Constellation Brands, relatively unknown, is now the world's largest wine producer. Here's how they did it.
By Daniel McGinn and Nadine Joseph
Newsweek

Feb. 20, 2006 issue - It's a rainy day in wine country as a team of laborers works its way through the lush vineyards at the Robert Mondavi Winery in Napa, Calif. Carefully they prune the vines, getting the plants ready to produce the grapes whose juice will yield $125 bottles of Mondavi Cabernet Sauvignon Reserve. Inside the Mission-style buildings that comprise one of the region's most celebrated wineries, some things remain unchanged. Portraits of founder Robert Mondavi, now 92, look down on visitors who stroll toward the tasting room. But throughout the establishment, there's a newfound sense of efficiency. Those vine pruners are subcontractors, who'll finish the job more quickly than the employees who used to do it. The winery once produced three MerlotsÑnow it makes just one. Not long ago Mondavi was an undercapitalized mess. But now, says Jean-Michel Valette, the Harvard M.B.A. and former investment banker who is Mondavi's chairman, "it's a more centered, calmer place, brimming with optimism."

Credit for that renewed vigor goes to its new corporate parent. Mondavi's luxury vintages have little in common with Richards Wild Irish Rose, the $2.79-a-bottle beverage that's usually chugged out of paper bags by folks who aren't particularly interested in noting the hints of toasted vanilla. But today these wildly disparate beverages have a common owner: Constellation Brands, which paid $1 billion to acquire Mondavi just over a year ago. The move was the latest in a decade-long acquisition binge that's turned the largely unknown beverage company into the world's largest wine producer.

Last fall the company launched a hostile bid for Vincor, a big Canadian wine company. Although that move failed, Constellation CEO Richard Sands says that when it comes to growth, this party is just getting started. Constellation's portfolio includes several brands of vodka, gin and tequila and the rights to import the Mexican beer Corona to the United States. But lately most of the growth has come from additions to its wine portfolio, which accounts for more than half of its revenue. Its wine holdings now include everything from low-priced Almaden to niche wines like Manischewitz to high-end quaffs like the $150-a-bottle Opus One. Company revenue now exceeds $5 billion a year ahead of second-place E. & J. Gallo WineryÑand Wall Street has been impressed. "In five short years, Constellation has gone from no presence to the global leader in premium wine," says analyst Tim Ramey of D.A. Davidson & Co.

It's been a ripe time for a grape grab. Today one in seven American adults regularly drinks wine, and per-capita annual consumption is up from 1.05 gallons in 1970 to 2.77 gallons today, according to Merrill Research & Associates. Wander through a bar nowadays and you'll find plenty of twentysomethings, once a reliable beer-drinking demographic, instead sipping pinot noir. And while value wines like Paul Masson and Taylor (both Constellation holdings) continue to sell, pricey vino has been the fastest seller lately. In the $15-and-up ultrapremium category, sales grew 19 percent last year.

Constellation's roots lie firmly in the bargain bin. Founder Marvin Sands launched it 60 years ago in a former sauerkraut factory in Canandaigua, N.Y. The business struggled until 1954, when he introduced Richards Wild Irish Rose, an inexpensive dessert wine with an alcohol content of 18 percent (and named after his baby son, now the CEO). The drink fueled the company for decades; even by the mid-1980s, it constituted 85 percent of revenues. It's still produced, along with cheap sparkling wine and other nonprestigious beverages, in the original factory, which sits beside the railroad tracks without a vineyard in sight. Wine critic Robert Parker might shudder, but this plantÑwhere every bottle takes a screw topÑchurns out 9 million cases of wine each year, providing a reliable stream of cash. "We're not sexy... but we pay the bills," says East Coast operations VP Peter Lijewski.

Constellation might have remained a small, regional wine producer if not for a marketing debacle that put the company into crisis. In 1984, wine coolers became hot, so the company launched its own Sun Country coolers. The new brand took off: within six months, wine coolers had doubled the company's revenues to $175 million a year. But soon afterward Gallo and Seagrams launched their own wine coolers, backed by huge ad budgets. Constellation bought its own ads, featuring Ringo Starr. Within three years the cooler market had cratered, Constellation dipped into the red and its managers decided to let Sun Country die off. But rather than watch revenue fall by half, they began looking for new products to fill the gap. "Today's [growth] philosophy definitely evolved out of the hardship of the Sun Country years," says Richard Sands.

By the 1990s Constellation was knocking down acquisitions faster than a frat boy does shots on spring break. Soon it owned the importing rights to Corona beer, various brands of liquor and wineries including Taylor and Inglenook. Although Constellation typically doesn't tinker with its acquisitions' wine-making operations, its size brings advantages, like cost savings on bottles and better treatment by distributors. "There's plenty of backroom kind of stuff that we can bring to the party," says Richard's brother Robert, the chief operating officer. By the mid-'90s Constellation was a big player in low-priced wines, but it could see that drinkers were starting to migrate upmarket. Constellation considered launching its own high-end brands but worried that as a mass-market player, it lacked credibility, the same way Anheuser-Busch and Miller can't seem to launch a credible microbrew.

The wine market, however, is highly fragmented, which brings opportunities. In soft drinks, the top few players control 70 percent of worldwide market share, according to Robert Nicholson, president of International Wine Associates. In distilled spirits, the top players own 50 percent, and in beer, 26 percent. But the top five wine makers have just 6 percent of global volume. That means there are plenty of small wineries that come up for grabs. Constellation, which has six employees focused on acquisitions, has become adept at sizing up targets.

In 1999, it bought Franciscan and Simi, its first high-end wineries. Its big opportunity came in 2004. Mondavi, a celebrated family-run winery, had been struggling for years. Its board planned to sell off some of its brands to shore up its finances. Instead, Constellation bought the whole company.

Some still see it as a dark day. "It's yet another nail in the coffin of family wineries," says George Rose, a VP at Kendall-Jackson in the Sonoma Valley. Outsiders worried the new owners would try to boost production at Mondavi or interfere with esteemed winemaker Genevieve Janssens. Happily, both insiders and outsiders say that hasn't happened. Instead, the new owners lowered production by 10 percent to focus on quality. Today, Mondavi's high-end wines are sold by Constellation's elite Icon Estates sales force, instead of alongside lower-priced Woodbridge. "There is a continued commitment to excellence," says Janssens, who recently submitted a 10-year wish list of vineyard improvements, which Constellation appears likely to approve in its entirety. "Constellation has done a great job integrating acquisitions while maintaining the culture of each brand," says Vic Motto, chairman of Global Wine Partners, an investment firm.

In other industries, the emergence of big corporate players has imperiled the small fry. Consider book retailing, in which independent bookstores are endangered species in the face of Amazon, Borders and Barnes & Noble. In Napa, the sense is this won't happen. "The Valley has become more corporate," says Jack Cakebread, CEO of Cakebread Cellars, which produces 95,000 cases of wine annually. But among wine consumers, who love to find new brands, there's plenty of demand for wine from small producers.

Inside Constellation headquarters, executives emphasize that acquisitions aren't their only source of growth. Even if you exclude new brands like Mondavi and Ruffino, sales of existing brands grew 7 percent last quarter. Talking up a company's ability to achieve so-called organic growth is a common refrain these days. The rap against growth by acquisition is that it can be risky. Sometimes the buyer and seller don't blend together as well as dealmakers hope (see AOL Time Warner), or that buyers may overpay (see, er, AOL Time Warner). For years, General Electric has bought and sold companies at a fast clip, but lately chairman Jeff Immelt has been talking up his desire to boost revenues through innovation and smarter selling, rather than M&A.

To help Constellation managers find the hot spots for growth in the wine market, last year it interviewed 3,500 consumers about their wine purchases, and used the data to segment the market into six groups, including such categories as "Satisfied Sippers" and "Overwhelmed." The data are helping them to make sure they have wines that appeal to every kind of consumer, and to launch new brands, like 3 Blind Moose, to appeal to the faster-growing segments. Over time, though, CEO Sands, who earned a Ph.D. in social psychology before joining the family firm, expects more consumers to keep trading up. "We all want to be betterÑfirst you want to be better than your parents... to have better taste, to have more money, to be more sophisticated," he says, launching into a theory of wine-buying that sounds a bit Freudian. And so long as Americans have dates or dinner guests to impress with just the right bottle, Sands and his team will stand ready to uncork it.



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