time to stew.

“It’s not been, necessarily, a well-received transaction. Wholesalers look at this as they’re likely going to lose brands, and so it looks like they’ve lost attention on some brands,” Moramarco said. “It’s been hurting [Constellation’s] shipments over the last six months.”

The deal was set to close by the end of May, and no statement was issued prior to the end of Constellation’s latest fiscal quarter at the end of August. Moramarco now anticipates approval by the end of year, a decision that will transform the landscape. Gallo will move from holdings 18% of the market to nearly 24% by volume, while Constellation will drop from more than 10% of the market to just under 5%.

The deal should be “a very viable and prosperous venture” for Gallo, Moramarco said, while it will poise Constellation to achieve stronger growth that will appeal to shareholders and the public markets.

However, it will fall from being one of California’s top three producers into the category of smaller wineries that’s enjoying greater growth. The result will be a sharper distinction between the top five producers and everybody else.

The shift will ultimately underscore the big picture Moramarco described as facing the wine industry.
Change is afoot, competition is fierce, but there are still opportunities.

“It’s a more challenging market, but people are finding ways to win, by different manners, with different brands,” he said. In the case of Constellation, shedding 30 brands is a move that he believes, “should come out better for them.”

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