Is the U.S. wine industry becoming too concentrated, with just a few big firms dominating the marketplace? That, more or less, was one of the questions we were asked at the press conference that followed the annual “State of the Industry” session at last month’s Unified Wine & Grape Symposium in Sacramento, California. How would you answer this question?
The query was prompted in part by Mario Zepponi’s excellent presentation about merger and acquisition activity in the wine industry in 2021. Mario is principal at Zepponi & Company, a firm that advises winery and vineyard M&A clients and was very busy indeed last year, when a number of large (for the wine industry) deals were concluded.
How concentrated has the U.S. wine industry become? How competitive is the wine marketplace? The answer you get depends in part on how you look at the data. Wine Business Monthly (which sponsored the State of the Industry session again this year) publishes a report on the U.S. wine industry early in each new year which is required reading. This year’s report appears in the current March 2022 edition, which can be accessed online.
U.S. Wine By the Numbers
Judging by the number of firms competing for retail shelf and restaurant wine list space, the U.S. market is very competitive indeed. For perspective, consider that the WBM report for 2014 found 8,287 U.S. wine producers in total, 3913 in California, 734 in Washington State, 632 in Oregon and the rest distributed across the country. Mississippi was at the bottom of the league table with just two wineries.
Zoom ahead to the just-published WBM report for 2021 and the numbers have jumped. The U.S. winery count rose by 36% in the intervening years, with 11,300 wine producers in total. California again leads the way with 4804 wineries, Oregon comes second with 877, followed by Washington with 875. Mississippi’s winery count increased to six. The Other Washington — Washington DC — is last with two wine producers.
Looking at the data this way, the U.S. wine industry is very competitive, with amazing growth in number of wine producers for such a brief period of time. The increase in winery count in 2021 was slower than in 2020, WBM reports, but that’s not a surprise given the covid and economic conditions we have experienced.
The U.S. market is actually more competitive than these numbers suggest because imports account for about a third of U.S. wine sales, so thousands of international brands are also vying for buyer attention.
Top of the Table Concentration
But number of competitors is not the only factor to consider when assessing industry competition. Market power matters a great deal and the U.S. wine industry features a number of very large players. WBM reported on the top 30 companies in 2014 and the top 50 companies in 2021 along with the lineup from the first report in 2003 and the lists make interesting reading.
The top five producers, ranked by volume of sales, in the very first WBM report in 2003 were as follows: E&J Gallo Winery, Constellation Brands, The Wine Group, Beringer-Blass Wine Estates (now Treasury Wine Estates), and Bronco Wine Company (followed by Mondavi — now part of Constellation — and Trinchero Family Estates).
The 2014 report produced this list: E&J Gallo Winery, The Wine Group, Constellation Brands, Bronco Wine Company, and Trinchero (followed by Treasury and Ste Michelle Wine Estates). The current (2021) line-up is: E&J Gallo, The Wine Group, Trinchero, Delicato Family Wines, and Constellation Brands (followed by Treasury and Bronco).
I think you would have to conclude that the top of the U.S. wine table has been very stable, with a good deal of the movement due to transactions within the industry such as Constellation’s acquisition of Mondavi and more recently its sale of many brands to Gallo and The Wine Group. The steady rise of Trinchero (think Sutter Home, Menage a Trois among other brands) and Delicato (Bota Box, of course, and now also the Francis Ford Coppola Winery) is noteworthy.
The 50 largest wine companies (out of the 11,000 total) account the vast majority of sales volume for domestic wines (not counting the imports) and it is easy to see why because firm size is very large. JUSTIN Vineyards and Winery is #50 in the 2021 table but still produces a very substantial 339,000 cases of wine each year. Gallo is at the top of table with a WBM-estimated 100 million case annual wine output. That’s 1.2 billion bottles. Incredible!
It is interesting to look at how production measured by volume of the top three largest wineries has evolved over the years reported here. In 2014, for example, the big 3 totaled over 187 million cases (not bottles) of wine (Gallo 80 million, The Wine Group 57.5 million, Constellation 50 million). The Big 3 total for 2021 is actually bit less: Gallo 100 million + The Wine Group 51 million + Trinchero 20 million = 171 million total. That is less than in 2014, which could be due to a number of factors including, as I have heard some insider’s comment, a lack of investment in some of the brands involved in the Constellation-Gallo transaction during the long regulatory approval process.
If we assume that the total U.S. wine market was about 450 million cases in 2021, then the Big 3 accounted for about 38% of sales by volume. If imports accounted for a third of total sales, then the Big 3 alone were responsible for 57% of domestic-produced wine sales by volume.
The biggest wine companies are really, really big, but some of the market power has shifted down the line. The 30th largest wine company in 2014 (out of the 30 listed), for example, was Purple Wine Company, which produced 415,000 cases. Number 30 in 2021 is Firstleaf at 700,000 cases. Firstleaf is a direct-to-consumer operation founded in 2016 with more than 75 brands in its portfolio.
What’s Driving Consolidation?
Big is in for U.S. wine and a lot of the bulking-up is taking place in the tiers below the Big 3. What’s driving it? Mario Zepponi presented an interesting perspective in our State of the Industry session. He argued that you have to put wine production in the context of its linkages in the product chain.
A lot of wine is sold in grocery stores, for example, and the top 5 U.S. grocery companies account for about half of total revenues in that sector. Big store chains, with their thousands of assorted SKUs, tend to prefer to work with a small number of distributors in each product segment if possible. So maybe it is no surprise that the top 3 wine distributors account for about 65% of revenues according to Zepponi’s data. Connect the dots here and it is easy to see why distributors might favor large wine companies with broad portfolios.
Big favors big, which favors big. Evolutionary forces point towards increased concentration, even in an industry as fragmented in some ways as wine.
To a certain extent, then, wine consolidation is the result of a process (accelerated by the covid channel shifts) that is affecting retail more generally. Consolidation, in this view, starts at the retail level and works its way backwards.
So has U.S. wine industry consolidation gone too far? It depends upon how you look at it and where you are positioned within the industry — in the Big 3 tier, the broader top 50, or further down the pyramid. And maybe the question should start higher up the food chain with consolidation at the retail and distributor levels. The market sure is competitive even if market power is concentrated at several points.
It is, I am afraid, one of those annoying “on the one hand …” situations that provoked President Harry Truman to ask for someone to send him a one-handed economist.
Thanks to Cyril Penn and his Wine Business Monthly team for the 2022 edition of their wine industry report. A very valuable resource for anyone interested in U.S. wine market dynamics.