G'Day Adelaide Au Revoir Bordeaux
Australia’s wineries are flourishing in world markets, outselling French rivals in the U.S. and U.K. And parent companies such as Constellation Brands are providing investors with intoxicating returns as well.
When Australian Stephen Millar became chief executive officer of the world’s biggest wine business in April, he didn’t move into the corporate headquarters of parent company Constellation Brands Inc. in Fairport, New York. Instead, he stayed put on the other side of the world in a converted 160- year-old homestead outside Adelaide, Australia.
Neither Millar, 59, nor the man who appointed him, Con- stellation Brands CEO Richard Sands, 52, say they see any- thing unusual about that. After all, Adelaide is in the heart of the world’s fastest-growing wine region: Australian-based companies have captured more than 10 percent of the $13.8 billion international wine trade, according to Dutch agribusi- ness lender Rabobank International.
Since 1986, the value of Australia’s wine exports has grown an average of 33 percent a year, reaching $1.4 billion last year, says Australian Wine and Brandy Corp., a government regula- tory body. Last year, Australia became the largest wine exporter to Britain, overtaking France. In the U.S., Australia is the second-biggest source of imports, behind Italy, and its sales volume grew at 67 percent last year, according to Salomon Smith Barney, now called Citigroup Global Markets Inc. California wine sales, which have 70 percent of the U.S. market, grew by 3 percent. “The growth of Australian wine sales in the U.S. is staggering,” says Jon Fredrikson, CEO of Woodside, California–based wine industry consulting group Gomberg, Fredrik- son & Associates. “The Aussies have shown the French how to write the book when it comes to marketing.”
Millar has been at the forefront of the Australian surge. Until this past April, he was managing director of BRL Hardy Ltd., which he’d taken from a jug wine producer that sold only $30 million worth of wine in 1991 to Australia’s third-largest wine company, with annual sales of $520 million. In January, he and BRL Hardy shareholders agreed to sell the company to Constellation Brands for $1.4 billion. The deal, which closed in April, makes the merged company—with combined wine sales of $1.7 billion—larger than California’s E&J Gallo Winery, previously No. 1 in the world, according to New York–based Smith Barney analyst Gregory Badishkanian.
The sale also resulted in Millar’s being elevated to CEO of Constellation’s global wine division, says Sands, in recognition of his achievements at BRL Hardy. Now, Millar says, he wants to reprise his performance at BRL Hardy on a bigger stage. Unlike the soft drink industry, in which three companies— Cadbury Schweppes Plc, Coca-Cola Co. and PepsiCo Inc.—control 80 percent of the market, the wine industry is highly fragmented. Even with its BRL Hardy acquisition, Constella- tion Wines says, it has only 5 percent of the global market. Its brands include U.S. labels Almaden, Franciscan Estates, In- glenook, Paul Masson, Ravenswood and Simi and Australia’s Banrock Station and Hardy’s Stamp of Australia. “There isn’t a Coca-Cola or a Microsoft or a Nestlé of our industry,” Millar told analysts in a conference call when the takeover plan was announced in January. “We certainly intend to be that.”
The BRL Hardy deal will increase Constellation Brands’ earnings per share by about 10 cents, according to Sands. Sales of Australian wine are expected to account for about one-sixth of the $3.2 billion worth of alcoholic beverages— including Corona beer and Black Velvet whiskey—Constellation sells. In fiscal 2003, Constellation’s profit rose 22 percent to $192 million, or $2.07 per share, from $157 million in fiscal 2002. On April 11, its share price closed at $25. That’s a 47.8 percent rise over the past two years, compared with a 19 percent fall in the Dow Jones Industrial Average.
Long-term BRL Hardy investors have also fared well. The Australian company’s market value had risen to $1.12 billion at the time of the takeover from $54 million at its initial public offering on Sept. 17, 1992. Shareholders who’d held the stock from the time of the IPO made a 1,300 percent return at the time they accepted Constellation’s offer price of $6.40, according to Bloomberg data. The Adelaide-based International Wine Investment Fund, which was BRL Hardy’s largest shareholder, with a 10 percent stake, made a profit of $90 million on the $23 million it paid for the company’s shares, says Chris Day, CEO of Berren Asset Management Ltd., which administers the fund.
Day says there are other bargains to be found in Australia’s burgeoning wine industry. “There’s going to be a lot more money to be made from other listed Australian wine compa- nies and those that will list,” says Day, who helps manage the $200 million the fund invests in Australian, European and U.S. wine-related stocks. “The market is ripe for consolida- tion, and any company that wants to become global will have to have Australian wines.”
Among the owners of Australia’s 1,450 wine busi- nesses, there are 15 public companies. They include New York–listed Constella- tion, French liquor conglom- erate Pernod-Ricard SA, big Australian corporations Fos- ter’s Group Ltd. and South- corp Ltd.—which together account for 70 percent of Australian production—and small-cap winemakers such as Perth, Australia–based Evans & Tate Ltd., which had a market value of only $36.5 million and shares that closed at 52.8 cents on April 11.
The world’s third-largest liquor company, Paris-listed Pern- od-Ricard, produced 5.9 million cases of Jacob’s Creek wine in Australia last year—a 12 percent increase from 2001—and sold them in 60 countries. CEO Patrick Ricard says this performance helped lift second-half profit by 2.4 percent to $275 mil- lion at a time when sales of its other brands, including Chivas Regal scotch, fell. “Our investment in Australia has been much better than our expectations,” says Ricard. The company’s shares closed at $76.15 on April 11, up 10.9 percent for the year.
Over the past five years, three leading Australia-listed wine companies have easily outperformed the benchmark S&P/ASX 200 Index, which was up 7.1 percent on April 11 to 2945, from 2753 on April 11, 1998. McGuigan Simeon Wines Ltd., which began selling its Black Swan brand in the U.K. and the U.S. this year, more than doubled its share price to $2.60, from $1.20, over the same period. Shares in Peter Lehmann Wines Ltd., 10 percent owned by British drinks group Allied Domecq Plc, were up 33 percent during the period. Shares in Foster’s Group, which owns California’s Beringer and Australia’s Wolf Blass brands, were up 24 percent, to $3.36 from $2.71.
The secret of Australia’s success, says California wine consultant Robert Nicholson, is that its wines are simply better values than their California and European rivals. “They overdeliver for the price,” says Nicholson, principal of International Wine Associates, which has advised on $650 million worth of wine industry mergers and acquisitions in the past 10 years. “You can get the same quality from a $7 bottle of Australian wine as you can from a $9 or $10 Californian equivalent.”
Australian winemakers and their rivals cite several reasons for that ability to overdeliver. Most important, they say, are cost and climate. Australia, a country the size of the main- land U.S., with a population of just 19 million—less than that of Texas—has abundant cheap land. A sweeping, sunny 3,000-kilometer (1,860-mile) arc of that territory, between the barren outback and the modern cities built on the coast of southern Australia, is climatically perfect for growing grapes, says Nicholson.
Australia’s first white settlers—British convicts who’d been deported to Australia to set up the colony of New South Wales around Sydney Cove in 1788—planted vines soon after their arrival. Fifty years later, nonconvict European immigrants settling outside Adelaide in the colony of South Australia began growing grapes in the Barossa Valley and the McLaren Vale. Today, South Australia is the country’s most-important wine-growing area. “You can buy the land and plant a vine- yard in McLaren Vale for $15,000 an acre,” says wine consultant Fredrikson. “In Sonoma, here in California, it would cost you two or three times as much. In the Napa Valley, it would be four or five times higher.”
Millar discovered the Australian wine industry and its competitive advantage relatively late in his career. After graduating from college in Melbourne, he joined the local unit of General Motors Corp. and was sent to study management at Kettering University, in Flint, Michigan, before being post- ed to the Pontiac truck division in Detroit as an accountant.
Returning to Australia in 1970, he joined Sabco Ltd., a company that made brushes and other basic household cleaning equipment, and rose to become CEO before leaving in 1991 to join Berri Renmano Ltd., a producer of inexpensive wines sold in boxes. Within nine months, he’d taken over Thomas Hardy Ltd., a family winery four times Berri Renmano’s size. In 1992, Millar took the merged company, renamed BRL Hardy, public. He then moved his office into the homestead built by pioneer winemaker John Reynell in 1842. He began producing better-quality wines and developing Hardy’s brands.
Today, Hardy’s wines are the No. 1 seller in Britain, according to Nielsen Research. In a decade, exports have risen to 6.9 million cases annually from
55,000. Now, following the merger, Millar says, he’ll be able to use Constellation’s distribution networks to develop those brands in the U.S. A silver-haired, talkative man who could pass for a decade younger, Millar leads the way into his antiques-filled homestead turned office with a brisk stride. “Millar may be nearly 60, but he’s as fired up as he’s ever been,” says wine stock investor Day.
Millar says he won’t micromanage the heads of Constellation’s nine wine-related divisions who’ll now report to him. Instead, he’ll plot global strategy. His boss, Sands, says management style was one of the reasons he was chosen for the job. “Both Constellation and BRL Hardy believe in a decen- tralized approach,” Sands says. “Steve is very collaborative and passionate.”
Millar says cost is only one Australian advantage. Another is the fact that Australia lacks the regulations that restrict so- called old-world producers in Europe. Many of the French winemakers have to operate under the Appellation d’origine contrôlée system—a set of rules that restricts them to using only grapes from their immediate locality and of specified varieties. “The rules in France are much too strict,” says Perinod- Ricard’s Patrick Ricard. “As long as France cannot change them, it will not be in a good position to compete against wines of the new world.”
In Australia, winemakers face few such restrictions. They can use grapes from any of scores of wine-growing areas stretching from the Hunter Valley just inland from the Pacific Ocean north of Sydney to the Margaret River on the Indian Ocean south of Perth in Western Australia. If floods or drought damage a vintage in one area, a winemaker can bring in grapes from another, unaffected wine-growing region a thousand or more kilometers away.
In 1989, Pernod-Ricard was the first big foreign beverage company to see Australia’s potential, acquiring Orlando Wines Ltd., a family-owned company in the Barossa Valley. Orlando traced its history to German immigrant Johann Grampp, who in 1847 had first grown grapes beside a small stream named Jacob’s Creek. In 1976, Orlando took the Jacob’s Creek name for a new wine for the domestic market. The first batch sold 17,000 cases. When Pernod-Ricard took over, the French own- ers decided to turn it into a global brand and built a new, 32- hectare (79-acre) plant less than one kilometer from Grampp’s dried-out creek bed. Today, Jacob’s Creek is so well-known that the winery’s become a tourist attraction, and foreign and local tourists can eat Australian outback cuisine such as char- grilled wallaby at the Jacob’s Creek visitors center.
France’s share of the international wine trade has declined to 40 percent from 50 percent in the past 10 years, according to the Federation of French Wine and Spirits Exporters. During the same period, the share of so-called new-world producers—Argentina, Australia, California, Chile, New Zealand and South Africa—has risen to 18 percent from 4 percent.
Technology is another area in which Australia has an advantage, says Nicholson of International Wine Associates. California producers have long relied on a supply of cheap labor from Mexico and other Latin American countries. Australia’s wineries, always short of workers, were forced to develop efficient mechanical picking techniques.
With only a tiny domestic market, Australian winemak- ers also learned how to export. While California winemakers could afford to concentrate on the large U.S. domestic market, Australian wine producers were forced to sell over- seas to survive. “They had to fight in every market and do every deal known to man,” says Day.
At times, Australian wineries have been wounded in the course of battling in export markets. In January, Keith Lambert, CEO of Southcorp—owner of the Lindemans, Penfolds and Rosemont brands—resigned. One month later, Southcorp reported a 97 percent reduction in fiscal-first-half profit to $3.4 million from $126 million a year earlier. The company blamed the drop on price cuts aimed at winning market share in the U.K.
The country’s wine entrepreneurs are also engaged in con- tinuing skirmishes with predators. Take Brian McGuigan, for example. In 1970, McGuigan founded Wyndham Estate winery in Hunter Valley, north of Sydney, and took it public. In 1990, he lost the company when Pernod-Ricard, through its Orlando subsidiary, made a successful takeover bid. McGuigan then started over. In 1992, he floated Brian McGuigan Wines Ltd. on the Australian Stock Exchange and, last year, took over an- other winemaker, Simeon Wines Ltd., to form McGuigan Simeon. In 11 years, the company’s market value has risen to $250 million from $6 million. The 35 percent profit margin McGuigan reported in February was the best return of any
Australian wine company this year.
Now, McGuigan, 60, says he may eventually find himself back where he was when Pernod-Ricard acquired his first winery. “Of course, we’ll be subject to a takeover,” he says. “People have approached us already, but we want to keep this company Australian. At least, the bigger we get, the harder it will be.”
Some Australian wine producers have become predators as well as prey. In 1995, Australia’s best-known beer company, Foster’s, went into the wine business by paying $336 million for Mildara Blass Ltd. In 2000, it acquired Beringer Wine Estates Holdings Inc.—which was founded in 1876 and which says it’s the oldest continuous wine producer in California’s Napa Valley—for $1.5 billion. Foster’s wine subsidiary, re- named Beringer Blass Ltd., now operates 15 wineries in Australia and New Zealand, seven in California and one in Italy.
Multinationals such as Foster’s and Constellation, with low-cost wine production facilities in Australia and distribution networks in the U.S., are the future of the wine business, says Fredrikson. “It’s really the globalization of the vineyard part of this industry,” he says.
That’s the way it has to be, says Jamie Odell, managing director of Asia-Pacific trade at Beringer Blass. As the Australian wine industry matures, he says, its owners will have to get big—or get out.