The Wine Group Fighting for Tight Margins

In the highly fragmented wine brand landscape, The Wine Group (TWG) stands as third overall in market share with approximately 7.8%. Though they are third largest, they are competing against Goliath's in the space with Constellation Brands (13.6%) and E&J Gallo (24.9%). Their competitive advantage has been building strong brand awareness in the low priced end of the spectrum, with brands like Cupcake and Flipflop, while also capitalizing on the growth in the boxed wine segment. On the latter point, TWG is the industry leading producer of boxed wines, giving it the designation as the country's most carbon efficient winery and increasing it's appeal to environmentally conscious customers. Though their growth of 3% annually has increased at rate higher than the industry over a five year period, the small margins in the low end create difficulties in growing profitability.

The two competing story lines of The Wine Group is growth and margins. First on growth, TWG has been consistently able to grow operating profit at a rate of 5-7% annually, driven by increase in volumes in its low end brands. Constellation Brands experienced more volatility over the same three year time period, with some years experiencing decreased operating profit. With regards to margins, TWG experiences significantly thinner margins relative to its piers, with an average operating profit % of approximately 12-13%. Constellation in contrast realizes 18-20%. TWG has been expanding it's wine brands to nearly 50 brands and begun to expand into higher-priced product segments, which can contribute to increasing its margin.

TWG has been successful in driving in growth in their sales, especially as consumer preferences have shown a preference for red wines. Additionally, TWG being a leading producer of boxed wines gives them strong positioning in a product category that has faster growth than the industry at broad. Though margins have been relatively weak, their expansion in product categories can help drive wider margins, while continuing strong growth. In short, boxed wine saves the environment, and TWG, too.