Thursday, July 2, 2015

Constellation bets $315 million that vineyards don't matter in wine

Sweet-tasting Meiomi has rapidly become one of America's favorite beverages with "Pinot Noir" on the label. More than 7 million bottles were sold in 2014. As the grapes are bought relatively cheaply  all over coastal California, and the wine sells for $20 a bottle, it's clearly a nicely profitable item.

That's why Constellation bought Meiomi this week. But is a wine brand, by itself, with no other assets -- no vineyards, no winery -- really worth $315 million?

Are American wine drinkers really that stupid?

For a little perspective, last month The Wine Group bought Benziger for $90 million. Benziger makes only about 20% as much wine as Meiomi, but the purchase came with two wineries and an 85-acre estate vineyard. The Wine Group thinks Sonoma County vineyards are valuable.

In May, Gallo spent an undisclosed amount to buy 642 acres of vineyards in Napa Valley, and two months earlier Gallo bought J Vineyards & Winery, which came with 300 acres of vineyards in Sonoma County. Gallo thinks Napa and Sonoma vineyards are valuable. Jackson Family Wines is buying vineyards all over Oregon because it thinks Oregon Pinot Noir is valuable.

Meanwhile, Constellation thinks Americans don't care where their wines come from. And in fact, Constellation plans to make Meiomi at different wine factories all over California.

Constellation's directors are not stupid, or bad businessmen. Its stock is up about 40% over the last 7 months, and that has not been achieved by farming.



Gallo, The Wine Group and Jackson Family Wines are privately held. Gallo, for all its enormity, is a family business. The Gallos can take the long view. Constellation is publicly held. It exists to do what American businesses do: find a brand that's popular, scale up its production until it's omnipresent, milk it for all it's worth, and concurrently develop the Next Big Thing for when Americans figure out that the previous hot brand is just generic crap in a cool bottle.

When you look at that model, Meiomi is a perfect match, because it's already generic crap in a cool bottle. Wine lovers think Pinot Noir reflects terroir. Haha, wine lovers, you're so 20th century.

From the Meiomi website.
Meiomi is, according to its website, "Made with love to be shared with love." Sure, the grapes come from vineyards, and "all have been chosen for their unique aromas, flavors and textures." None of them are named.

But Meiomi drinkers don't care. The label says "Pinot Noir," the wine is noticeably sweet, and they're not fussy old enophile types.

No sarcasm here: you have to hand it to the Wagner family for figuring out American tastes. Caymus Conundrum is sweet and it's hugely popular. People go broke making wine they love that consumers don't. I haven't met a wine professional who likes Meiomi, but I've had a number of ordinary people tell me that they love it, and ordinary people buy a lot of wine.

Moreover, to give credit to the Wagners, if Meiomi tasted bad, it wouldn't work. It's not to my taste, but if you like sweet reds, it's fine. Can Constellation maintain its adequacy while increasing the production? That's more challenging than it seems. Gallo can easily make two million cases of its similar Apothic Red because it can use any grape. But Meiomi will lose a lot of its luster if it can't be called Pinot Noir.

Constellation will be scouring the market to mop up as much Pinot as it can. The residual sugar in the wine can cover up a lot of faults, and Constellation can use 25% Syrah or Zinfandel to fill out the wine, but 75% of, say, 25 million bottles is still a lot of Pinot Noir. And remember, it's not as if Constellation acquired any vineyards in the deal to provide supplies. I find it hard to believe Constellation will be able to satisfy its shareholders' thirst for growth of the brand without a noticeable decline in quality.

It's hard for me to see this purchase as anything other than a $315 million bet, by a smart, publicly traded American wine company. And it's not just a bet that vineyards don't matter: it's a bet that American wine drinkers are stupid.

Follow me on Twitter: @wblakegray and like The Gray Report on Facebook.

15 comments:

Larry Brooks said...

Wow, nice job, Blake. I couldn't have said it better myself. But, or course if I had said it people would have thought, "sour grapes"

W. Blake Gray said...

Thanks Larry. I've noticed this since "Sideways," and it hasn't gone away: People want to drink something called "Pinot Noir," and in many cases they're happy if it tastes like what they already like rather than actual Pinot Noir. I'd rather drink your Pinot, but that's just me.

Justin said...

They'll probably take the appellation off entirely, and no one will notice as the wine becomes primarily Chilean Pinot Noir blended with some Central Valley Zinfandel for 'flavor'.

tom said...

Americans always talk dry, and they always drink sweet. BTW, I'm guessing there is a good shot of Syrah in that wine!

Todd Alexander said...

I love the wine snobbery here! Why is this a surprise. Americans drink sweet. Fine, Constellation bought a brand. Consumers buy brands. Whether the grapes come from Australia, Chile, or the central coast consumers are buying Meomi in cases why you guys are trying to figure out why they aren't buying terroir driven wines. Meomi will eventually make a zin, a red blend, a white blend, a cab, and a merlot and a sparkling and they will all sell and no one will give a rat's ass where the grapes comes from if THEY think it tastes good. It's called business. Meomi uses sugar. Paul Hobbs uses ratings. The game is the same.

Erika Szymanski said...

What Larry, Justin, and Tom said, in that order.

jesus hernandez said...

"murica for ya

Andrew Walter said...

A poster on Matt Kramers blog said he tested the 13 Melomi and got a residual sugar of 6.9 g/l (dry is < 0.5 to 1 g/liter). Thats not sweet...thats syrup. Amazing......

Big Valley WM said...

Well said Blake! I foresee another "crash and burn" brand in the making. They paid $45M for Rex Goliath, and now it's a $4.99/bottle wine. Very sad... very sad!

Unknown said...

Wow hard to keep up lately. Last I read Meiomi was the centerpiece of the younger Wagner's Cooper Cane thing.

Think you're being too harsh on the wine. It's a bit syrupy for me, but enjoyable and incredibly consistent. Nice intro to the Belle Glos vineyard wines. Don't we want more people drinking wine?

Seems like a very smart sell by Wagners. I do agree with you that the quality -- if that's the right word, since you think it's crap now -- can be maintained with greatly increased production.

Unknown said...

BTW -- Chris Parente here, didn't mean to be unknown. Very difficult to leave comment.

Glenn Proctor - Puccioni Vineyards said...

Blake - I think that you are being unfair in your characterization of both Constellation and Meiomi. It is too simple and easy for you to make these "conclusions". I think that your tag line that vyds dont matter may not be accurate. Meomi has done a good job of working with growers developing long term contracts and relationships to make sure they have the quality vineyards that meet their supply needs. How is that not valuing vyds? Benziger is a great brand and the family behind it has been some of the best people in this industry - but 85 acres in reality is not much acreage given their volume needs. Many wineries rely on quality grower relationships to grow and develop their brands. I dont think you need to own "all your vineyards" to necessarily make quality wine. Your predictions of the future may or may not occur - but I think you need to be careful before you say "vyds dont matter". Just my opnion.

Wine Life Radio said...

Before anyone opens a winery, plants a vineyard, makes wine etc etc... they should work in RETAIL for a minimum of one year and understand the consumer.. Listen Listen Listen Listen and then get in the wine business or maybe not. The young Wagner obviously understood what the consumer wanted and wants. Men, Women, Grandmas and Grandpas love Sweet!

Great article as usual Blake !

Cheers, Keith Miller / The Winery Group

Bob Henry said...

Constellation Brands is swimming in profits based on its ownership of Corona Beer -- not from selling wines or spirits.

"Will the Corona Flow Fast Enough to Meet U.S. Demand?"

Link: http://www.wsj.com/articles/will-the-corona-flow-fast-enough-to-meet-u-s-demand-1434414150

Excerpt:

"Constellation’s brands, which include Corona, Modelo Especial and Pacifico, have grown at retail by 12% over the past year -- much faster than the industry’s 0.4% for the 52-week period through May 16, according to U.S. market research data from Nielsen cited by Citi.

"That’s pretty good for a company that wasn’t even trying to be a beer company. Until 2013, Constellation was just an obscure winemaker with $2.8 billion in sales and a toehold in the beer business. It made Robert Mondavi and Clos du Bois and sold Corona in the U.S. through a joint venture called Crown Imports LLC.

"Initially, AB InBev struck a deal to sell Constellation the 10-year rights to Modelo’s U.S. importing business. After regulators intervened, Constellation received a bigger windfall—the Nava Brewery, 10 beer brands and rights to peddle Modelo beers in the U.S. The assets were valued at $5.3 billion.

"Overnight, Constellation became the U.S.’s third-largest beer company by volume.

“'I never saw that coming,' said Bill Hackett, president of Constellation’s beer division.

"Since that deal, Constellation’s market cap has more than doubled to $22.79 billion from $10.43 billion.

"Constellation’s annual sales have increased to $6.03 billion since 2013, with beer contributing 53% of sales. The beer division’s operating profit rose to $1.02 billion from $448 million since 2013, dwarfing operating profit of $674.3 million from wine and spirits."

-- AND --

"Constellation Brands Raises Outlook for the Year on Sales of Mexican Beer"

Link: http://www.wsj.com/articles/profits-rise-at-constellation-brands-propelled-by-beer-sales-1435753715

Excerpt:

"The alcoholic-beverage company also announced a $315 million deal to buy the California wine brand Meiomi. The brand generated net sales of $65 million last year on about 600,000 cases of wine, up from 60,000 cases in 2010. Constellation said it expects the brand to add three cents to four cents per share to earnings this year.

"[Constellation Chief Executive Rob Sands] . . . described the brand’s signature Pinot Noir, which sells for about $25, as a 'heavier and fuller bodied wine than the typical California Pinot Noir.' Meiomi wines are made from bulk wine it purchases from Californian vineyards, which the company said creates operational synergies in areas such as bottling with Constellation’s portfolio of wines, which includes Robert Mondavi and Clos du Bois. The company said the deal was financed with credit."

Mauricio said...

All the Broncos, constellations, Diageos, etc... are here to introduce wines to new wine drinkers, they are helping the industry by helping to increase the wine drinking population with their $5/bottle wines. We are here to educate those new drinkers so they can learn to appreciate the $20/bottle, the $40/bottle and the $60/bottle wines.

I also agree, I have walk the vineyards that make the Fetzers, constellations and Bronco wines and I can tell you, Vineyards really don't matter to them but we are here to tell those new and no so new wine drinkers that it only gets better after Meo-mi...
I was once told by a former Constellation manager that (quote) people ARE stupid, they don't know anything about wine and they will buy wherever crap you make. Point made.