Issue link: http://winesandvines.uberflip.com/i/918844
146 WINES&VINES January 2018 BUSINESS Source: Nielsen Food/Liquor, four-week periods from Oct. 11, 2014, through Nov. 4, 2017. NUMBER OF ACTIVE WINE SKUS IN U.S. FOOD AND LIQUOR CHANNELS Thousands of SKUs 40 35 30 25 20 15 10 5 0 Oct. 2014 Nov. 2014 Dec. 20 14 Jan. 2015 Feb. 2015 March 2015 April 2015 May 2015 June 2015 July 2015 Aug. 2015 Sept. 2015 Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016 March 2016 April 2016 May 2016 June 2016 July 2016 Aug. 2016 Sept. 2016 Oct. 2016 Nov. 2016 Dec. 2016 Jan. 2017 Feb. 2017 March 2017 April 2017 May 2017 June 2017 July 2017 Aug. 2017 Sept. 2017 Oct. 2017 Nov. 2017 for wine producers. While a number of busi- ness models in the wine industry have been able to leverage the recent surge in direct- to-consumer sales, the reality today is that a clear majority of wine volume is sold through wholesale channels. Since 1995, the number of U.S. wineries has grown from approxi- mately 1,800 to 9,200; however, the number of U.S. wine and spirits distributors has compressed from approximately 3,000 to 1,200 over the same time period. In recent years, the pace of consolidation among wholesalers has snowballed as a result of a series of mega mergers. Beginning in early 2016, Charmer Sunbelt and Wirtz Beverage merged to create Breakthru Beverage, which, once completed, accounted for approxi- mately 10% of U.S. wine and spirits sales dollars. Shortly thereafter, two of the indus- try's largest distributors, Southern Wine and Spirits and Glazer's, combined to form Southern Glazer's, whose combined footprint accounts for almost one-third of total U.S. market share. In response to the Southern Glazer's merger, Republic National Distribut- ing Co. (RNDC) and Breakthru Beverage, the second- and third-ranked distributors, re- spectively, recently announced their inten- tion to merge. Assuming the deal closes, the top two distributors would account for more than half of total U.S. wine and spirits sales, with the next-largest (Young's Market) ac- counting for approximately 5.5%. (See "Top U.S. Spirits and Wine Wholesalers"). Consolidation at the wholesale level has encouraged a similar dynamic at wine sup- plier and retailer levels, putting pressure to implement more simplified sales strategies so products have access to the market. Larger retailers prefer to work with larger wholesalers in order to leverage operational efficiencies and simplify the supply chain. Retailers in general also face pressure to rationalize the number of wine products they carry, as increased demand for craft spirits and craft beer has resulted in dwin- dling shelf space historically reserved for wine. Not surprisingly, during the past three years the number of wine SKUs monitored within retail scan channels has decreased (see "Number of Active Wine SKUs in U.S. Food and Liquor Channels"). Additionally, larger wine companies that have better, more robust representation of specific ap- pellations and varietals under one owner- ship umbrella have become more attractive to larger distributors looking to expand their own portfolios. The inherent implica- tion of all these changes is that smaller manufacturers are the ones most susceptible to losing placements in retail accounts. In response to the quickening pace of con- solidation, mid-sized wine companies are feeling increasingly compelled to expand their portfolios in order to stay relevant with dis- tributors. Falling into this category was WX Brands' (formerly known as Winery Exchange) April 2017 purchase of the Bread & Butter wine brand. At the time of its acquisition, Bread & Butter was one of the fastest growing brands in the wine industry, reaching annual sales of approximately 170,000 cases in just over three years. WX Brands also acquired the Jamieson Ranch Vineyard family of brands, which added a further 80,000 cases to the company's branded wine business. Santa Rosa-based Vintage Wine Estates, which over the past five years has amassed a collection of wineries and brands through ac- quisitions, expanded its geographic footprint in 2016 and 2017 with the purchases of Firesteed Cellars in Oregon, Buried Cane in Washington state and Clayhouse Wines in Paso Robles, Calif. The Buried Cane and Clayhouse Wines transactions were part of a strategic partnership with Washington's Middleton fam- ily. Vintage Wine Estates also won a bid in early 2017 to acquire the well-known Cameron Hughes negociant brand out of bankruptcy. These brand acquisitions bring Vintage's total acquisition tally to more than a dozen within the past five years, which put it on pace to sell close to 1.5 million cases by the end of 2017. Geographic expansion continues to be a central theme for many mid-sized acquirers. Private equity-backed Duckhorn Vineyards, which made a foray into Washington in 2014 with its Canvasback label, looked south in 2017 in acquiring the Pinot Noir-focused Cal- era Wine Co. in Monterey County (see related story on page 132). This purchase represents the company's first organic acquisition, as well as first foray into the Central Coast. Addition- ally, Jackson Family Wines, which has been heavily investing in Oregon, expanded its holdings in the Central Coast with the acquisi- tion of Brewer Clifton, a 100% estate producer of Sta. Rita Hills Pinot Noir and Chardonnay. The success of emerging wine regions in recent years is particularly compelling from an M&A perspective. It has created acquisition opportunities for a broader range of buyers who are able rationalize more favorable sourc- ing economics and relatively lower regulatory constraints from these emerging regions in comparison with other wine regions such as Sonoma and Napa. Key supply assets in high demand Vineyard values remain high in premium wine- growing regions—as do the level of vineyard transaction activity, due to intensifying competi- tion for quality grape sources corresponding with premiumization trends. Favorable lending condi- tions and several years of strong industry growth have made vineyard acquisitions a more viable and attractive option for mid-sized wineries look- ing to control supply and mitigate increasing supply costs. As a result, the number of strategic buyers of vineyard assets has increased in recent years, with each successive acquisition by a strategic buyer having the compounding effect of reducing available supply. In certain cases, the acquisition of a key supply asset can have a disruptive and rever-