Following our case discussion in class, I was struck by the
number of potential strategic next moves for Inniskillin to grow as a brand,
coupled with the incredible execution challenges associated with each. I set
out to outline (in greater detail) the key options Inniskillin had, the
strategic pros and cons associated with each, and what happened next.
Constellation Brands
As further context, for those of you with limited familiarity of the big players in the wine space, I wanted to outline some more background on Constellation Brands. Constellation, with about $8B in annual revenue and $36B in market cap today, is the top conglomerate in the US beverage space (its next largest competitor, privately held E&J Gallo, has about $5B in annual revenue today).
In speaking to colleagues at Duckhorn this past summer, when they were last up for sale by their previous Private Equity owner, GI Partners, there was a seeming existential threat that they'd be sold to a strategic - specifically, Constellation or Gallo. This was feared not only because of the "synergies" that would inevitably mean the firing of HR, Finance, Marketing, etc., but also (and mostly) because they worried it would significantly cheapen the brand. Constellation has a reputation for taking successful brands down-market: for cutting costs and pumping much higher volumes through their (top notch and massive) distribution channels. This is great from a profit perspective, and profit maximization is obviously an important metric. But, in the case of wine, I would argue that long term brand equity and customer LTV are driven by quality and authenticity. I don't think that higher volume and lower price are the only way to succeed. Duckhorn (and a number of other top luxury brands) has proven that.
Luckily, TSG Consumer Partners (an excellent fit for the brand) acquired Duckhorn in August 2016. Phew - existential crisis averted.
Note that I am obviously biased here. Constellation has some decent quality and top-selling wines in its portfolio. Take Kim Crawford, the Prisoner, Meiomi. Constellation has taken these brands to an incredible volume. Fun fact: Kim Crawford was snagged up by Constellation as a part of the Vincor deal, and it's now a big winner for them. (But, as a Kiwi, I still hate that Kim Crawford isn't Kiwi owned...)
Strategic Options
- Move up-market: Create an ultra-premium icewine appealing further to the same (or slightly wealthier) demographic - primarily tourists. There, of course, is risk that the current demographic isn't a fan or that few need another expensive dessert wine - this would compete more with some famous, more "authentic" (read: European) dessert wines. Also would not take advantage of Constellation's operational synergies (read: mass distribution).
- Move down-market: Create a lower-price product (cheaper icewine or table wine). While not the sexiest option and definitely brand dilutive, this is what Constellation does best. Successful label differentiation (e.g., creating a second label - "Icy by Inniskillin") could limit this. Risk of cannibalization exists, but strategic positioning could also make it a "gateway." Hard to execute, but if done well (and if a market exists), could be promising.
- Tackle adjacencies: Build off of the "ice" trend to launch something new (e.g., ice cider). While the class liked this idea, the risks of cannibalization and potential brand dilution well-noted. But, Constellation would certainly be able to pump this through its channel, making this an attractive option itself.
What Happened
In December 2016, about 10 years after its initial Vincor takeover, Constellation divested
its Canadian brands, including Inniskillin, for C$1B. The press release initially announcing the decision highlighted that this move would "advance its strategy of focusing on premium, high-margin, and high-growth brands while building shareholder value," a hint that the broader Vincor portfolio it had purchased was a margin inhibitor for Constellation.
While, of course, Constellation shares limited details behind its rationale, it seems like their move was mostly down-market. Inniskillin table wine is now available, as is sparkling icewine (suggesting one up-market move). Based on distribution details, they certainly pumped Inniskillin through their distributors, rather than sticking with the DFS strategy alone.
Was Inniskillin unsuccessful for Constellation? Did Constellation make the wrong move strategically in its expansion plans? Curious to hear your thoughts (and any inside details Alyssa may have behind the full set of steps Constellation took).
Sounds icy.
I found the discussion on the expansion strategy to be extremely interesting. I would like to share my thought on such topic.
ReplyDeleteI believe Inniskillin has done a phenomenal job in creating such a brand via genius marketing strategy. However, I believe that it may have exacted all its value when it comes to ice wine. I do not think the company should risk canabalizing its existing product by going down the value chain.
I did some research on the shelf life of ice wine to see if there is any potential hoarding value such as other sought-after varieties of wine and found no evidence of that. In other words, there is little to no collection value over time. In addition, given the intense level of sugar content, a normal consumer is unlikely to consume ice wine in large quantity in one sitting. The occasion of picking up a glass of ice wine is also less likely to present itself compared to a glass of red, white, or a cold brewed beer. Simply put, the consumption capacity is also “capped”.
With the unique characteristics of ice wine in mind, I would suggest the following growth strategy:
1. Create a superior line of product: smaller, fancier bottle that focuses on the “top quality” wine, demanding higher price than the rest. (limited edition)
2. Continue to expand its footprint geographically and out of the DFS by leveraging its existing brand name
3. To acquire different vineyard, or varieties of wine altogether since the management has demonstrated its ability to create such strong brand from scratch
Nicole - thank you for your thoughts! Very interesting perspective.
ReplyDeleteI'm curious to hear - how do you reconcile these ideas with Constellation's strategy of wide-scale distribution for most of its brands?
Of course, Constellation was particularly interested in acquiring Inniskillin given its popularity and market traction up until the point of acquisition. Presumably their thesis was that the market was under-tapped - that under their ownership, they could massively expand distribution vs. what Vincor had been doing. I tend to agree with you here that the consumption capacity is somewhat "capped" compared to your typical reds and whites (given that dessert wine is more of a specific taste), but other dessert wines like port are widespread. Do you not see this as an Inniskillin-specific (or icewine specific) problem?
In my mind - I think it's an icewine problem. It's very specific, and to agree with several students from class, it's not perfectly "authentic" in that icewine originally came from Canada. Inniskillin has also been established as premium, so brand dilution is a palpable risk in going downmarket (though Duckhorn is certainly an example of success with that strategy).
I'd argue that Constellation had a miss here - they overestimated market size and/or butchered execution if they aimed to roll this out more to the masses (though this will depend on the exact path they took, which per my notes above, obviously proves quite hard to find via an internet search without inside knowledge). Hoping to hear more context this upcoming class!