FIDUCIARIA COLMENA - FIDUCIARIA COLMENA S. A.

The period during which Europeans colonized much of the non-European world (about 1500–1800), variously called ‘‘the Age of Discovery’’ and ‘‘the Age of Sail,’’ saw important developments in the wine industry. From being concen- trated in Europe, wine production was gradually extended throughout the Ameri- cas from the early 1500s to the late 1700s and beyond toSouth Africa in the mid- 1600s,Australia in the late 1700s, and New Zealand in the mid-1800s. At the same time, new styles of wine and technologies of transportation were developed to allow for the more successful long-distance movement of wine.

Before this time, wine had been transported over extensive distances from vineyards to markets, sometimes overland, but generally by water. River and coastal shipping were less expensive than land and easier on barrels than carts with wooden or iron wheels traveling over unpaved roads. Wine traveled rivers from the Mediterranean to Russia, was shipped down the Rhine to the North Sea ports, and followed the coasts to the Baltic ports.

But there were constant problems of transportation, and the wine (which was frequently unstable and in any case was intended to last only a year) frequently reached its destination in poor condition. The most successful trading route was the substantial trafﬁc in wine fromBordeaux to England and northern Europe that began in the thirteenth century. Sailing ships could make the voyage from Bor- deaux to London in as short a time as a week, depending on weather conditions, but voyages much longer than that put wine at risk.

Various methods were used to slow the spoilage of wine. TheDutch, who were preeminent as shippers in the 1600s, burned sulfur in the barrels as a conserva- tion measure. But a more common solution was to fortify wine with brandy and thus raise its alcohol level and extend its longevity. Brandy itself entered the com- mercial mainstream of Europe in the 1500s, thanks to the spread of information ondistilling and the Dutch sponsorship of the brandy industry in the Charente region of westernFrance.

Among the most important newfortified wines were Sherry from the Jerez region of southernSpain and Port from the valley of the Douro in Portugal, both initially developed for the English market. Other fortified wines were produced on the islands of Sicily, Cyprus, and Madeira. The keeping properties of fortified wine were so impressive that when wine industries were developed in South Africa, Australia, and New Zealand, much of the early wine was fortified in the style of Sherry and Port.

Far from all wine was fortiﬁed, however, and where it could be safely transported, it was left unfortiﬁed. The important trade between Bordeaux and England continued through this period, although there were interruptions at times when war hampered trade. The scale of the Bordeaux trade was immense. It peaked in 1687, when 15,500 tuns, or nearly 18 million liters (the equivalent

of 2 million cases) of wine wereimported, enough for three and a half liters for each man, woman, and child in England.

England and northern Europe imported wine because they were climatically unsuited to extensive viticulture, but that was not so in many of the lands colonized by the European powers from the 1500s. Viticulture spread to these regions in a variety of ways. When New Spain (Mexico) was settled in the 1520s, Spanish colonists who received grants of land and slaves were required to plant vines. Apart from some northern areas and Baja California, however, Mexico and the rest of Central America proved inhospitable to grape growing. But as the Spanish armies swept through South America, the Jesuit missionaries who accompanied them identiﬁed suitable sites, and they successfully established vineyards in the territories that later became Peru,Chile, and Argentina.

This new colonial industry was opposed by wine producers in Spain, who sensed that they were losing considerable export possibilities. However, it proved impractical to ship wine across the Atlantic, and the wine often arrived spoiled. By the 1600s, a large wine industry in Peru, Chile, and Argentina (and a brandy industry in Peru) was supplying the Spanish and indigenous populations of Latin America with the bulk of their wine needs.

In the second half of the eighteenth century, Franciscan missionaries (who replaced the Jesuits when they were expelled from Mexico) began to establish missions and vineyards in the northern reaches ofCalifornia. It remained isolated and marginal until the population boom of the Gold Rush in the mid-1800s and the completion of the railroad to the West Coast of theUnited States.

The ﬁrst vines in the Dutch Cape Colony (South Africa) were planted in 1655 in order to provide wine for ships making the long voyage from the Netherlands to the Dutch East Indies around the southern tip of Africa. This early South African wine was consumed by the sailors as one means of staving off scurvy, and it was also exported to Dutch settlers in the Indies. The ﬁrst vineyard was planted in Australia in 1788, but it was not until the early nineteenth century that wine production took off. New Zealand followed in the mid-1800s.

North America’s experience in developing a wine industry was more compli- cated. The British hoped to reduce their reliance on French wine by producing wine (and olives) in their American colonies just as the Spanish had done. However, attempts to cultivate European vines in the 1600s failed, probably due to a deadly combination of diseases,phylloxera, and harsh climate. Meanwhile, experiments with indigenous vines were largely unsuccessful because of their unpleasant (‘‘foxy’’) flavors. Despite official encouragement of viticulture in several colonies, it was not until the late eighteenth century that there were signs of consistent suc- cess. It might have helped that some of the first leaders of the United States, including George Washington, Benjamin Franklin, and Thomas Jefferson, were all enthusiastic about wine. Jefferson was keenly interested in viticulture and had vines planted on his estate at Monticello. Later, as American ambassador toFrance, he toured French vineyards and kept detailed records of his wine travels and purchases. For the most part, Americans were supplied with wine from Europe during the colonial period, but wine was not a major part of the diet of Americans, who consumed more distilled spirits (whiskey and rum) than their European contemporar- ies. The Atlantic wine trade was buoyant, but one of the most important routes was

between Madeira and the southern colonies. Indeed, thanks to being fortiﬁed, Madeira was shipped as far aﬁeld as the Portuguese and British colonies in India.

Rod Phillips

CONSOLIDATION

Consolidation is part of the natural ebb and ﬂow of many industries, but it has been a particularly important and disruptive aspect of the wine and spirits industries over the past several decades. Consolidation generally occurs through the merger of two companies or through the acquisition of one company by another. Most consolidation taking place in the wine industry today involves acquisitions, which differs from joint ventures in that the acquiring company assumes control and ownership over the other company. Consolidation affects every tier of the wine industry, including growers, producers,importers, distributors, and retailers worldwide, and it will continue to be an important market force shaping the industry in the coming years.

Causes. One important force driving consolidation in the past two decades has been the continued decline in demand for spirits. Wine has historically been linked with and dependent upon the distribution of spirits; both require similar permits, licenses, and bonded warehouses, but spirits often offer greaterproﬁt margins than wine. The softening demand for spirits in the early 1980s set into motion a wave of consolidations at all levels of the industry. Many point to the amalgamation of Guinness and Grand Met in formingDiageo in the late 1990s as the start of the consolidation period in the wine and spirits industry.

Consolidation among large retailers such as Tesco, Sainsbury’s Supermarkets Ltd., and Safeway in the United Kingdom and Costco Wholesale Corp. and Wal- Mart Stores, Inc., in theUnited States has added additional pressure for suppliers to become larger. Large retailers want to deal with fewer, larger suppliers that offer the technology, resources, and support services that will enable them to lower their costs of operation. It is estimated that Safeway, Costco, Wal-Mart, Sam’s Club, and BJ’s Wholesale Club now account for just under 10 percent of all U.S. retail sales.

At the producer level, consolidation has been driven by the need to become more competitive, increase sales, maximize shareholder value, and improve and strengthen distribution in the marketplace. Consolidation enables companies to realize economies of scale in the production, promotion, and sales of wine. Today, some 30 wine suppliers, includingConstellation Brands, Inc., E.&J.Gallo Winery, Foster’s Americas, Diageo, the Wine Group, and Brown- Forman Corp., make up more than 90 percent of the U.S. wine market. These companies have relied on recent acquisitions to augment their portfolios.

Constellation includes some half-dozen divisions comprising more than 180 wine and spirits companies.

Effects. Consolidation at the supplier level enables companies to add existing brands, ﬁll in portfolio gaps, and react to market demand more rapidly and efﬁ- ciently than through the organic growth or development of new wine brands. One of the most costly aspects of the wine business is the development and brand- ing of new wine labels, due to the challenges involved in securing broad market distribution and stimulatingconsumer demand. Buying an established wine brand or producer eliminates or bypasses much of this risk. Constellation has relied primarily on brand acquisitions such as Vincor, Robert Mondavi, and Franciscan to become the world’s largest wine company. In recent years, even companies known for developing their own brands have begun to acquire existing ones, as in Gallo’s acquisitions of Louis M. Martini, Barefoot, and Mirassou.

Theglobalization of wine has meant that consolidation impacts every region and country. Even prestigious, traditional wine regions such as Burgundy, Bordeaux, and Champagne have been affected. For example, consolidation has occurred amongne´gociants in Burgundy, noted for its fragmented ownership of vineyards and domains: Jean-Claude Boisset has bought Bouchard Aıˆne´ & Fils, Jaffelin, Mommessin, and Ropiteau Fre`res and today is the largest ne´gociant in the region. In the Champagne industry, LVMH (Louis Vuitton/Moe¨t Hennessy) now owns Moe¨t & Chandon, Dom Pe´rignon, Veuve Clicquot, Krug, Mercier, and Ruinart; it is estimated that LVMH, Pernod Ricard, Vranken-Pommery, Tattinger, and Nicolas Feuillatte control more than 95 percent of the Champagne sold in the United States.

Types of Consolidation. Consolidation can occur either vertically or horizon- tally. Vertical consolidation involves the union of two wine companies from dif- ferent segments or tiers of the industry. Companies gain a competitive advantage by having a presence in more than one tier. A producer may acquire or perform the role of importer, distributor, or retailer. In the British market, for example, largesupermarket chains, such as Tesco and Sainsbury’s, commonly source, pro- duce, and directly import their own brands. The French producer Nicolas owns its own chain of retail stores both inFrance and Britain, guaranteeing that its wines will have immediate access to the consumer market. While helping to eliminate the middleman’s markup and potentially lowering cost, vertical integration bypasses market forces and potential competition.

A distinguishing feature of the U.S. wine market is the noticeable lack of vertical integration. Laws created during the post-Prohibition era, stemming from the 21st Amendment, essentially prohibit vertical integration and have also indirectly made horizontal consolidation more difﬁcult. These laws prevent a ‘‘tied house’’— vertical integration involving an on-premise seller—and mandate three distinct tiers of distribution for wine, beer, and spirits as a way of discouraging promotion of alcohol. However, the implementation differs greatly from state to state, espe- cially betweencontrol states and licensee states. Control states effectively serve as governmental forms of consolidation. True vertical consolidation can be seen in control states such as Pennsylvania that control wholesale distribution and retail, or in a monopoly market, such as Sweden or theCanadian provinces.

Horizontal consolidation—mergers and acquisitions—is more typical of the forces at work in the U.S. distribution system. It can be seen at the supplier and retail levels, but is particularly evident in the wholesale distribution tier. Large wine suppliers have put pressure on distributors to consolidate by eliminating or buying out their competitors. While this allows suppliers to reduce their costs, it has had a tremendous impact on the selection, availability, and price of wine in the U.S. market.

Changes to the Industry. In recent years, consolidation has completely reshaped the wholesale network and reduced the number of companies. Thirty years ago, several thousand licensed wholesalers distributed wines and spirits in the United States, but today there are less than a thousand. In the mid-1980s, states such asCalifornia, Florida, Texas, and Illinois had a dozen or more distributors each; today there are as few as two or three. Five national distributors with a multistate presence—Southern Wine & Spirits, Republic National Distributing Company (Republic and National merged several years ago, moving them into the second position), the Charmer Sunbelt Group, Glazer’s, and Young’s Market Company—currently account for more than half of the wine and spirits market, worth an estimated $20 billion in sales revenue.

Producers have been affected by consolidation at the wholesale level in several ways: it is more difﬁcult to introduce new wines and brands into the market, they have less control over the type of distribution in the market and market penetra- tion (on-premise versus retail, or chain versus independent or club), and it has become increasing difﬁcult to command the attention of the distributor manage- ment and sales force. The shape of the wine industry is often compared to an hourglass, with producers attempting to get through the bottleneck posed by a shrinking number of distributors. Large wholesalers distribute thousands of differ- ent wines and cannot realistically focus on each one. In order to be successful, they must service the needs of their largest suppliers and wine companies, the 20 percent of their portfolios that makes up 80 percent of their revenues. Whole- salers are unable to spend time on traditional brand-building activities and have been forced to focus more on logistical activities, such as warehousing, shipping, and delivery of wine. Large suppliers have had to augment the efforts of the distributor with their own salespeople in the market.

Smaller producers without the resources to put their own sales force into the market must look to other ways to sell their wine and gain distribution. They must seek out cooperative marketing companies and brokers, rely on highratings in the wine press to stimulate demand, or concentrate on cellar-door sales and direct sales through newsletters ande-commerce to survive. The market forces created by consolidation have created the most pressure on midsize producers; there is an increasing disparity between small and large producers as a result.

Outlook. Consolidation will continue at all levels of the wine industry in the coming years, but due to the three-tier system and state control, this consolidation will occur primarily in a horizontal fashion. Large retailers will be unable to consolidate vertically, as seen by the recent court case between Costco and the Wash- ington State Liquor Control Board. Suppliers will continue buy wineries, vineyards, and brands, which will provide liquidity for successful business own- ers looking to cash out of their businesses. There will, however, continue to be

plenty of new investors willing to start wineries and vineyards and enter the market. For the consumer, consolidation may continue to affect the selection of wines available, but it will not compress pricing in the way vertical consolidation would.

Jay Youmans