Paul Hetterich, executive vice president for business development and corporate strategy at the world's largest winemaker by volume, is a busy man. Among other things Hetterich (pictured) oversees mergers, acquisitions and divestiture initiatives at Fairport, N.Y.-based Constellation Brands Inc., whose 300-strong portfolio includes Robert Mondavi wines, Corona beer and Svedka vodka. The LeMoyne College graduate has been with the firm since 1986, working his way up from assistant product manager in marketing of what was then Canandaigua Wine Co. to his current position in June 2003. He shares his thoughts about the changing face of Constellation and the world wine industry with The Deal's Renée Cordes.
Recently Constellation has been a net seller rather than a net acquirer
of wine brands. What is the rationale behind the current strategy?In the Almaden and Inglenook divestiture scenario these wines are in a lower "popular" price segment that has been declining for years. As we have seen U.S. consumers become better educated about wines, and their palates become more sophisticated, we also see them continue to trade up to better wines. Strategically, our emphasis is on the premium and above segments. The sale of Inglenook and Almaden [in February 2008] monetized assets and provided us with cash to help us reduce borrowings. For the more recent scenario [June 2008] in which we sold eight wine brands and other wine assets in California and the Pacific Northwest (Atlas Peak, Geyser Peak, Gary Farrell, Buena Vista, Columbia, Ste. Chapelle, etc.), these were predominantly labels that were considered to be redundant with others in our portfolio. Again, we turned these assets into liquidity that helped us reduce borrowings. We continuously assess the viability of our assets with a focus on always maximizing long-term profitable growth, returns and value.
What is the most important criterion in seeking a buyer for your assets?Ensuring the buyer's ability to conclude the transaction with
Constellation to the mutual benefit of both parties as efficiently as
possible.
What is the time frame foreseen for the planned Australian asset sale
announced in August, and what level of interest do you expect?
Due the nature of the sales -- mostly vineyards and facilities -- we
have engaged real estate firms to find suitable buyers. Most of the
product being eliminated comes in the form of discontinued SKUs [stock-keeping units] as part of an overall product rationalization initiative associated with the
repositioning of our Australian wine business. The timetable for selling
Australian assets is flexible. We do not intend to rush the requisite
changes that need to be made to handle our ongoing business. This is a
significant change, and we will not unduly rush its implementation.
When does Constellation expect to start making acquisitions in the wine
sector again, or is this not in the cards for the near future?Our long-term growth strategy relies upon a combination of both organic growth from our existing portfolio, and strategic acquisitions. We do not speculate regarding future potential acquisitions.
How would you describe Constellation's general approach to acquisitions, be it in wine or other industries?
Acquisitions must be strategic in nature, meaning they should
complement our existing business and provide long-term growth potential,
solid ROIC [return on invested capital] and help us generate superior long-term value. They should also further our efforts to move our portfolio toward the premium and above price segments, which is where consumers are gravitating in our major markets.
What are the main drivers of deal activity in the global wine
sector, and will this trend continue?International consolidation. The move toward greater scale by
suppliers is being necessitated by consolidation in both the on-premise and
off-premise retail sectors in our key markets. Additionally, in the United
States there continues to be consolidation among distributors. To remain a
competitive, top-tier supplier, we must be able to provide our customers
with consumer preferred brands from a variety of growing regions (for
wine), or key brands in hot categories (spirits).
How much pressure is there on industry players to innovate?There will always be a need to create new brands as a percentage of a
portfolio as large as ours. Some are designed to be in the market for a relatively short period of time. Some are introduced to create or take advantage of consumer trends. Yet others are developed to determine demand and to see if they have longer-term viability. Regarding the need for innovation, that will never end and
comes in the form of new packaging, new and creative ways to market
products, consumer-driven emphasis such as "green initiatives" and flavored
spirits such as vodka, schnapps and others, and the science/technology
associated with wine and spirits production. However, consumers also
desire established brands they know and trust and there will always be a
market for those products as well.
What is the target consumer group for new brands such as Twin Fin, Monkey Bay and 3 Blind Moose, and how do you explain their success?We have conducted extensive consumer research in the U.S. and U.K. in
the past two years or so, and have discovered there are numerous categories
of consumers. In the U.S., we know there is currently a large "baby boom"
population with significant discretionary income. Their purchasing habits
are somewhat different than the so-called millennial generation that has
come into legal drinking age during the past eight years. We also have
found that consumers like variety and value, and that they are drinking
across categories. Where someone may have been loyal to a specific scotch
whiskey 30 years ago, and that's all they drank when they had an alcohol
beverage, now we see people who are drinking a beer at a baseball game in
the afternoon, having a cocktail prior to dinner, a glass of wine with
dinner and a cordial liqueur after dinner. The success of any of our
brands is because we have been able to somehow connect with consumers and
they try, like, recommend and repeatedly buy our brands.
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