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Days of Wine and Mergers

Small domestic wineries struggle to compete in a fast-consolidating market.

In 1985, legendary wine critic and industry shaker Robert Parker did something he had never done before: he gave a bottle of California wine a 100 rating. The perfect score went to a 1985 Reserve Cabernet Sauvignon produced by a struggling start-up, Groth Vineyards & Winery. In Napa Valley, the geographic heart of the U.S. wine industry, a perfect score from “The Nose” is a big deal. A Parker rave often triggers a market frenzy, lifting reputations and prices. Conversely, a bad review can leave thousands of bottles sitting on warehouse shelves.

The 100 score from Parker put Groth on the map, catapulting the obscure winery to stardom. Amid the industry buzz, however, few observers noted a small irony: the perfect balance of grapes in that 1985 Cabernet was produced by a lifelong bean-counter. Dennis Groth spent 13 years at accounting firm Arthur Young and Co. and was CFO at electronic-game maker Atari when he plowed money from his profit-sharing plan into a 121-acre vineyard nestled in Oakville, California. Although Groth and his wife, Judy, initially lost their bank financing, they persevered, pouring more of their own money into the project. “It took us 24 months to sell our 1983 vintage,” the CFO-turned-vintner remembers. “But we were determined to demonstrate we could make a good wine.”

Two decades later, Groth still produces good wines, harvesting mainly cabernet and sauvignon blanc grapes from the vineyards dotting the lush valley in Oakville. But for Groth — and executives at smaller wineries in Napa — the landscape is changing.

An industrywide consolidation is beginning to squeeze smaller producers along nearly every price segment of the market. Well-capitalized global beverage conglomerates like Diageo Plc, Foster’s Group Ltd., and Constellation Brands Inc. have brought risk management and financial discipline to the wine business, fashioning small empires that can withstand blips in the marketplace. And cheap imports from Australia, a country flush with an overabundance of grapes, have come to dominate the slurp-and-burp sector. The most successful Aussie import, Casella Wine’s Yellow Tail brand, is now the ninth most popular wine brand in the United States, and the single biggest seller in grocery stores. Says Barbara Insel, managing director at MKF Research LLC: “Everybody’s getting out of their way.”

The crush of competition has made things difficult for finance executives at many of the 4,000 wineries operating in the United States, most of which are small, family-owned businesses like Groth. As with finance managers at small-to-midsize businesses in other consolidating industries — software, banking, telecommunications — these CFOs must control costs, protect brands, and, above all, maintain margins.

It’s no easy task. Although domestic wine buying jumped 4 percent (to $23 billion) in 2004, sales are increasingly going to brands owned by large, acquisitive multinational corporations. Constellation, in particular, has been picking off wineries like so many dead-ripe grapes on a late summer day in Sonoma — and in the process, transforming the industry. “The traditional way of growing the business was beating the pavement and selling more wine,” says Jon Fredrikson, president of wine consultancy Gomberg, Fredrikson & Associates, in San Francisco. “But Constellation has been very successful at digesting acquisitions and leveraging deals. And others are now trying to do the same thing.”

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