The Rise and Fall of Vincor

Noushi Rahman and Saima Prodhan

Abstract

Within a decade since its inception, Vincor had become the tenth largest wine
company of the world. Vincor’s rapid growth was mechanistic, namely through a series
of acquisitions. Notwithstanding Vincor’s impressive growth, by 2005 its stock started
under-performing and the company started drawing the attention of various suitors. In
2006, under mounting pressures, Vincor’s board was forced to agree to be acquired by
the spirit-giant Constellation Group. Where did Vincor go wrong? This case will
highlight two key areas: lack of focus on core competency and over-dependence on
mechanistic growth over organic growth.

Vincor Background
In 1992, Canadian winemaker Cartier bought rival winemaker Inniskillin, and in
1993 merged with another Canadian winemaker T. G. Bright to form Vincor. After it
acquired Dumont Vins et Sparitueux in 1996, Vincor became the largest winery in Quebec.
Also in 1996, Vincor listed its stocks on Toronto Stock Exchange. Vincor stocks soared in
the following years as it engaged in numerous acquisitions and rapidly grew in size.
Within a decade since its inception, Vincor became one of the largest wine companies of
the world.

Lubin School of Business, Pace University

 THE RISE AND FALL OF VINCOR

Table 1: Vincor’s Acquisitions and Associated Costs

Year Target Firm Acquisition Costs
1996 Okanagan Vineyards $4.2 million
1996 London Winery $9.5 million
1997 R. J. Grape Undisclosed
1998 Spagnols Wine & Beer Making Undisclosed
Supplies
1998 Groupe Paul Masson Winery $22 million + undisclosed deferred
payments
2000 Sumac Ridge Vineyards $4.7 million (estimated)
2000 Hawthorne Mountain Vineyards Undisclosed
2000 R. H. Phillips $92 million
2001 Hogue Cellars $36.4 million
2002 Goundrey Wines $53.7 million
2003 Kim Crawford Wines $9 million + $2 million payout option
2004 Western Wines $248 million (estimated)
Source:
Allday, E. 2000. Canadian wine seller to buy R. H. Phillips. Press Democrat. August 29.

Food & Drink Weekly. 2000. Vincor International, Inc. May 8.

Globe and Mail. 1996. Profit to rise in 1996, Vincor says. September 18.

Leong, M. 2002. Vincor buys Australian winemaker -- Ontario firm uncorks $53.7 million deal
for Goundrey Wines. Toronto Star, October 10: D3.

Market News Publishing. 2001. Vincor International Inc -– Acquisition of the Hogue Cellars.
August 8.

Market News Publishing. 2004. Vincor International Inc – Acquisition of UK-based Western
Wines Ltd. July 29.

Walker, L. 2003. Vincor International Inc. purchases Kim Crawford Wines. Wines & Vines. July
1.

Walton, D. 1997. Vincor profit jumps 79%: Changing demographic tastes and new acquisitions
boost earnings. Globe and Mail. August 7.

Gazette. 1998. Masson sale closes. June 3.

Vincor’s rapid growth was mechanistic, namely through a series of acquisitions

(see Table 1). The company acquired Okanagan Vineyards and London Winery (in
1996), R. J. Grape Inc. (in 1997), Spagnols Wine & Beer Making Supplies Ltd and
Groupe Paul Masson Winery (in 1998), Sumac Ridge and Hawthorne Mountain
Vineyards and R. H. Phillips (in 2000), Hogue Cellars (in 2001), Goundrey Wines (in

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 THE RISE AND FALL OF VINCOR

2002), Kim Crawford Wines (in 2003), and Western Wines (in 2004). Needless to say,
with every acquisition, Vincor’s debt increased. However, banks were willing to lend to
Vincor, as its revenues also increased with each acquisition (see Table 2).

Table 2: Vincor’s Acquisitions, Revenue, Debt, and Shareholder’s Equity

Year Acquisitions Affecting Revenue Total Debt Shareholders’
Performance Equity
2000 Spagnols; Groupe Paul Masson 269.7 80.5 130.6
(1998)
2001 R. H. Phillips (2000) 294.9 254.4 145.3
2002 Hogue (2001) 376.6 195.1 396.8
2003 Goundrey (2002) 434.6 163.1 428.9
2004 Kim Crawford (2003 476.1 152.1 640.9
2005 Western (2004) 653.9 293.4 660.7
Source: Vincor Annual Reports (2002, 2003, 2004, and 2005)

Besides a series of acquisitions, Vincor also engaged in some Greenfield

investments simultaneously. For example, Vincor started its first planting at Osoyoos
Lake bench vineyards in BC (in 1998), established Les Clos Jordan Winery and
Vineyards (in 1999), and opened Niagara Winery (in 2001). Namely, wherever there was
impressive growth in the new new world wine regions, Vincor entered the region through
mechanistic growth (see Figure 1).

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 THE RISE AND FALL OF VINCOR

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 THE RISE AND FALL OF VINCOR

Vincor’s competitors were Andrew Peller, Constellation Group, Diageo, Gallo,

Foster’s, Kendall-Jackson, Magnotta Winery, and Sebastiani Vineyards. These
companies exerted considerable pressure on Vincor’s sales. Thus, notwithstanding
Vincor’s impressive growth, by 2005 its stock started under-performing and the company
started drawing the attention of various suitors. Several credible offers were made to
buyout Vincor, but the company was initially successful to stave off the suitors.
Basically, Vincor’s competitors were keen on acquiring an undervalued Vincor to further
their consolidation efforts. Vincor’s board, however, caved in under mounting pressures,
agreeing to be acquired by the spirit-giant Constellation Group in 2006.
Where did Vincor go wrong? This case highlights two key areas. First, the
company basically substituted mechanistic growth for organic growth. While
mechanistic growth can be useful, focus should never fade away from organic growth.
Second, the company failed to capitalize on its key value-adding resource—the frozen
grapes that are used in making Inniskillin wine. Had Vincor focused on its core business,
instead of looking into new acquisitions as the primary method of growth, then the
company
would have had much stronger chance of survival.

Canadian Wine
History
The history of Canadian wine industry dates back nearly two hundred years.
Wine entered Canada with Johann Schiller, a retired German corporal, who planted a
small vineyard, made wine, and sold it to his neighbors. From the middle of the
nineteenth century, small vineyards started to mushroom out along the Lake Erie coast up
to the Niagara Peninsula. The first vineyards in British Columbia were planted in the
1860s. In 1890, there were 41 commercial wineries in Canada; till then most of the
growth had happened in Ontario.
By 1997, Canada had over 110 licensed wineries. Presently, wine from locally
grown grapes is made in four provinces: Ontario, British Columbia, Québec and Nova
Scotia (small fruit wine operations exist in New Brunswick, Newfoundland and Prince
Edward Island) (see Table 3).

Table 3: Distribution of Canada’s Wineries and Vineyards

Number Acres Wine Grape
State of under Vine Production (tons) Viticultural Areas
Wineries (acres)
ONTARIO 33 16,000 29,000 1. Niagara Peninsula
2. Lake Erie North Shore
4. Pelee Island
BRITISH 45 2,800 6,102 1. Okanagan Valley
COLUMBIA 2. Similkameen Valley
3. Fraser Valley
4. Vancouver Island
QUÉBEC 28 220 330 - Cottage wineries

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 THE RISE AND FALL OF VINCOR

NOVA 2 200 520 - Cottage wineries

SCOTIA

Climate
Canada’s climate is much colder than that of other wine growing countries. The
quality of Canadian wines varies significantly from one vintage to another. The majority
of plantings in Ontario have been the winter-hardy North American labrusca varieties and
early-ripening, winter-resistant hybrids. Interestingly, Canada is also the home of the
icewine, made from grapes left to freeze on the vine and pressed in frozen state.

Icewine
Canada’s climate affords the unique weather conditions to produce icewine. The
basic ingredient of icewine is frozen grapes. According to VQA (Vintners Quality
Alliance) regulations, icewine grapes must be left to freeze on the vine and cannot be
artificially frozen later on. The naturally frozen grapes are painstakingly handpicked,
ideally at temperatures of 7 to 13 degrees Fahrenheit (i.e., never warmer than 17 degrees
Fahrenheit). To ensure the desired low temperatures, icewine grapes are sometimes
picked at night (see Figure 2).

Figure 2: Frozen Grapes and Harvesting Icewine at Night

The frozen grapes are pressed in the extreme cold as well. This way, the water in
the juice remains frozen as ice crystals, and only a few drops of sweet concentrated juice
is extracted. This concentrated juice is then fermented slowly till the fermentation
process stops naturally after several months. The natural freezing and thawing of the
grapes intensify the flavors and add complexity to icewine. Since its inception, Vincor
has been the principal producer of Canada’s icewine, selling it under the name of
Inniskillin (see Figure 3). In 1991, the ‘1989 Inniskillin’ was awarded Bordeaux’s
Vinexpo Fair's highest prize, Le Grand Prix d'Honneur. Sold in over 50 countries,
Inniskillin has become the premier icewine brand of the world (Shareowner, 2004).

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 THE RISE AND FALL OF VINCOR

Figure 3: Vincor’s Inniskillin – Canada’s Icewine

Vincor’s Supply and Production

Vincor produced wines at various regions and its supply and production processes
were not integrated. In Ontario, the company owned approximately 119 acres of
vineyard in the Niagara Peninsula. Here it could grow only a portion of the grape
supplies it needed for its local wineries, such as lnniskillin and Jackson Triggs. Thus,
Vincor also bought a large amount of grapes from other local vineyards. According to
Investors Digest (2001), Vincor bought 30% of the Niagara wine-grape crop. Between
in-house and outside supplies of grapes, Vincor used one third of the entire Niagara wine-
grape crop (Shareowner, 2004).
In British Columbia, Vincor owned over one thousand acres of vineyard. Yet, the
company still bought grapes through long-term supply agreements with almost two dozen
local growers. According to Investors Digest (2001), Vincor bought 5% of the Okanagan
crop in 2000. Between in-house and outside supplies of grapes, Vincor used one fourth
of the entire Okanagan Valley wine crop (i.e., the most prominent wine-grape growing
area of British Columbia) (Shareowner, 2004).
In 2000, Vincor effectively entered the U.S. through its acquisition of R. H.
Phillips of California. A year later, Vincor acquired another U.S. winery—Hogue Cellars
of Washington—to strengthen its foothold in the U.S. market (Business Wire, 2001).
Both of these wineries came with vast vineyards: R. H. Phillips had 1600 acres and
Hogue Cellars had 600 acres. Although wine-grapes grown at R. H. Phillips and Hogue
Cellars were used to produce their own existing brands of wines, the production capacity
was far from optimum (Business Wire, 2001). Dependent on local growers for its supply
of grapes for its Canadian wineries, Vincor did not take advantage of its newly acquired
supply capacities at R. H. Phillips and Hogue Cellars. Instead of shipping California and
Washington wine-grapes to its Canadian wineries, the company focused on increasing its
in-house supply of Canadian grapes.

Distribution & Retailing

According Shareowner (2004), Vincor had 149 professionals in its sales and
marketing function, which was by far the largest in Canadian wine industry. Consumers

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 THE RISE AND FALL OF VINCOR

could buy an array of Vincor wines belonging to three broad categories: popular-priced
(under $8), premium ($8 to $10), and super-premium wines ($10 to $18).
Vincor primarily sold its wines in Canada, the U.S., the U.K., and Australia. In
Canada, the company sold its wines through provincially regulated liquor stores. Also, in
Ontario, it owned a chain of 165 wine boutiques, where it carried all of its Ontario wines.
Given Vincor’s low level of integration, it is not surprising that its Ontario chain did not
carry its best selling wines from all around Canada or even the world, but rather from the
Ontario region only.
In the U.S., Vincor sold wines from not only R. H. Phillips and Hogue Cellars
(i.e., Vincor’s U.S. wineries), but also Canada, Australia, New Zealand (Shareowner,
2004), and South Africa (PR Newswire, 2005). Vincor initially relied on R. H. Phillips’
network of 90 distributors and a sales force of over 30 professionals to distribute and sell
its wines in the U.S. from all around the world (Canada NewsWire, 2000). Acquisition
of Hogue Cellars complemented its distribution network through R. H. Phillips. Vincor’s
U.S. sales soared in 2002, a year after its acquisition of Hogue Cellars. Besides Canada
and the U.S., Vincor also had its sales force working in the U.K. and Australia.

Export & Import

Although Vincor had been exporting Canadian wine to the U.S. since 1998
(Canadian Press, 2003), its U.S. presence increased in strides only after its acquisition of
R. H. Phillips and Hogue Cellars. Vincor also imported some of its American wines back
to Canada. However, given its significant presence in the U.S., Australia, and the U.K.,
Vincor was in a position to engage in exporting and importing at very high volumes. But,
given its low integration among different geographically dispersed operations, the
company management never took the initiative to take advantage of its uniquely
diversified circumstances.
While Vincor produced scores of different wines through its various wineries,
Inniskillin icewine was always its most famed wine. According to the National Post
(2001), Vincor started exporting its icewine to the European Union, boosting its
Inniskillin sales further. While Vincor positioned Inniskillin as a super premium brand,
its retail price was mediocre, compromising Vincor’s revenue stream. While sales
revenue and market share ought to be synchronized, Vincor seemed to have focused
excessively on market expansion, leaving revenue generation as an automatic outcome.

The Fall of Vincor

Vincor’s rapid expansion forced the company to dig itself deeper into debt with
each new acquisition. The short-term positive reactions of the market must have partly
fueled this acquisition frenzy. Prior to purchasing R. H. Phillips, Vincor’s outstanding
debt was $80.5 million. After it had completed its Hogue Cellars acquisition, Vincor’s
outstanding debt stood at a staggering $195.5 million. During this time, shareholder’s
equity also rose from $130.6 million to $396.8 million. Even then, Vincor continued in
its acquisition spree, making large acquisitions in Australia (Goundrey), Canada (Kim
Crawford), and the U.K. (Western).

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 THE RISE AND FALL OF VINCOR

Besides the general idea of international growth and expansion, Vincor’s

internationalizing strategy seems to be unclear. Since little effort was made to integrate
its geographically dispersed operations, its very size became its biggest liability. Also,
for several years, acquisition news seemed to have fuelled much of the upward movement
in its stock price. But, as Vincor’s debt burden climbed up to dizzying heights, the
company was forced to perform much better than before to prevent its stock price from
sliding down a spiral. While a smaller-sized Vincor with smaller debt could have
registered stronger performance, the larger-sized Vincor with a massive debt burden was
too pegged to its debt and the accumulating interests. It was almost impossible by 2005
for Vincor to break out of its hapless conditions.
As Vincor started to under-perform in 2005, Constellation Group became
increasingly interested to acquire Vincor. Vincor management and board were not
willing to sell their company, especially under such circumstances. However, after a year
of resistance, Vincor’s top brass were forced to agree to sell off their prized company to
the giant spirits company Constellation Group.

References

Allday, E. 2000. Canadian wine seller to buy R. H. Phillips. Press Democrat. August 29.

Business Wire. 2001. New Phillips-Hogue Wine Company shows how family farms
succeed. August 10.

Canadian NewsWire. 2000. Vincor International Inc. completes tender offer for R. H.
Phillips, Inc.: Vincor becomes fourth largest North American winery. October 5.

Canadian NewsWire. 2001. Vincor International announces record first quarter results:
Quarter highlighted by strong contribution from R.H. Phillips acquisition and
steady growth in all Canadian markets. August 8.

Canadian Press. 2003. Wine producer Vincor earns $9.5M in Q1, up from $8.2M as
sales rise to $107M. August 7.

Food & Drink Weekly. 2000. Vincor International, Inc. May 8.

Gazette. 1998. Masson sale closes. June 3.

Globe and Mail. 1996. Profit to rise in 1996, Vincor says. September 18.

Investors Digest. 2001. Vincor captures Canada’s premium wine market. June 15.

Leong, M. 2002. Vincor buys Australian winemaker -- Ontario firm uncorks $53.7
million deal for Goundrey Wines. Toronto Star, October 10: D3.

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 THE RISE AND FALL OF VINCOR

Market News Publishing. 2001. Vincor International Inc -– Acquisition of the Hogue
Cellars. August 8.

Market News Publishing. 2004. Vincor International Inc – Acquisition of UK-based

Western Wines Ltd. July 29.

National Post (Canada). 2001. Vincor soars as winemaker eyes foreign markets: Returns
62% since august: Company funds expansion with long-term debt. July 5.

PR Newswire. 2005. Vincor USA is ready to conquer another New World frontier with
the upcoming launch of a South African wine called Kumala. April 25.

Shareowner. 2004. Vincor International Inc.: Good for your too. September/October.
Retrieved from: <http://www.shareowner.com/index.html>.

Vincor Annual Report. 2002. Retrieved from <

http://www.vincorinternational.com/base-
module/level0.cfm?mainID=2&depth=2&mainNav=10>.

Vincor Annual Report. 2003. Retrieved from <

http://www.vincorinternational.com/base-
module/level0.cfm?mainID=2&depth=2&mainNav=10>.

Vincor Annual Report. 2004. Retrieved from <

http://www.vincorinternational.com/base-
module/level0.cfm?mainID=2&depth=2&mainNav=10>.

Vincor Annual Report. 2005. Retrieved from <

http://www.vincorinternational.com/base-
module/level0.cfm?mainID=2&depth=2&mainNav=10>.

Walker, L. 2003. Vincor International Inc. purchases Kim Crawford Wines. Wines &
Vines. July 1.

Walton, D. 1997. Vincor profit jumps 79%: Changing demographic tastes and new
acquisitions boost earnings. Globe and Mail. August 7.

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 THE RISE AND FALL OF VINCOR

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