Times are tough in the industry,so the big players are growing bygobbling up smaller wineries

By TERRY MCCARTHY NAPA

Jon Moramarco has vvine in his blood.

His ancestors made wine for eight generations in

southern Italy, and after his grandfather Giuseppe

emigrated to the U.S., he bought a winery in Los

Angeles from the Jesuits during Prohibition. Jon's

father was an expert in vine management-the

pruning, spacing, grape thinning and irrigating that influence the quality of thegrapes and the taste of the wine. As a young boy, Jon cleared weeds between thevines. He later went to work at the Callaway winery as a "cellar rat, " cleaning

tanks, moving barrels, stacking bottles and sometimes working 19-hr. days dur-ing the busy crush season. "By high school," he recalls, "I swore I was going toget out of the wine business."

But he still had the stuff in his veins. After earning a degree at the world-famous school of viticulture at the University of California at Davis, and afterspending 20 years learning every aspect of the industry, Moramarco, 45, is pres-ident and CEO of Canandaigua Wine. With sales of $863 million for its most re-cent fiscal year, Canandaigua is the second biggest wine company in the world,

~ Bargains on the Best Costco's winebuyer David Andrew, at a distribution centerin Tumwater, Wash. , helps the warehousegiant lead the U.S. in wine retailing

expensive wines with higher profit margins.Understand that when Moramarco talksabout moving upmarket, he doesn't mean toOpus One at $150 a bottle. He can make lotsof money just by shifting more of his pro-duction-and more of his customers-from1.5-Ljugs of generic red that sell for $5 retailto smaller bottles of $7 Merlot.

Around the world and especially in theU.S., companies with cash are snapping upwineries that are struggling, and everyone istrying to improve quality so that the winescan command higher prices. For the con-

~

Grape Slushi'"~'(;

...Buying in BulkMore than 500 tankslike these store55 million gallons ofwine at Mission Bell

after E.&J. Gallo Winery, with a reported$1.4 billion in annual sales. But Canandaigua{named after the town in upstate New Yorkwhere the company was founded in 1945), aunit of publicly traded Constellation Brands,is expanding more aggressively than its com-petitors, with profits increasing 134% from1999 to 2001. Many of his peers considerMorarnarco the savviest operator in atradition-bound industry that is rapidly con-solidating under the pressure of changingtastes and global competition. "Moramarcois one of the brightest guys in the industry.He is one of the real movers," says JohnGillespie, president of the Wine MarketCouncil, a promotional body for the industry.

Morarnarco works long hours directinga company that sold 45 million cases of winelast year. But as the wine industry has be-come more corporate-60% of u.s. wine isproduced by the top five companies-he nolonger has much time to stroll through vine-yards or sample vintages from the cellar.

On a recent Sunday morning he pausedbriefly in the Red Carpet Lounge at SanFrancisco International Airport before hop-ping a plane for Chicago and the first in aweek of meetings that would also take him toBentonville, Ark. (home of Wal-Mart, a bigcustomer), and Rochester, N.Y. (headquar-ters of Constellation).Moramarco lives in a spa-cious house in the sere hillsabove Santa Rosa, north ofSan Francisco. But hespends three weeks out offour on the road. Mora-marco is always in a huny:to catch planes, hit deliv-ery schedules, grow thebusiness. 'The goal is todouble the size of the com-pany by revenue every fiveyears," he says, his eyesflashing to check the time.

Times are tough formost in the wine industrytoday-which creates op-portunities for Moramarcoand other executives ofbig wine companies.As vineyards expand in the U.S. and aroundthe world, there is an oversupply of grapes,which depresses prices for growers but offersa boon to companies like Canandaigua,

AlO TIME GLOBAL BUSINESS OCTOBER 28.2002

At Mission Bell, themakers of Almadenand Inglenookbrands, crushedgrapes are pouredinto metal containers

The Wine Group, third largest wine com-pany in the U.S., acquired Glen Ellen andM.G. Vallejo in May from Diageo, a beveragegroup based in London. Until then the WineGroup had relied on its Franzia wine-in-a-box brand, which sold in high volume but ata low profit margin. Diageo added Sterling

Vineyards-a Napa property that is more Up"market than Glen Ellen or M.G. Vallejo-with its purchase of Seagrams this year.

Foster's Group of Australia boughtNapa-based Beringer Blass Wine Estatesin 2000 for $1.5 billion, and for the firsttime last year, the quintessential globalbeer company sold more wine ($1.04 bil-lion) than beer ($931.9 million). AlliedDomecq of Britain, which already ownedClos du Bois in Napa as well as wineries inArgentina and New Zealand, last Septem-ber paid $275 million for Spain's largestwine producer, Bodegas y Bebidas.

Canandaigua's parent, Constellation(which distributes Corona beer in the U.S. inpartnership with Gnlpo Modelo), has alsobeen on the acquisition trail. In 1999 it ac-quired Franciscan Estates in Napa, whosebottles sell for $20 and up. Franciscan addedRavenswood and Simi to its higher-end col-lection last year. Together they sold 2 mil-lion cases for $140 million in 2001. More ac-quisitions are likely for the Franciscan groupand Canandaigua. "We will look around theworld," says Constellation's CEO, RichardSands. " An Australian acquisition, maybe, or

Italian or Spanish."Canandaigua's brochures boast that the

company sells the equivalent of 1,479,452

AllTIME GLOBAL BUSINESS OCTOBER 28. 2002

sively. Four companies-SouthcorpWines, B.R.L. Hardy, Orlando Wyndham(owned since 1989 by Pernod Ricard) andBeringer Blass Wine Estates (Foster's)-now account for 74% of the wine export-ed from Down Under, according to Mac-quarie Resource Equities.

Much of that wine is coming to theU.S., where Australian imports increasedby 30% last year. In Britain too, Australianwine outsells French wine. Why? The AilS.,tralian wines offer better quality for themoney and are easier to understand. Totalwine exports from Australia jumped from

particularly in Napa, whose prestigiousname puts it on the wish list of every ambi-tious wine company in the world.

Clos do Val, a Napa winery set up byFrenchman Bernard Portet in 1972 and bestknown for its Cabemet Sauvignon, hired anewexecutive team last year to reposition itsbrand further upmarket. It will soon sell itstop Cabemet at $62 a bottle, up from $55.Several of its other wines will also have priceincreases. The wine labels will be re-designed, but the wine inside will remainthe same. "By not raising our prices in the1990s, we fell behind in positioning andrecognition," says DavidCampbell, the new CEO.

Another powerful force forconsolidation in the wine in-dustry comes from the arcanedistribution system for alcoholin the U .$., a legacy of the Pro-hibition era. By law, wil\emak-ers may not sell directly to re-tailers or restaurants but areforced to sell their goods towholesalers, who operateunder laws that vary widelyfrom state to state. As retailersconsolidate into large nationalchains, so do the distributors.For big producers, this is an ad-vantage: Diageo, the world'sbiggest alcohol-beverage com-pany, recently began reducingthe number of its distributorsin each state and persuadingeach to have a separate divisioncater exclusively to Diageo'sSterling and Beaulieu brands.

But consolidation amongdistributors is squeezing outthe medium-size producers,who make from 100,000 to1 million cases a year. Theycannot charge the premiums of the small,boutique wineries nor rely on private mail-ing lists for customers. Nor do they haveenough volume to get priority from distrib-utors. "In 1975 there were 45 wine whole-salers in California. Today there are threeleft, " says Carolyn Martini of Louis M.

Martini. "The middle category we are in" impossible to get distribution

out." This, Martini says, was thefamily sold out to Gal-

$98.7 million in 1990 to $1.01 billion in2001, powered by favorable exchange ratesand strong brand marketing. Like U.S.winemakers,the Australians sell wines thatare easily identifiable by the grape they aremade from-Shiraz, Sauvignon Blanc-asopposed to the confusing geographicalclassifications of French wines. "Brandsare the key," says David Scotland, presi-dent of Allied Domecq's wine division."New technologies have improved wine-making. ..the consistency of style buildstrust and thus brand equity." Consider Or-lando Wyndham's Jacob's Creek brands,which include Chardonnay and ShirazCabemet: they have been marketed heavi-ly, and sales have increased by 24% on av-erage for each of the past five years.

Although France still sells 40% of theworld's wine by volume and its most fa-mous Bordeaux are the most sought-afterwines, the French are losing ground.French winemakers, says Jean-MichelPeyronnet, editor of La Revue Vinicole In-ternationale, "simply didn't see the com-petition coming." Jacques Berthomeau,who heads a group of industry experts, is-sued a report in May in which he called fora simplification of wine classifications, va-rietallabeling and the promotion of recog-nizable brands.

Italy, once looked down upon for turn-ing out cheap table wine thatdidn't travel well, has beenquicker to catch on to thechanges in the wine industryby improving quality andlearning how to sell overseas.Says Francesco Trimani, own-er of Trimani, Rome's oldestwine store: "Before, big wine

producers bought grapesfrom small vintners. Now theyare acquiring vineyards sothey can control the quality ofproduction from the start."

He points to Marchesi deFrescobaldi-best known forits Tuscan red wines, such asNipozzano Chianti Rufina-which has acquired propertyin Friuli to make Sauvignon,Pinot Grigio and Ribolla Gial-la white wines. "The Italianshave figured it out-how tocreate tastes that suit theAmerican palate," says JohnFredrickson of Gomberg,Fredrickson & Associates, awine-industry consultancy inSan Francisco. In the U.S.

-market, Italian Pinot Grigiosrepresent the largest import category. Atthe higher end of the market, the new cat-egory of Super Tuscans-such as Tignanel-lo and Sassicaia-are commanding pricesof $80 a bottle and up.

Back at Canandaigua, Moramarco val-ues his Italian ancestry, but his businessmethods are all-American. The consolida-tion process, he says, is only beginning: "Itwon't be so apparent. You won't see abunch of different wineries closed down-just different corporate ownership." Askedwho might be next on the acquisition list,he smiles and says, " A lot of conversations

are going on." And he heads off to catch aplane. -;--With reporting by Maryann BirdlLondon, Usa C/ausenlMelbourne, AdamSmithlParis and Mimi MurphylRome

The consolidation trend is starting tooutside the U.S., although some-

.Europe has been slow to-

especially the

TIME GLOBAL BUSINESS OCTOBER 28. 2002 A1S