Is the UK the wine world's Afghanistan?

A column that appears in the December 2010 edition of Meininger's Wine Business International

The notion of the unwinnable war is far from new. The difference today, since the later days of the Vietnam war and the beginning of hostilities in Iraq and Afghanistan, is that it has become acceptable to talk about unwinnability without automatically being accused of wanting to demoralise the troops. There is a parallel with business. In wars and sporting encounters, it is customary to grit one’s teeth and fight until the bitter end. In the world of making, buying and selling, however, it is acknowledged that, when the numbers cease to add up it is quite proper to sell up or close down. In recent weeks, the biggest example of this kind of acknowledgment has been the decision by Constellation Brands to sell its Australian and UK operations to a Sydney-based private equity group. The sale, and its financial implications are significant. The US giant paid AU$1.85bn for these businesses in 2003; today, it is offloading 80% of its shares in them for a mere AU$290.

With admirable understatement, Rob Sands, Constellation’s chief executive described the sale as “tidying up” its portfolio in the face of "challenging market conditions." It is no coincidence that brands like the Canadian Jackson-Triggs, and Inniskillin, New Zealand’s Nobilo and California’s Robert Mondavi and Ravenswood were not subject to this kind of early spring cleaning. These, of course, are labels with a successful record in the US, while the brands that were sold all depended heavily on the UK.

Constellation is far from alone in feeling disenchanted with the British wine market. The renaming by Foster’s of its historically UK-focused wine business as Treasury Wine Estates and its hiving off have widely been seen as a prelude to a sale. Pernod Ricard also set up a separate fine wine division in 2010, giving rise to rumours that it might sell off Jacob’s Creek and Brancott Estate, the New Zealand brand that was formerly known as Montana. The French firm may indeed be intending to hold onto these brands, but there are certainly questions about how committed it is to the UK market. The renaming of Montana, after all, was driven by the need to make the brand more palatable to US consumers who were unready to buy Sauvignon Blanc they thought came from a sparsely-populated state in the north of their country.

If Pernod Ricard is not pulling out of Britain, it is certainly pulling back from the games UK retailers have asked it to play. Along with the similarly disenchanted Gallo Family Estates, it has made it clear that loss-making discounting is not an activity it wishes to pursue. And if this means losing market share, so be it.

Diageo, the other giant of the wine world, has wisely, consistently and revealingly, declined even to try to sell its premium US wines in Britain. Instead, it has restricted its vinous efforts there to Piat d’Or and Blossom Hill: non-regional products with low production costs.

So, is the simple conclusion that the British wine market, for the moment at least, has become the Afghanistan of the wine world? Is it the market where the battles are too costly and thoughts of capturing hearts and minds now seem to be too ambitious?

Or is there a bigger question? Was Philip Bowman right when, as CEO of Allied Domecq, he openly wondered whether ownership in the wine business was really more appropriate for families and cooperatives than for investors looking for short- and even mid-term returns. The spirits business is far from easy, but it ticks many more boxes for anyone watching quarterly and half-yearly results. Scaleable major brands can be launched and built, and value can be added to them in ways that winemakers can rarely dream of. Just think of Hendricks gin and Grey Goose vodka. Of course many fail - as do many films - but the hits succeed so much more dramatically than any wine. The week that brought news of the Constellation sale also brought an announcement from Brown Forman that it was ready to offload its Californian Fetzer and Bonterra wine businesses. These are not Australian brands retreating from being battered by UK retailers; they’re US brands selling in North America.

I wish the private equity buyers of Hardy’s et al well, but I wonder how much fun they are really going to have with the extravagant Christmas present they have bought themselves.