What is the best model for the wine business?

Thursday, 5. April 2018 - 14:45

Over the last few weeks, some 400 wine producers, more than 2,500 employees and franchisees and numerous other creditors have been biting their nails while waiting to discover the fate of Britain’s biggest wine distributor, Conviviality. For those who have not been following this story, it concerns a publicly-owned giant that has speedily grown by acquisition to make revenues in 2017 of over £1.2bn ($1.7bn). Its empire includes some 700 shops - under the Bargain Booze and Wine Rack brands - and wholesale distributers, including Matthew Clark, Bibendum, Catalyst PLB, and Walker Wodehouse. To put it in perspective, Conviviality’s 2017 turnover was heading for three times that of the nearly 900 independent retailers and retailer/wholesalers who often seem to monopolise favourable media coverage of the UK wine scene.

After a series of profit warnings, however, and the revelation of an unexpected tax bill, and some hasty analysis by top accountants, it was announced that the business needed to find £125m if it were to survive.

As I write this, the wholesale parts of the company have been rescued by cider and beer producers C&C and AB InBev, and will continue, at least for the moment, as a single going concern. The fate of the shops is still uncertain. Conviviality will still be publicly owned – hardly surprisingly, given its size - but as part of a much broader, non wine-focused business.

Which brings me to the question that lies at the heart of this column: is public ownership really appropriate for the wine industry?

The demands of public ownership

The first person to suggest that maybe it is not, was Philip Bowman, chief executive of Allied Domecq which was, for a while, the second biggest booze business on the planet and one of the 100 most valuable companies on the London stock exchange. Best known for profitable spirits brands from Stolichnaya vodka to Tia Maria, among others, Allied Domecq also owned New Zealand’s and Spain’s biggest wine producers - Montana and Bodegas y Bebidas, along with a few other vinous bits and pieces.

Spirits, Bowman explained are perfectly suited to public ownership, but shareholders looking for a regular return on their money struggle with the long-term investment associated with wine, and harvests whose size and quality are impossible to predict. Quarterly results and wine just don’t mix very well. With vodka, he pointed out, producers can simply open or close the tap according to the strength of demand. And if consumers wanted it to be flavoured with wortleberries, well, there was no reason why you couldn’t give that to them. In December last year, C&C illustrated this freedom perfectly by launching a ‘dark fruits’ version of its Magners cider brand.

A couple of years after that conversation, when Constellation, Fortune Brands, Brown Forman and Pernod Ricard were all in competition to acquire all or parts of Allied Domecq, I had another interesting chat - this time with Paul Walsh, the chief executive of Diageo which had an option to buy Montana Wines (since rebranded as Brancott Estate). Walsh, one of the most successful drinks brand-builders of his generation wondered aloud about the appeal of the New Zealand brand and, by extension, of most wines. The margins to be made from spirits, he said, were much more interesting.

Diageo not only walked away from Montana on that occasion, it subsequently gave up on wine completely. Pernod Ricard, the successful bidder for Allied Domecq still owns Jacobs Creek, Brancott Estate and Campo Viejo, but my understanding is that they would not be averse to selling all of their wine assets to focus on spirits.

Some publicly owned wine businesses do well of course, but usually for reasons of their own. LVMH, for example, unashamedly treats its vinous brands in the same way as most of its other luxury goods. Constellation, still believes in wine, but not in the price-conscious British wine market (it sold off its UK-focused brands). Its near 50% share price growth last year was largely attributed to its beer and craft whiskey brands and to its high-margin ‘masstige’ premium wine brands Meiomi and The Prisoner.

After some bumpy times, Treasury Wine Estates (TWE) now looks like a successful, wine-focused, publicly traded business, thanks to its increased targeting of a very specific part of the market. As its January 2018 interim report states, “Whilst Commercial wine continues to play an important role in TWE’s portfolio… actions to increase access to Masstige and Luxury wine, are now facilitating the exit from lower margin Commercial volume, without materially impacting profit or profitability.” 

When it comes to distribution, two of the most successful quoted businesses, Australia’s Woolworths - owners of the Dan Murphy’s and BWS chains, Langton’s auctioneers and the Chinese wholesalers Summergate - and the Netherland’s Ahold, with its Gall & Gall chain, both sell wine alongside a wide range of other groceries.

Understanding the business

Private ownership by partnerships and families comes with its own challenges, of course, ranging from inheritance taxes to sibling rivalry and the willingness or ability of subsequent generations to take the helm. But at least there’s a likelihood of the stakeholders having a basic understanding of the nature of the business they are in. Unlike one so-called industry ‘analyst’ who, during a conference call with an Australian company, asked which time of the year the grapes needed to be harvested.

Setting aside cooperatives, the only other major option is private equity, the model that can, for example, be seen in operation at CHAMP, the Australian private equity owners of Accolade and brands including Hardy’s, Kumala and Echo Falls. Until today’s announcement of their sale to the Carlyle Group, a far larger US-based private equity company. At first glance, the short-term (usually five-to-seven-year) strategy associated with private equity might seem as ill-suited to wine as public ownership, but the expertise and focus that are its hallmarks have often proven fruitful in an industry that is not always skilled at managing its assets or its cashflow. In CHAMP’s case these skills led to a tripling of its money over the space of seven years.

I’ll take a closer look at how private equity works in the wine sector in another column, while ending this one with my best wishes for everyone affected by the Conviviality saga – and those retail franchisees and employees who are still waiting to learn of their fate.
Robert Joseph