The US wine market is over $40 billion per year and growing. This is despite the fact that the traditional 50-state wine market in the US is dominated by a handful of large wine companies who largely focus on fortified wines (like the “Three Bs”: Brandy, Bordeaux, and Burgundy) and large industrial-sized winery plants. Yet, there is a new generation of smaller producers, that are battling to change the very definition of what ‘wine’ is. These smaller producers are producing wines that are handcrafted from specific grapes and high-quality fruit; they are also eschewing the production of large barrels of wine in favor of producing small batches of wine that are far more in-line

The US wine market is an interesting piece of economic data that demonstrates the power of supply and demand in the modern economy. The market has grown massively in the last 10 years, partly due to a greater awareness of the health benefits of red wine, and the amount of people drinking wine has increased by over 600% in the last 20 years.

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According to a new report from Rabobank, mergers and acquisitions of small wineries will be at a low ebb in 2021, due to a large difference in valuation expectations between buyers and sellers. Sellers sees the recent IPO of Duckhorn, which is currently trading at about 20 times EBITDA, as a new standard for valuations in general. Buyers use other recent transactions in the market at much lower valuations as a reference.

4. May – This gap in expectations will narrow over time, and the ongoing recovery in the on-premise space will play an important role in providing more clarity. Some wineries will improve their valuations over time, but for others, deferred sales may reduce incremental value, says Stephen Runnekleave, global beverage strategist at Rabobank.

The Covid crisis and recent wildfires have increased the number of small family vineyards interested in selling, but there seems to be a significant gap between buyers’ and sellers’ expectations in terms of valuation. Part of the reason for this discrepancy is that the valuations of the sensational M&A transactions that were completed varied quite a bit. Duckhorn was valued at 15 times EBITDA at the IPO, but the share price immediately rose to a valuation of around 20 times EBITDA at the time of writing. On the other hand, the recent sale of the Constellation brands to E&J Gallo was completed (by most industry estimates) for less than ten times EBITDA.

While high market liquidity can put upward pressure on valuations of certain types of deals,… 20 times EBITDA is not a normal benchmark for a wine deal. On the other hand, the Constellation-Gallo deal is obviously not an indicator of where most valuations will fall, Runkleive says.

Since the decline in sales in the retail channel has been a major disruptive factor for smaller wine producers, the pace of recovery in this channel will likely play a role in aligning valuation expectations between buyers and some retailers.

On-site service revenues are expected to grow steadily in the second half of 2021.

The good news is that the restoration of the local network is on track for the second half of 2021. There is pent-up demand, consumers are eager to go out and have fun again, and wholesalers are seeing sales at or above 2019 levels in many bars and restaurants that have fully reopened.

However, there are still some major challenges that will limit growth. In addition to losing customers due to constant closures, many restaurants are cutting back on their wine lists to better manage cash flow and improve operational efficiency, Runkleive said. This will likely favor the larger, better-known brands and create more competition for placement among smaller wineries, he says.

The pace of recovery for chain restaurants and independent restaurants will be uneven: The former will recover faster and gain shares from the latter. The growing share of networks will be more beneficial to the large, established brands.

The difference in evaluation expectations will eventually disappear

The continued recovery of the market for wine for on-site consumption is good news for the sector and may allow some wineries to increase their profitability, allowing them to align their prices with those of potential buyers. Moreover, wine producers who were able to effectively shift sales from local channels to e-commerce/direct-to-consumer channels during the pandemic may find themselves in a relatively advantageous position.

Technology deals come to the forefront of mergers and acquisitions in the wine sector

Food and beverage retailers and technology companies are focusing on the beverage category to drive the growth of their e-commerce business and are investing heavily in the development of their online beverage infrastructure.

Despite huge growth in 2020, alcohol remains undervalued and under advertised in most major e-commerce channels, says Burkard Nesin, beverage analyst at Rabobank. Alcohol may be the last low-hanging fruit in the online food and beverage world, a bright spot in a difficult time for e-commerce players, he says.

What does all this mean for alcohol brands? This investment in the liquor category is almost a guarantee that, even if we leave the coronavirus pandemic behind us, the liquor category will continue to grow strongly for the next two or three years. As retailers and technology companies begin to set up dedicated e-commerce teams for the alcohol category, they will look to alcohol brands for support, advice and guidance.

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