Altria’s Wine Segment: Surprising Top Performer for 2015

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It may be easy to forget that Altria (NYSE:MO) isn’t just a tobacco company. While its Ste. Michelle wine business may not contribute a significant portion of its revenues, it was the most successful segment for the company in 2015. Altria Group’s subsidiary, Ste. Michelle, is a leading producer of wine in the Washington state region, with brands like Chateau Ste. Michelle, Columbia Crest, and 14 Hands. It owns wineries and distributes wines in several other wine regions and foreign countries.

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Strong Portfolio Of Premium Brands Results In Impressive Profit Gains

Ste. Michelle Wine Estates has a number of premium brands under its belt and a widely respected leadership team. In 2014, 180 wines that Ste. Michelle and its wineries produced, or represented, received ratings of 90 or higher, including one that attained a prestigious 100-point rating. In 2015, Wine & Spirits magazine named Chateau Ste. Michelle one of its ‘Top 100 Wineries of the Year’ for the 21st time, making it the most honored American winery. [1]

These prominent brands helped the company achieve significant growth in the wine segment. For the nine months ended September 30, 2015, the company witnessed almost 8% growth in its wine segment year-on-year, compared to 5% growth of smokeable products revenue, and a 4% rise in revenue in the smokeless products division. Looking at the operating companies income (OCI) is even more impressive. The OCI from its wine segment increased 20% year-on-year to $97 million, in contrast to 13% in the smokeable products segment, and a measly 3% in the smokeless products segment. [2] In its October conference call, Martin J. Barrington, chairman, president, and chief executive officer of Altria Group, stated the reasons for such high growth in the wine division were higher volumes and an improved premium mix. [3]

Volumes Growth

The presence of Altria Group in the wine business, as well as its beer assets, has aided the company to attain a most diverse model among its U.S. peers, which may also provide a competitive advantage.

Rise Of Washington State Wines

Wines from Washington state have made remarkable steps forward in the U.S. market. It now produces more than 12.5 million cases overall. [4] The number of wineries in the region has grown substantially, from less than 20 in 1980 to more than 850 today. [5] The revenues from the region total over $1 billion, with a market share in the U.S. of 4%. [6] The low-priced acreage found in Washington makes innovation viable, enabling winemakers to take a chance on varietals not considered mainstream.

Washington state of the industry

Ste. Michelle is the leading player in terms of volume, with 12 Washington wine brands and 6.5 million cases of wine shipped from the state in 2014. According to President and CEO Ted Baseler, the highest growth has been in red blends priced between $9 and $17. He also predicts increased growth of wine production in the Washington area and expects to see tremendous growth in both vineyards and wineries.

Precept Wine, another big player in Washington, shipped 900,000 cases in 2014, an increase of 15% over the previous year. Walla Walla-based Charles Smith Wines is an additional rising player, which employs traditional winemaking techniques with contemporary packaging. It shipped 750,000 cases in 2014 while achieving sales growth of 25%-30% annually, for several years.

With vineyards in Washington available at a fraction of the price of those in California, and water plentiful with the Columbia River, the industry is expected to grow dramatically. In the words of Baseler, “the future is bright for Washington.” [7]

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Notes:
  1. Chateau Ste. Michelle named Wine & Spirits “Wineries of the Year” []
  2. Altria 10-Q, Q3 2015 []
  3. Altria Q3 2015, Earnings Call Transcript []
  4. Washington Wine, Part 1 []
  5. Washington State Wine Facts []
  6. Washington Wine, Part 2 []
  7. Ste. Michelle CEO: Economic Factors Key in Wine’s Pacific Northwest Migration []
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