Constellation sees lower grape supply
CHICAGO (Reuters) - Wine and spirits maker Constellation Brands Inc (STZ.N) expects its 2009 Australian grape harvest to fall about 10 percent to 1.6 million tonnes, an estimate its chief executive said could help the industry.
Robert Sands, speaking at the Reuters Food and Agriculture Summit in Chicago, also said his company's strategy of focusing on higher-end brands remained the right one, even though lower-priced brands were selling well in the recession.
Sands, whose company produces Robert Mondavi, Clos du Bois and Ravenswood wines, said a smaller Australian harvest would help reduce the grape surplus that has pressured prices and hurt the industry lately.
"We kind of hope for a smaller rather than a larger harvest," Sands said on Wednesday.
Constellation, the world's biggest branded wine producer, also said recent wildfires in Australia did not have a material effect on its vineyards.
As for the United States, Sands said last year's harvest was down about 10 percent.
"In general, we're seeing the grape supply and demand in the United States as pretty balanced," he said.
"In fact ... it's tipping a little bit toward under-supply, which is a healthy place for the industry," Sands said.
As with all other consumer products, alcoholic drink makers have seen sales suffer as U.S. consumers tighten spending.
For example, Sands said sales of wine in the United States were currently growing at a mid-single digit rate, down from a high-single digit rate before the recession.
Sands said wines priced above $5.00 a bottle were still growing faster than those below $5.00, but that the differential was shrinking.
Sales of Constellation's value-priced wines, such as Arbor Mist, are now growing at a mid-single digit rate, whereas they used to be flat to down.
Even though cheaper wines are now growing, Constellation's strategy of focusing on more expensive brands remains unchanged.
FOCUS ON PREMIUM BRANDS
"Value is still fairly uninteresting to us ... even though it's growing somewhat faster, it's not the focus of our portfolio," Sands said.
"We think our premiumization strategy continues to be the right strategy, even in the current environment."
Sands said people were still reaching for higher-end brands, just not to the extent that they had been in the past.
Constellation has shifted its portfolio upward by acquiring several premium brands and selling several value brands.
While that may improve margins in the long term, it has required the company to take on a lot of debt, which Sands said had hurt its market value in the short term.
"Constellation is one of the more leveraged beverage alcohol companies out there, so I think that has created a certain degree of disfavor in the stock," he said, noting that the company is aggressively paying down its debt.
Other reasons for the stock's weakness are that successive acquisitions have diluted the company's return on invested capital and that sales results have been at the low end of expectations or, in some cases, missed expectations, he added.
Constellation shares, which have been trading near lows not seen since 2003, closed at $13.35 on Wednesday.
(Reporting by Martinne Geller, editing by Matthew Lewis, Bernard Orr and Ted Kerr)
