California Wine Players See More Consolidation Ahead
January 18, 2024There was a flurry of activity in California wine’s M&A sector to close out 2023, with prominent labels like Daou, Sonoma-Cutrer, and Rombauer changing hands in the second half of the year. More dealmaking could follow this year, as winemakers navigate a tough market in which competition continues to intensify.
“Over the last ten years, the wine industry has witnessed changes at a pace unparalleled in our previous 90 years, and we anticipate this rapid evolution to continue,” says Chris Indelicato, president and CEO of Delicato Family Wines. He says the “call for efficiency” in the industry is undeniable. “The trend towards consolidation among wineries brings with it the advantage of amalgamating capital resources,” he notes.
Joe Wagner, founder of Copper Cane Wines & Spirits, points to the current struggles some winery owners face with regard to financing as fueling dealmaking. “Most small family wineries have an operating line of credit,” he notes. “If all of a sudden they’re paying 8% or 9% interest, it’s really harmful. And I know the banks are getting very skeptical about the smaller people in the wine business. They’re tightening their belts during a time when the wineries really need more of a collaboration with the banks. I see that as pushing people to consider a possible sale.”
While rising costs hit hard at any level, it’s the lower priced wines that may be most vulnerable. “Making margins on lower priced wines is really difficult to do,” notes Wente Vineyards CEO Tyson Overton. “The cost of glass, labor, cardboard, fuel to transport it, all of those things really eat into profit. If you’re going to make profit at that low end and still deliver a product that has some quality to it…the trends are really tough below $11 a bottle.”
Meanwhile, large and mid-sized wine suppliers continue to add scale to match the clout of their distributors. “As distributors get bigger, the suppliers then need to get proportionally bigger to maintain their relevance in the distributor’s portfolio,” says Peter Mondavi, Jr., co-proprietor of Napa’s Charles Krug Winery. “This trend is just further bifurcating our industry where the big get bigger and rely almost exclusively on the distribution network, the small remain small and rely largely on DTC, and those in the middle have a patchwork where they may struggle being in a large house, or rely on a patchwork of small, specialized distributors that have limited reach in a market, and of course DTC.”
Issues of succession also loom large in the M&A landscape. In numerous instances, there are “situations where the next generation of family-owned wineries don’t want to follow in their parents or grandparents’ footsteps,” says Jackson Family Wines president and CEO Rick Tigner. “All of this leads us to believe that consolidation will continue as smaller sized wineries sell to larger wine companies that have infrastructure and resources to maximize sales channels and build more consumer awareness.”
Wagner adds that the onus is on the more powerful small and medium-sized independent wineries to ensure ongoing vitality. Successful independent brands, he says, “have to come with a great story and great marketing. The quality needs to be at the highest level, and your pricing needs to be correct.”—Carol Ward
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