Demand for premium wine acts as catalyst for interest in Napa vineyards
An increasing demand for premium wine has spurred on the slew of recent acquisitions of Napa valley vineyards by national and international producers, wanting to gain a foothold in the high end wine business.
Constellation Brands purchase of Schrader Cellars last week is just the latest example of this trend which experts say is bound to continue. And earlier this year E&J Gallo snapped up the 600 acre Stagecoach Vineyard for around $180m making Gallo one of the largest vineyard owners in California.
“There is no question that demand from consumers is for better wine, not cheaper wine,” said Rob McMillan, author of Silicon Valley Bank’s annual State of the Wine Industry report
“This purchase affirms Gallo’s commitment to compete in the luxury wine segmenet,” said Roger Nabedian of Gallo’s premium wine division at the time of the purchase. The sale, he said, “provides us with the opportunity to continue making and selling luxury wine offerings such as Louis M. Martini, William Hill Estate and Orin Swift.”
Gallo bought the Orin Swift brand last year, while it has owned William Hill since 2007 and Louis Martini since 2002. The company in 2015 also acquired the Ranch Winery, a large custom-crush facility in St. Helena, and more than 250 acres of planted vineyards in Pope Valley in separate deals.
Matt Franklin, founder of California-based M&A firm Zepponi told the Napa Valley Register that while there has always been interest in the premium wine market, he has seen premiumization “over the last three or four years really take hold.”
With more consumers buying wine above $10 a bottle and growth increasing exponentially over the $15 and $20 marks, Franklin pointed out that many large producers “already have brands and labels in that $10-$15, maybe $20 price point.” However, he said, there aren’t many that have brands of scale at $20 and above. “But they can see the consumer migrating up the pricing ladder.”
Therefore companies have acquired brands, facilities and vineyard assets to grow their higher-end offerings, Franklin said. “All the big players are investing behind this consumer trend of trading up,” he said.
One of the biggest investments in Napa vineyards came last year when Australian wine company Treasury Wine Estates snapped up global drink company Diageo’s US and and UK wine business for $600m. The current spate of high profile acquisitions has put sellers in a strong position according to Franklin.
“It’s a strong market for those interested in selling, and there are plenty of buyers and interest,” he confirmed.
As to the future, Franklin predicted that acquisitions would continue, and regarding Stagecoach he said: “they're not the last vineyard owner to sell. There’s going to be more.”
He predicted that smaller producers who rely on such vineyards to source their fruit would be the losers, as vineyards acquired by producers use the grapes themselves instead of selling them. As a result, more Napa wineries might begin to source grapes from other regions at lower prices and blend them with Napa grapes to lower the oveall price.
“What that does for quality remains to be seen,” said Franklin. And as grapes become more expensive and scarcer, another knock on effect could be fewer wineries overall.