Altria (NYSE:MO) entered the wine business with the acquisition of UST Inc. in January 2009. UST’s principal subsidiaries included U.S. Smokeless Tobacco Company and International Wine & Spirits Ltd. Altria primarily acquired UST for its smokeless tobacco portfolio, as it wanted to partially insulate itself from the growing migration of smokers toward smoke-free tobacco consumption. However, it continues to operate the wine business to this day. Here, we take a look at the key revenue drivers impacting the business that contributes just around 2% to Altria’s total value by our estimates.
Our $41 price estimate for Altria is almost 10% above its current market price.
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Sales Volume: Altria sold 7.97 million 9-litre cases of wine last year. Its sales volumes have grown at more than 7.3% CAGR since 2009. This compares to growth of around 3.6% CAGR in total wine consumption in the U.S. over the same period.  As a result, Ste. Michelle Wine Estates, Altria’s subsidiary that controls its wine business, has been able to grow its volume share in the U.S. wine market from 1.9% in 2009 to 2.2% in 2013. The market share gain can be primarily attributed to growth in the distribution network and performance of its 14 Hands brand over the past few years. 14 Hands has been one of the fastest growing wine brands in the U.S. Last year, its sales volume grew by more than 34%, compared to growth of just 2.7% in the total U.S. wine market. 
Going forward, we forecast Altria’s wine sales volume to grow at around a 5% CAGR, primarily driven by growth in the overall U.S. wine market as well as market share gains due to increased distribution of its brands. Wine consumption in the U.S. has grown at 3.4% CAGR since 2005, compared to 2.9% CAGR growth seen in the U.S. beverage alcohol market over the same period. It is expected to continue to grow at around 3-4% CAGR in the long run, as wine continues to gain traction among adult consumers.  Apart from the expanding consumer base, we also expect wine sales in the U.S. to draw growth from increased distribution points. For example, Starbucks started serving wine in some of its restaurants recently and plans to expand its wine menu to thousands more in the coming years.  Moreover, consumers can now also purchase wine from online retailers such as Amazon and can gift wine to their friends via Facebook. 
Pricing: Ste. Michelle Wine Estates primarily produces and markets premium wines sold nationally under 20 different labels including Chateau Ste. Michelle, Columbia Crest, Stag’s Leap Wine Cellars and Erath. It exclusively distributes and markets Antinori products in the United States. The company earned revenue of around $76.4 per 9-litre case of wine sold last year. Its revenue per case has increased at around 3.3% CAGR since 2009. The rise in revenue per case can be primarily attributed to better volume-mix and higher grape costs seen over the last couple of years due to a shortage in supplies. 
Going forward, we expect Altria’s revenue per case to continue to grow at around 3% CAGR in the short to medium, as a continuous decline in vineyard acreage and a steady increase in consumption demand has led to a structural imbalance in the U.S. wine market. While planting activity in wine grapes has increased over the last couple of years, it would take around 2-3 years for new production output to have a significant impact on wine prices. Notes:
- 2012 Wine Sales In U.S. Reach New Record, wineinstitute.org [↩]
- Altria 2013 10-K, sec.gov [↩]
- State of Wine Industry, demetergroup.net [↩] [↩]
- What To Expect From Starbucks’ New Booze Menu, bloomberg.com [↩]
- Giving The Gift of Wine via Facebook, winespectator.com [↩]
- U.S. Grape Industry Stats, ngwi.org [↩]