How to Structure a Wine Industry Company - Top down or Bottom Up?

If you were going to build a wine company, would you start at the top (Robert Mondavi) and work down (Woodbridge) or would you start at the bottom (Gallo) and work up (Gallo Sonoma, Louis Martini)?

During the roaring 90's, when producers could seemingly violate the laws of supply and demand by both raising production levels and prices, anybody could sell wine and be successful at it. Particularly after 1991, when CBS' 60 Minutes broadcast its landmark "French Paradox" segment, which attributed the health of the French to their high red wine consumption, despite a relatively high-fat diet. Since then, wine consumption in the US has grown by 90 million cases! However, in the post 9/11 economy, consumers have become increasingly drawn toward value wines (two-buck chuck, yellow tail, Black Swan, Fat Bastard, Columbia Crest, Blackstone) and brands at higher retail prices have languished, particularly high-production Napa wines and, somewhat ironically, French wines (since they started the boom).

Add to this the apparent failure by Robert Mondavi, Inc. to be able to simultaneously sell both below $10 and above $10, the huge gap in profitability of Chalone (compared to other wine companies) which sells nearly 100% above $10, and the reported troubles at Paterno Wines (who have always prided themselves on only selling wines above $15) and one has to wonder, just how do you best structure a company to sell wine today?

The problem is that wines under $10 (and I'm grossly generalizing here) are primarily sold in Supermarkets, Liquor stores, Drug Stores, and large chain retailers of various types. As the price creeps farther above $10, the likelihood of selling a given wine in a restaurant, hotel, small retail shop, or direct-to-consumer via wine club or internet increases.

Example #1:

If you are in charge of selling brands ranging from $5-$50, how do you set up your sales group for best efficiency? Do you ask a guy in South Dakota to work the $5 sales at Costco before driving over to the nearest 4-star restaurant to push the $50 stuff? Or do you have two guys to cover that territory, resulting in lower total sales (and pay!) for each? If they have to sell your entire line can they even fit all the samples they need in a vehicle smaller than a Suburban?

Example #2:

You've established your company exclusively as a marketer of fine wines. The economy takes a u-turn and suddenly your wines seem overpriced, people are eating out and traveling less. Do you spend more money to create consumer demand (pull) at the retail level, lowering your margins in the process? Do you quickly move to launch a lower-end line extension to "bleed off" some of the excess supply at the high-end, thereby trading down on your name? How do you do any of this in such a way that you don't irreversibly damage the images of your brands that you've spent years cultivating?

It's beginning to be clear that Constellation has the answer. Their decentralized approach to running their various business units combined with separating the different units into operating groups by price point is a continued success. Further, their success in foreign markets (helped by a very strong UK presence), particularly with their low-end wines, gives them tremendous distribution clout and the ability to push slower moving exported wines.

Further, Constellation has built its success from the ground up. They started as producers of products like Wild Irish Rose, Inglenook, Almaden, and Paul Masson. Carefully using the leverage and capital created from high-volume lower-end wines, they moved into the super-premium and ultra-premium business with acquisitions of Franciscan, BRL-Hardy, Blackstone, Ravenswood, and now Chalone. Unlike Gallo, they have been able to avoid having their higher-end acquisitions painted by the same brush as the low-end. Letting each business unit run more autonomously allows them to maintain a separate and distinct image. This also avoids having the Mondavi problem, where you sprinkle the flagship brandname over every product up and down the portfolio, ultimately diluting the value of the name (Woodbridge drinkers have been overheard saying "I didn't know Robert Mondavi made expensive wines too!").

Like it or not, corporate players are here to stay and Constellation is going to be the one to watch.