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38 WINES&VINES February 2016 Viewpoint These include three closely related trends: premiumization, portfolio rebalancing and geographic diversification. In addition, the relentless consolidation occurring in the dis- tribution channels continues to be a strong motivator to increase scale through acquisitions. Barring major economic dislocation, these trends are likely to continue their influ- ence into 2016, portending another year of significant transaction activity. However, there are also factors that could temper the level of deal activity, and we would not be surprised to see a decline in the total dollar value of M&A transactions in 2016 compared to 2015. Premiumization: industry continues to move up market In conjunction with increased consumption, consumers are shifting to more expensive wine. This premiumization trend, which is also occurring in the spirits and beer sectors, has become very apparent in recent years, as demonstrated by the chart showing California winery revenue by price seg- ment in 2011 and 2014. Wine above $7 per bottle increased from 66% of total revenue in 2011 to 71% of revenue in 2014, while the share of wine below $7 wine shrank pro- portionately during the same period. The premiumization trend continued into 2015. Nielsen data show that the largest increases for the 52 weeks ending Nov. 7, 2015, were for bottles above $9, and the $12-$14.99 price category led other price categories with more than 10% growth. Premiumization was the primary driver for many of the major transactions occurring in 2015. The table "M&A Acquisitions: 2005 vs. 2015" contrasts the low retail price points of key acquisi- tions made in 2005 and 2006 by Constel- lation Brands, E. & J. Gallo Winery and The Wine Group with their acquisitions in 2015 of brands positioned in the ul- tra-premium and luxury categories. A quick review of historical M&A transactions shows that premiumiza- tion-driven acquisitions are often also focused on strengthening the acquirer's position in a rapidly growing grape va- rietal and tapping into premium vineyard sources in specific AVAs to feed the ac- quired brand. As recent examples, Meiomi, Siduri, J Vineyards and Talbott Vineyards were all strong ultra-premium or luxury T he stage for 2016 is set: The U.S. economy continues to expand; capital markets are rela- tively strong; U.S. wine consumption contin- ues to rise, and consumers' purchase patterns increasingly favor more expensive wines. Wine sales have increased during the past 16 years at an average of 3.4% per year, reaching 375 million cases (or approximately 2.8 gallons per capita) in 2014. As of 2013, the U.S. became the largest wine market in the world, with plenty of room for continued growth in per-capita consumption. The ongoing growth and attractiveness of the U.S. wine industry has created a fertile environment for merger and acquisition (M&A) activity. Established players as well as new entrants are likely to continue using acquisitions to stake out or strengthen their competitive positions. 2015 retrospective Looking at 2015 through the rearview mirror, it was a year of noteworthy transactions involving major wine players. High-profile deals included Treasury Wine Estates' $600 million purchase of the majority of Diageo's wine portfolio, Constellation Brands' $315 million purchase of Meiomi, and E. & J. Gallo Winery's acquisition of J Vineyards, Talbott Vineyards and The Ranch Winery. There were many other notable M&A transactions in 2015 and, as with any other year, M&A transactions in process that were delayed or otherwise have not yet come to fruition. We owe the elevated level of transaction activity to a number of key long-term drivers shaping the wine industry. n MARIO ZEPPONI, GEORGE COOPE AND DAVID VON STROH Predicting Mergers and Acquisitions in 2016 U.S. WINE SALES, 1998-2014 Millions of 9-Liter Cases Sold Retail Value in $ Billions 400 350 300 250 200 150 100 $40 $35 $30 $25 $20 $15 $10 1998 2000 2002 2004 2006 2008 2010 2012 2014 1998-2014 Compound Annual Growth Rate: 3.4% 1998-2014 Compound Annual Growth Rate: 5.1% n = 9-liter cases sold n = Total retail value Mario Zepponi