Posted: Thursday, April 15, 2010 12:00 PM
By MATEUSZ PERKOWSKI
A major global wine company is seeing shifts in the U.S. wine market even as overall sales remain stagnant.
Robert Sands, CEO of Constellation Brands, said the U.S. wine industry is facing a "good news/bad news" scenario due to changing consumer wine preferences.
"The good news is that consumers are continuing to trade up as a general proposition in wine," Sands said. "The bad is news is that's being fueled by some fairly heavy discounting of more expensive wines."
Reduced prices for premium wines have driven up sales in the category, but the discounts have eaten into profit margins, he said during a recent conference call with analysts.
Sands said he doesn't expect overall wine sales to rebound until the unemployment level falls.
"We're fairly cautious about projecting big improvements," he said, noting that revenues should remain stable.
"Given the economic trends, being flat to up is pretty good," Sands said.
Gains in "off-premise" wine sales -- through retail and grocery venues -- have been offset by the recession's negative impact "on-premise" sales in restaurants and bars, he said.
"We don't see that consumer behavior changing dramatically right now," Sands said.
The U.S. wine market shouldn't be upset by large 2009 production in California, the largest wine-producing state, he said.
In 2009, the state's winegrape crush topped 4 million tons for only the second time on record, according to the USDA's National Agricultural Statistics Service.
Before the harvest, however, the scales were tipping toward a slight shortage, Sands said.
"Even though the crop was big, we still end up in a pretty balanced state going forward," he said. "I certainly wouldn't characterize it as an oversupply."
Constellation sold about $4.2 billion worth of wine, beer and spirits in its most recent fiscal year, down from about $4.7 billion in fiscal 2009, according to filings with the U.S. Securities and Exchange Commission.
Due to cheaper raw materials, reduced administrative expenses, lower tax expenses and other factors, the company reported an increased profit, however.
Constellation earned $99 million in net income during fiscal 2010, compared to a loss of more than $300 million the prior fiscal year, according to SEC filings.
The firm also reduced its total liabilities, including debt and deferred expenses, from roughly $6 billion to $5.5 billion.
In recent years, the firm had to "write down" the value of previous acquisitions by more than $1 billion, essentially acknowledging that it overpaid for those businesses.
Constellation has sold off much of its spirits business and consolidated the remaining brands into its wine operation, said Robert Ryder, the company's chief financial officer.
"This also represents our next logical business phase as we move beyond a previously decentralized organization, which had been very focused on acquisitions, to a more centralized organization more focused on profitable, organic sales growth," he said.
Constellation's wine brands include Robert Mondavi, Hardys, Clos du Bois, Blackstone, Estancia, Ravenswood, Jackson-Triggs, Inniskillin, Kim Crawford, and Nobilo.