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Monday, April 18, 2016

Spending Millions on Trendy Wine Labels

Wineries are bought and sold like other businesses. When you hear of a winery changing hands you picture a building where they make the wine, maybe a tasting room, and possibly some vineyard land. But what if millions of dollars are only buying the privilege of using a label on a bottle? What if there's no land, building, contracts for grapes, or anything physical? Can you imagine buying a smaller car company, say Jaguar, and not getting the factories or sales network, but only the right to use the name?

Meet Constellation Brands. Their stockholders apparently have no time to develop the wines, don't want the expense of land or buildings, and find buying just a customer base a relative bargain.

In 2015 Constellation bought Meiomi for $315 million, based in Napa and known for their Pinot Noir found in many restaurants. They didn't get any property with the purchase. All they have to do now is keep producing this wine in the same style to keep the customers happy.

Recently they bought a wine label called The Prisoner, a wine started about twenty years ago as a high-alcohol Zinfandel just as the popularity of that style was taking off. Again, no property or buildings, just the label. The people who created The Prisoner sold it six years ago for $40 million, not a bad payday. Constellation just paid $285 million. That's a seven-fold profit in six years for the sellers.

You might wonder about Constellation's game plan. In the past they've mostly bought established premium wineries. Why the change? They are a publicly traded company and must feel this is a quicker turnaround on profits for less outlay. Of course, they're actually getting nothing for their money except currently happy customers.

So, for Meiomi, Constellation has to keep making Pinot Noir in the same style as people are expecting. For The Prisoner, they have to keep making a wine in the same style, it doesn't even need to be Zinfandel. How do they do this when they are sourcing grapes from all over? It's a recipe. Just as a good chef can keep repeating a popular recipe night-after-night Constellation has to keep repeating these wine recipes year-after-year. If they don't then they have nothing to show for their money.