How Wine Businesses Can Anticipate a Shift in the M&A Environment
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The U.S. wine industry is in the midst of historic change. An array of factors, including changing generational preferences and distribution channels, is affecting businesses at every level.
These factors are also currently influencing discussions about wine M&A following a recent period of rising interest in dealmaking. Despite a slowdown in the pace of blockbuster transactions in recent months, lucrative M&A deals are still possible, especially for those armed with clear, reliable data about trends, sales forecasts, and consumption. Here's our outlook on the current market and how wine businesses — and those interested in potentially acquiring them — can navigate it:
New dynamics in the M&A market
During COVID-19, wine business was booming. More bottles were produced to meet demand, and the industry prepared for a continuing growth period that simply didn't happen. Now the industry faces a predicament in which it has more wine at a time when people are drinking less of it. Millennials and Gen Zers haven't embraced wine in the same way as Boomers – yet.
There are reasons to be optimistic. According to data from bw166, a beverage alcohol advisory firm and fellow founding member of the U.S. Wine Industry Partnership, consumers are spending more on wine even as they're being pinched by the rising cost of living. Wine shipments were down 8.7% for the 12 months ending October 2023.1 During this period, consumer spending was up 4.9%.2
The disconnect here comes down to inventory excesses. Wine businesses are overloaded with product while being squeezed by rising interest rates. At the same time, what we’re hearing in client conversations is that as potential buyers are understandably more cautious and the cost of financing remains elevated, valuations have dipped.
We're also seeing generational shifts at the very top. The industry may be millennia-old, but thanks to Prohibition disrupting its history in the United States, many wineries are undergoing a change in leadership for the first time. Brands that have been around for a long time have leadership who may be looking for new directions for their businesses and opportunities to leap ahead of the competition. They may look to strategic deals to make it happen.
This combination of factors means many wineries may be looking to sell at a time when, for precisely the same reasons, investors are exercising caution.
Lucrative deals are still on the table
What we've heard in conversations about wine M&A deals this year is that the investors are out there. Just like sellers, they are wisely waiting to see how the dice fall. Are we seeing a true reset in the industry, or just a resettling as inventories level out?
The premiumization of wine is an important trend that could hasten more dealmaking. Economic factors and increased competition from inexpensive imports and other categories, including spirits and cannabis, mean the under-$10 category isn't as profitable for U.S. wineries anymore.
That presents an opportunity for wineries to focus more on fine wines at higher price points. It could also help push customers — and potential investors — to consider wines from burgeoning wine regions across the United States.
To some extent, this is a trend that has already started taking shape. In 2021, Indiana's Oliver Winery sold to private equity firm Nextphase
.3 Deals are also in the works in Washington State, Texas, and New York.
And there will always be a strong market for those trophy assets. Marchesi Antinori purchased Napa Valley pioneer Stag's Leap in the summer of 2023.4
October saw the near-$1-billion sale of Central Coast's DAOU to Treasury Wine Estates.4 The deal featured the perfect pairing of premium Bordeaux wines (like a gutsy $30 Cab) with a photogenic, mountaintop tasting room, proving irresistible to social media-savvy Millennials and Gen Zers.
Taking stock and preparing for future deals
Trophy asset wineries share some key characteristics: sustainable production models, a reputation for excellent wine, and a price point that's ripe for harvesting profits. For investors, it's about yielding good returns.
Wine businesses with M&A in their sights can use this time to strengthen their understanding of the market. For investors, it's an important time to analyze current and future trends. When the market becomes more favorable to sellers, wineries can consider taking the following steps to boost appeal to buyers:
-
Consider Production Dynamics: The first consideration is the sustainability of the brand's production dynamics, from reliable distribution channels to sourcing fruit from areas with plentiful supplies and proven quality. Future success might be found in less-established wine regions or states, in different formats — from boxes to cans — or in new varietals and blends.
-
Strategically Expand Cross-Generational Appeal: We hear it on a regular basis — how can brands boost their cross-generational appeal? We know younger generations are drinking less wine, but that could change. DAOU proves it's possible to do this without compromising on brand identity or price. It could be tempting to clear an inventory backlog, but heavy discounting has the potential to damage a brand.
-
Leverage Reliable, Broad-based Industry Data: The real trophy asset is information. Having reliable industry data means wine businesses can stay abreast of trends and make informed decisions to help them thrive.
That is why we formed the U.S. Wine Industry Partnership with bw166 and Wine Business Analytics. Our forthcoming broad-ranging 2024 BMO Wine Market Report will shine a light on every stage of wine production, from grape to glass — and distill data from wineries of all sizes across the United States.
This industry has a habit of adapting to change. Wine has survived for centuries, and history shows it will survive this period of change, too. Wine businesses that plan their next moves and make smart timing decisions based on fresh, accurate data will do far more than that – they'll thrive.
1. Gomberg & Fredikson market statistics.
2. U.S. Bureau of Economic Analysis.
3. NextPhase Capital, "Oliver Winery & Vineyards Partners with NexPhase Capital to Accelerate Future Growth," March 2021.
3. Martin Green, "Antinori purchases iconic Napa Valley producer Stag’s Leap Wine Cellars," Decanter, May 2023.
4. Treasury Wine Estates, "Treasury Wine Estates announces acquisition of fastest-growing luxury wine brand in the United States, DAOU Vineyards," October 2023.
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Adam Beak & Perry DeLuca
Adam Beak, Managing Director and Head, Wine and Spirits & Perry DeLuca, Head of Wine, Beverage and Agriculture Middle Market M&A, BMO Capital Markets
The U.S. wine industry is in the midst of historic change. An array of factors, including changing generational preferences and distribution channels, is affecting businesses at every level.
These factors are also currently influencing discussions about wine M&A following a recent period of rising interest in dealmaking. Despite a slowdown in the pace of blockbuster transactions in recent months, lucrative M&A deals are still possible, especially for those armed with clear, reliable data about trends, sales forecasts, and consumption. Here's our outlook on the current market and how wine businesses — and those interested in potentially acquiring them — can navigate it:
New dynamics in the M&A market
During COVID-19, wine business was booming. More bottles were produced to meet demand, and the industry prepared for a continuing growth period that simply didn't happen. Now the industry faces a predicament in which it has more wine at a time when people are drinking less of it. Millennials and Gen Zers haven't embraced wine in the same way as Boomers – yet.
There are reasons to be optimistic. According to data from bw166, a beverage alcohol advisory firm and fellow founding member of the U.S. Wine Industry Partnership, consumers are spending more on wine even as they're being pinched by the rising cost of living. Wine shipments were down 8.7% for the 12 months ending October 2023.1 During this period, consumer spending was up 4.9%.2
The disconnect here comes down to inventory excesses. Wine businesses are overloaded with product while being squeezed by rising interest rates. At the same time, what we’re hearing in client conversations is that as potential buyers are understandably more cautious and the cost of financing remains elevated, valuations have dipped.
We're also seeing generational shifts at the very top. The industry may be millennia-old, but thanks to Prohibition disrupting its history in the United States, many wineries are undergoing a change in leadership for the first time. Brands that have been around for a long time have leadership who may be looking for new directions for their businesses and opportunities to leap ahead of the competition. They may look to strategic deals to make it happen.
This combination of factors means many wineries may be looking to sell at a time when, for precisely the same reasons, investors are exercising caution.
Lucrative deals are still on the table
What we've heard in conversations about wine M&A deals this year is that the investors are out there. Just like sellers, they are wisely waiting to see how the dice fall. Are we seeing a true reset in the industry, or just a resettling as inventories level out?
The premiumization of wine is an important trend that could hasten more dealmaking. Economic factors and increased competition from inexpensive imports and other categories, including spirits and cannabis, mean the under-$10 category isn't as profitable for U.S. wineries anymore.
That presents an opportunity for wineries to focus more on fine wines at higher price points. It could also help push customers — and potential investors — to consider wines from burgeoning wine regions across the United States.
To some extent, this is a trend that has already started taking shape. In 2021, Indiana's Oliver Winery sold to private equity firm Nextphase.3 Deals are also in the works in Washington State, Texas, and New York.
And there will always be a strong market for those trophy assets. Marchesi Antinori purchased Napa Valley pioneer Stag's Leap in the summer of 2023.4
October saw the near-$1-billion sale of Central Coast's DAOU to Treasury Wine Estates.4 The deal featured the perfect pairing of premium Bordeaux wines (like a gutsy $30 Cab) with a photogenic, mountaintop tasting room, proving irresistible to social media-savvy Millennials and Gen Zers.
Taking stock and preparing for future deals
Trophy asset wineries share some key characteristics: sustainable production models, a reputation for excellent wine, and a price point that's ripe for harvesting profits. For investors, it's about yielding good returns.
Wine businesses with M&A in their sights can use this time to strengthen their understanding of the market. For investors, it's an important time to analyze current and future trends. When the market becomes more favorable to sellers, wineries can consider taking the following steps to boost appeal to buyers:
-
Consider Production Dynamics: The first consideration is the sustainability of the brand's production dynamics, from reliable distribution channels to sourcing fruit from areas with plentiful supplies and proven quality. Future success might be found in less-established wine regions or states, in different formats — from boxes to cans — or in new varietals and blends.
-
Strategically Expand Cross-Generational Appeal: We hear it on a regular basis — how can brands boost their cross-generational appeal? We know younger generations are drinking less wine, but that could change. DAOU proves it's possible to do this without compromising on brand identity or price. It could be tempting to clear an inventory backlog, but heavy discounting has the potential to damage a brand.
-
Leverage Reliable, Broad-based Industry Data: The real trophy asset is information. Having reliable industry data means wine businesses can stay abreast of trends and make informed decisions to help them thrive.
That is why we formed the U.S. Wine Industry Partnership with bw166 and Wine Business Analytics. Our forthcoming broad-ranging 2024 BMO Wine Market Report will shine a light on every stage of wine production, from grape to glass — and distill data from wineries of all sizes across the United States.
This industry has a habit of adapting to change. Wine has survived for centuries, and history shows it will survive this period of change, too. Wine businesses that plan their next moves and make smart timing decisions based on fresh, accurate data will do far more than that – they'll thrive.
1. Gomberg & Fredikson market statistics.
2. U.S. Bureau of Economic Analysis.
3. NextPhase Capital, "Oliver Winery & Vineyards Partners with NexPhase Capital to Accelerate Future Growth," March 2021.
3. Martin Green, "Antinori purchases iconic Napa Valley producer Stag’s Leap Wine Cellars," Decanter, May 2023.
4. Treasury Wine Estates, "Treasury Wine Estates announces acquisition of fastest-growing luxury wine brand in the United States, DAOU Vineyards," October 2023.
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