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Vintner no longer world No. 1, and likes it that way

Richard Sands, Rob Sands
Though it'll take years, Richard and Rob Sands think Constellation will move ahead of Gallo once more as the premium market, boosted by younger generations with more varied and vigorous consumption habits, swiftly expands.David Duprey / AP
/ Source: The Associated Press

Richard and Rob Sands took their father's little wine company on a two-decade buying binge, turning a regional purveyor of low-pedigree plonk into an alcoholic-drinks powerhouse with moderately priced wines, spirits and imported beers like Robert Mondavi, Svedka and Corona Extra.

Along the way, the brothers acquired one other seemingly enviable label in 2003: world's biggest vintner.

Even in a highly fragmented industry in which Constellation Brands Inc. claimed just 4 percent of global wine production, it was a high point for a family business with post-World War II roots in the Finger Lakes grape-and-wine country in western New York.

But size doesn't trump success. Constellation has been pruning methodically for five years as it strives to invigorate profits in a choppy economy and refocus on solidifying its supremacy in the sweet spot "premium category" — higher-margin wines priced from $5 to $20 a bottle.

In January, it dropped to No. 2 in the vintner-by-volume rankings behind longtime leader E. & J. Gallo of Modesto, Calif., when it offloaded a once-promising Australian wine business that had gone badly awry.

Disposing of Australia's top-volume winemaker, BRL Hardy Ltd., after eight turbulent years was critical, even if the $1.1 billion buyout had given sparkle to a company many people had never heard of.

"Sure, it was thrilling, a feather in the cap," said Chairman Richard Sands, 60, who was chief executive for 14 years before his younger brother took the helm in 2007. "But what happened in Australia was the perfect storm. And instead of the ship sinking, we sold it!

"We are focused entirely now on organic, profitable growth. We feel like we've got an even better feather, which is the world's No. 1 premium wine company."

Though it'll take years, the brothers think it likely Constellation will move ahead of Gallo once more as the premium market, boosted by younger generations with more varied and vigorous consumption habits, swiftly expands in North America and beyond.

"In my generation, we like to try new things and there are so many options," said Mitch Ball, 30, a bagel-bakery manager, as he shopped with his wife at a liquor store in Rochester for an $8-to-$10 wine. "We're feeling the crunch in this economy, so we're not spending as much on big-ticket items. But a bottle of wine is a simple indulgence, and we can certainly afford a few dollars more to get better quality."

Wine consumption in America has grown for 17 straight years to 330 million cases, up 70 million in a decade, and the quality of wine has kept pace, according to the San Francisco-based Wine Institute. The U.S. now sells more wine than any other nation and spends more, $6.50 a bottle on average.

Two-thirds of Constellation's wine is premium, mostly in the $5-to-$15 range. It has an estimated 17 percent share of that segment in the U.S., ahead of rivals that include Gallo, Treasury Wine Estates, Kendall-Jackson and Diageo.

"Premium-ization started early in the last decade," Rob Sands, 53, said from his hilltop office 20 miles southeast of Rochester. "We started even well before that, recognizing that the consumer is trading up and buying more expensive wines. And the margins are better."

Founded by Marvin Sands as a bulk wine seller, the company launched Richard's Wild Irish Rose in 1954, a cheap dessert wine that remains profitable. In the 1980s, it capitalized on the wine-cooler craze by creating new brands and gussying up old ones while picking off ever bigger competitors on the cheap.

It jumped into California's coveted market by netting Franciscan in 1999, Turner Road and Ravenswood wineries in 2001 and Robert Mondavi Corp. in 2004. Its 21 acquisitions over 21 years ran through 2007 when it bought Fortune Brands' U.S. wine business, maker of Wild Horse and Clos Du Bois.

Then came the cost-cutting.

Constellation divested Almaden, Inglenook and other low-priced wines that generally sell for less than $5 a bottle, paring its 300 brands to 100. It has slashed its debt from $5.3 billion to $3 billion and shrunk its payroll from 9,400 to 4,300.

Selling 80 percent of its Australian and British business sliced volume from 94 million cases to 64 million, it said. That compares with Gallo's estimated 76 million cases a year, says industry publisher Impact Database.

Hit by drought, a wine glut and a slump in quality exacerbated by price cuts in its largest export market in Britain, the Australian business became a commoditized misadventure the Sands were happy to exit.

Investors expect the sale to create a richer business with less risk. During the recession, trading up didn't stop but profits were eroded by heavy discounts and a 30 percent drop in wine sales at restaurants and bars.

"They're probably in the eighth inning of the turnaround," said beverage analyst Kaumil Gajrawala of UBS Securities in New York. "They should start to look a lot smoother as they come out of it."

Each brother says he would have done the same as the other if their CEO reigns were switched.

"We don't have a personality difference in risk-taking," the elder brother said. "The right acquisitions we would be very interested in. But during Rob's era, a more centralized focus is appropriate because of the environment."