Understanding Why Beer Companies Buy Wine Companies

In a prior life of mine, I was a investment analyst at a hedge fund in New York City. Tasked with finding good investments in the global consumer and retail industries during my time there, I went on to lead our firms sizable investments in the beer industry. At one time, we were a major shareholders in Constellation Brands, Anheuser-Busch Inbev, Molson Coors and SAB Miller. Our firms thesis was that global consolidation would continue and lead to a "duopolistic" like pricing structure whereby pricing and margins would increase for the entire industry. I spent countless hours mapping out the entire global industry, talking to industry participants and research analysts, placing assets with different companies using a physical map and pins. I became the beer guy at the firm.

Throughout all of this, one thing that continued to puzzle me was why Constellation Brand was building a wine portfolio. I didn't know much about the wine industry but in my view it was a lifestyle industry. No one went into the wine business to build a billion dollar business. It was a hobbyist industry, nothing more, nothing less. Yet Constellation was investing millions of dollars into their wine businesses and I couldn't figure out why. The beer business was a concentrated sixty percent gross margin with pricing power whereas the wine business was extremely fragmented. You had pricing power but consumers had far to many options for pricing power to matter. I needed to know why they were investing here instead of the beer business. Any chance I got, I inquired about the wine business, suggesting that the company get rid of it but time after time I was rebuffed, told that the company was committed to it's wine business. As if I needed further clarification, the company then bought The Prisoner Wine portfolio and I remember being utterly confused. As far as I could tell, the company just wasted three hundred million dollars, choosing to allocate it here instead on in the higher-return beer business.

I ultimately left the firm for the GSB without ever getting a good understand of the wine industry or what made it so attractive. Throughout this class I'm hoping to understand the history of the industry and why it evolved in the a manner so different from the beer industry. I also want to understand the underlying motivations of actors in the industry as a means of understanding the industry better in general. At the end of the class, I hope to be able to see why Constellation was so committed to the business.