The wine industry is fragmented with 10,000 wineries, but it is on the path of consolidation. Since the pandemic, consolidation has accelerated. The public markets will facilitate the consolidation. Wine never left the public markets, but there have not been pure-play investment vehicles to publicly invest in wine growth in decades. Then last year four wine companies went public.
Many investors had come to believe that wine companies do not belong in the public markets, because there were not any. There are wine companies listed on foreign exchanges, small caps listed in the U.S., and wineries owned by much larger diversified companies. The market was missing wine growth companies, consolidators gaining scale advantages. Scale matters in wine like it does in many CPG categories. In most CPG categories a few large brands and private label dominate, while smaller and regional brands try to carve a niche. Where wine is unique is growing the raw commodity while also processing and marketing the final, differentiated product.
We presented a deep dive into the wine category.
Our Black Book covered:
- the current state of the market
- demographic trends
- channel power
- the importance of scale
- M&A
- and where we see the sector in five and ten years.
We added The Duckhorn Portfolio (NAPA) to our short list. 2022 favors different channels than the prior year as pandemic restrictions are lapped. Tasting rooms and on-premise are positioned to have the strongest growth while the off-premise channel pulls back further as consumers pour glasses of wine outside of their homes. The slowdown in off-premise, inflationary headwinds, and the challenges to new distribution while raising prices will challenge NAPA's performance in the coming quarters. NAPA is a trade duration short in Quad 4 as we think the company will have a significant role in the future consolidation of the luxury wine sector.
Our investment themes for The Duckhorn Portfolio:
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