Dear Editor:

The recent $1.03 billion sale of Constellation Brand’s Canadian wine business is good news for the Canadian wine industry.

Pension funds invest for steady cash flows and growth prospects and the high pricing multiple of 12 times forward looking Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) paid by the Ontario Teachers Pension Plan is a huge vote of confidence in the prospects of the Canadian wine industry.

The sale, which included three commercial wineries and five estate wineries, along with 1,700 acres of vineyards and established grower relationships, shows the value inherent in a properly scaled winery business with strong and growing brands and a rich land base.

However, the premium pricing achieved by Constellation reflects more than the value of its Canadian wineries and acreage and is not a price readily attainable by most Canadian estate wineries.

The premium pricing reflects the value of Constellation’s high volume ‘Cellared in Canada’ operations – the business of importing cheap foreign wine in bulk and bottling it in Canada to service the under $10 market.

It also reflects the value of Constellation’s chain of 163 ‘Wine Rack’ retail wine stores in Ontario.

These private wine stores are positioned on the forefront of the development of a grocery channel for wine.

Although currently located just inside the front door of grocery stores but beyond the checkouts, under new Ontario regulations the Wine Rack stores would be relocated within grocery stores and will share a common till with the grocery cashier.

Recent experience in British Columbia is showing that enabling consumers to purchase wine with groceries significantly increases sales, purchases by women and the overall dollar value of the grocery basket purchased.

Both the sale of bulk foreign wine as ‘cellared in Canada’ by the large commercial wineries and the sale of wine through the grocery store distribution chain are controversial issues within the Canadian wine industry.

‘Cellared in Canada’ is a hot button not because cheap imported commodity wines realistically compete with Canada’s super premium products, but because the product labelling, as well as the product placement in liquor stores, misleads consumers into thinking that they are drinking a Canadian wine.

The fear is that grocery stores would cannibalize other sales channels and will stock mostly cheaper, high volume products.

There is also a fear that the preferences given to Canadian wine in grocery would lead to a trade challenge generally of the preferences given to Canadian wines.

The Canadian wineries purchased by the teachers’ federation are clear leaders in Canada’s $9.2 billion wine market, a market that is forecast to expand at a 3.9 per cent compound annual rate through 2020 (Euromonitor Passport data).

They have a market presence three times the size of their nearest competitors and represent seven of the top 20 brands in Canada.

This portfolio of premium Canadian wineries was build by Don Triggs (now of Culmina Estates) when he was President of Vincor, both through internal organic growth and through acquisitions.

He grew Jackson Triggs internally and acquired Sumac Ridge and Hawthorne Mountain (now See Ya Later Ranch) from Harry McWatters and Inneskillen from Don Ziraldo , only to lose them all in 2006 in a hostile takeover bid by Constellation.

Constellation, for its part, having now divested of its Canadian assets, has gone on to focus on high growth, high margin luxury brands such as the iconic Kung Foo Girl Riesling, Boom Boom Syrah and Velvet Devil Merlot labels which it purchased from Charles Smith concurrently with its exit from Canada.

Where will the Ontario Teachers Pension Fund take its new Canadian winery business?

Typically, institutional funds have strong financial management that will drive revenue growth.

The fact that Canadian per capita growth in wine consumption is among the fastest in the world is an obvious attraction.

Will they push the ‘Cellared in Canada’ product even harder as an easy way to maximize volume and sales growth in the lower end of the market?

Will they, like Don Triggs more than a decade ago, lead a needed industry consolidation of premium brands in Canada and internationally?

Canada’s smaller wineries will find common cause with the teachers’ fund on many issues – building the international reputation of the Canadian wine industry, eliminating the inter-provincial trade barriers that are currently severely limiting its growth, and defining the mix of varietals and geographic sub-appellations that will define its character.

They are likely to be at odds with them and the other large commercial wineries on other matters such as the ‘Cellared in Canada’ and ‘wine in grocery’ issues.

Editor’s note: Al Hudec is a Vancouver lawyer living part time in the Okanagan Valley in Oliver who regularly contributes articles and Letters to the Editor for the Osoyoos Times and Oliver Chronicle.

Al Hudec

Oliver, B.C.