Two wine behemoths are expanding, but doing so in very different ways, according to W. Blake Gray.
Constellation and Gallo are the two largest wine companies in the world. Both built their empires on cheap wine, and started moving upscale in the last 20 years, because that's where the future of wine is.
But their strategies are very different. Gallo, still a multi-generational family farming business, thinks like one: it's buying hundreds of acres of desirable vineyard land. Constellation is publicly traded, so it doesn't take a long-term, buy-and-hold view. Instead, it acts like a fashion house: it's spending hundreds of millions of dollars on nothing more than brand names.
The latest Constellation stunner came last week, as the company paid $285 million for The Prisoner, a wine brand with no connection to any place or type of grape. Constellation is betting that The Prisoner is like J. Crew or Commes des Garcons– do you know where they are based or where any of their material comes from? Consumers don't care, they just like the image, and they pay a premium for it.
This is the second sale of The Prisoner – just the brand, no vineyards, no buildings – in six years. The brand was created in 1998 by Orin Swift's Dave Phinney and began as a Zinfandel-based, high-alcohol, low-tannin, slightly sweet blend. In 2010 the founders sold the brand to Huneeus Vintners for $40 million. Agustin Huneeus just turned one of the greatest short-term profits in the history of the alcohol industry.
Last year, Constellation paid $315 million for Meiomi. That purchase included no vineyards, no buildings, simply a brand known for a sweet, and very popular, Pinot Noir – so popular that it has been chosen the No. 1 wine by the glass in US restaurants the past two years in a row, over the gnashing teeth of America's sommeliers. The first sentence on Constellation's new Meiomi homepage starts, "Meiomi is a high style wine ..." What the hell does that mean? It may not mean anything to wine lovers, but a Commes des Garcons buyer gets it.
Wine lovers might mock Meiomi and The Prisoner, but today that feels like fashion snobbery from somebody who knits their own sweaters. Constellation's net sales last year were up 9 percent and operating income was up 18 percent. If the Meiomi deal hadn't gone well, Constellation wouldn't be doubling down.
This doesn't mean Gallo's strategy is wrong. Buying vineyards and wineries is the mainstream approach to the wine business, and you see it all over the world. You don't see Chinese businessmen buying French names: they want the mansion and the Cabernet vines. Jackson Family Wines is trying to cover more of Oregon than blackberries. Chateau Ste. Michelle CEO Ted Baseler said last week he wants to see four times as many vines in Washington state as there are now.
But the Constellation path is more seductive for making money. You buy juice from anywhere, slap a bondage drawing on the bottle, and charge $40 for it. Why go to all the work of pruning and sweating through different weather every year? As sophisticated as wine technology is now, the right additives and treatments can transform any decent-quality grapes into a house style.
Constellation's press release about the purchase said The Prisoner "features enticing aromas of bing cherry, espresso, and roasted fig. Persistent flavors of ripe raspberry, pomegranate and wild berry linger harmoniously for a smooth and luscious finish." (If the wine critic thing doesn't work out, Antonio Galloni would appear to have a future writing press releases.) You'll note there isn't anything in there about "in a good vintage." Whether it's a rainy and cool 2011 (and so far 2016) or a hot and dry 2012, the wine is going to smell like coffee, while tasting like pie.
It's the longtime strategy of spirits companies: create a reliable product that always tastes the same, then sell it by the millions. Yet when actual spirits companies (not to mention Coca-Cola) bought big into the wine industry in the 1970s, they couldn't pull it off. Owning vineyards produced too many variables. Brands that are not tied to variables are easier to sell millions of bottles of without anyone asking "what vintage is it?"
The Prisoner is even more desirable than Meiomi because Meiomi is nominally Pinot Noir, which means at least 75 percent of the grapes are supposed to be Pinot. Nobody knows or cares what's in The Prisoner. It's not THE future of the wine world, but it is one future, and it's already a valuable one. Can The Prisoner t-shirts and knit caps be far behind?