Affected market: Wholesale supply of wine
The OFT’s decision on reference under section 22 of the Enterprise Act 2002 given on 14 June 2006. Full text of decision published 28 June 2006.
Please note that the square brackets indicate figures or text which have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.
Constellation Brands Inc (Constellation) is a US company listed on the New York stock exchange, is a global producer and marketer of branded beers, wines and spirits.
Vincor International Inc (Vincor) is an international producer and marketer of wines based in Canada. Through its wholly-owned subsidiary, Western Wines, Vincor imports into the UK and markets a portfolio of branded wine produced in a number of different countries.
Constellation acquired the entire share capital of Vincor on 5 June 2006. Prior to completion of the acquisition, it submitted an informal notification to the OFT on 13 April 2006. The administrative target date for a decision is 14 June 2006.
As a result of this transaction, Constellation and Vincor have ceased to be distinct. Vincor’s UK turnover exceeds £70 million and the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is consequently satisfied. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.
The parties overlap in the wholesale supply of wine in the UK.
In the UK, Constellation supplies a wide range of branded (see [note 1] wines produced in the United States, Australia, New Zealand and Chile. Vincor, through its wholly-owned subsidiary Western Wines, distributed a somewhat smaller portfolio of branded (see [Note 2]) wines produced in South Africa, Australia, Chile, Canada, Spain and Italy.
Constellation submits that the relevant product scope is no narrower than the wholesale supply of wine. It further proposes that consumer purchasing patterns indicate that all wines (and therefore all wine wholesales) pose mutual competitive constraint. Consumers’ choices of and attitudes towards wine can differ in a number of ways including knowledge of wines, sense of occasion, age and preferences for accompaniment with food.
Wine is a drink made from fruit juice - typically that from grapes - which is fermented to produce an alcohol content of around 10 to 15 percent by volume. They can be classified according to one or more different criteria such as:
- vinification method (eg. still, sparkling, fortified)
- palate (eg. dry, fruity, off-dry, sweet)
- colour (eg. red, white, rosé, blush)
- grape varietal (eg. merlot, chardonnay, tempranillo)
- country of origin
- region (eg. Burgundy, Côtes du Rhône, Chianti)
- vineyard (eg. Château Lafite-Rothschild, Château Latour)
- own-label brands (eg. Tesco Australian Merlot))
However, independent research undertaken by Mintel (see [Note 3] indicates that, from the end user’s point of view, price (the majority of wine sold in the UK retails at below £4 per bottle) and colour are the most influential factors taken into account by close to a third of UK consumers when choosing wine.
The same research also indicates that:
a. a quarter of UK consumers tend to buy wine according to country of
b. the same proportion make 'spur of the moment' decisions in the shop as to which wine they will choose, and
c. a significant number of UK consumers make distinctions between ‘New World’ and ‘Old World’ wines and that the impetus in the UK wine market is being driven by the New World.
Branded wines - particularly those of the New World type - feature prominently in the UK market and account for just over 40 per cent of the volumes sold.
By and large, comments from third parties add weight to Constellation's proposal for a product scope consisting of the distribution of all wines. However, several competitors submitted that, whilst all wines can in principle be regarded as being within a larger competitive framework to some extent, wines within a given price band (and in some cases, wines in adjacent price bands) compete more directly with each other.
Having regard to the fact that the parties overlap predominantly in the distribution of New World wine brands, the OFT’s assessment is made in this particular case on the impact of the merger on the distribution of all wines and, separately and cautiously, on New World wines. In light of the fact that no competition concerns arise even on a narrow, cautious basis, the OFT does not draw any conclusions as to the exact appropriate product scope in this case.
Constellation submits that the relevant geographic scope is global, given that over 90 per cent of the volume of wine sold in the UK is imported and that considerable proportions of that volume are imported from countries as far afield as Australia (20 per cent), the US (12 per cent) and South Africa (9 per cent).
However, given that the sale of wine is regulated within the UK, the analysis in this decision is based on the cautious approach of considering the UK separately.
Post merger, Constellation’s share of the supply by volume of all wine sold in the UK is around [10-20] per cent, increment [1-10] per cent. A considerable number of competitors remain. The second largest is Diageo with a share of around [1-10] per cent. E&J Gallo, Foster's Group and Pernod Ricard are on fairly equal footing as the third largest competitors with shares of supply at around [1-10] per cent. A long tail of smaller competitors account for the considerable majority of all wine supplied in the UK - with combined shares of supply amounting to a little over [65-75] per cent.
With regard to branded New World wines, Constellation's post merger share of supply in the UK by volume is around [20-30] per cent, an increment of [1-10] per cent, largely as a result of its taking ownership of Vincor's (South African) Kumala brand. The principal competitors in this segment are the same as those that supply all wines, namely Diageo ([1-10] per cent), E&J Gallo ([1-10] per cent), and the Foster's Group and Pernod Ricard with around [1-10] per cent each. A long tail of smaller competitors still account for half of the branded New World wine sold in the UK.
Constellation’s brand Stowells (which comprises a range of wine labels of individual varietals and blends from a number of different countries) is, with a share of just over [1-10] per cent of the total supply volume of all the wine sold in the UK, the best selling brand. But there are other prominent brands present, including E&J Gallo (US), Blossom Hill (US) and Jacob's Creek (Australia) - each with a share of supply of around [1-10] per cent.
Given the size of the parties and the presence of significant competitors, the OFT does not consider that the merger gives rise to any horizontal competition concerns in the supply of wine generally or of New World wines in the UK.
THIRD PARTY VIEWS
The majority of third parties did not raise any concerns. One customer proposed that prices would increase but also submitted that it could easily switch between suppliers.
The parties overlap in the wholesale supply of wine in the UK - in particular the supply of branded New World wines.
Wines can be classified according to a number of different criteria (see product market paragraph above) although the parties submit (and third parties broadly agree) that all wines can be regarded as being within one large competitive framework.
The OFT’s assessment has taken regard of the impact of the merger on the supply of all wines and of branded New World wines in the UK. On either basis the parties supply no more than [20-30] per cent of wine and will continue to face substantial competitive constraint from a large number of suppliers.
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted, or may be expected to result, in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- Constellation’s major wine brands in the UK include: Hardy's, Banrock Station, 4 Emus, Houghton, Leasingham, Stonehaven, Yarra Burn, Reynella, Barossa Valley Estates, Nobilo, DryLands, Echo Falls, Turner Road, Robert Mondavi, Estancia, Ravenswood, Paul Masson, Blackstone, Simi, Vendange, Rex Goliath, Shamwari, Vermonte, Stowells, Miavina and Ruffino.
- Vincor’s major wine brands in the UK include: Amberley, Bellingham, Carancho, Charles Black, Cono Sur, Da Luca, Douglas Green, Goundrey, Inniskillin, Isla Negra, Kumala, Palacio de la Vega, Villiera, Vina Alta Mar and Zonte's Footstep.
- Wine, Market Intelligence, January 2005.