Barbarians at the Grapes

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What is that loud sucking sound you hear coming out of the Napa Valley?

None other than the gasps of indignation from the nabobs of wine nattering on about a couple of wine companies that have the nerve to package the noble grape as a -- sniff -- mass-market beverage. The horrors!

The perps? None other than nouveau-vintners

Canandaigua Brands

(CBRNA)

and privately owned

Sutter Home Winery

. Their heresy? Combining white zinfandel with peach, berry and other flavorings in an unholy marriage to position wine against its mass-market cousin, beer. Think of it as chardonnay for the hoi polloi.

To understand this bit of Napa Valley class warfare, you have to realize that the wine establishment has never quite forgiven Sutter Home for its last big downmarket success. That was the winery's invention of white zinfandel back in 1972. This not only ignited an untapped market -- it created a category which ranks second only to chardonnay, but one that is still growing at better than 11% annually -- three times that of the wine market as a whole.

And yet the old grape establishment continues to look down its oenophilic nose on white zin -- even as it basks in its profits. Consider that even an old-guard winery like

Beringer

(BERW)

sells more than $100 million worth of the stuff every year, or about 38% of total revenue.

Even with that kind of success, wine remains a marginalized beverage. According to the

Wine Market Council

, barely 30% of adults who drink prefer wine to beer and spirits. And that's why Canandaigua has set its sights beyond the ranks of the

NPR

crowd. Packaged inside a tastefully frosted-glass bottle, their Arbor Mist is a demi-wine: low in alcohol (6%), slightly fizzy, tempered with a blend of fruit flavors and a hint of sweetener. Sutter Home has also introduced a white zin with fruit flavorings-- Portico -- but it's more a wine brand extension rather than a new product like Arbor Mist.

Mentioning fruit and wine in the same breath and you might wonder: "Whatever happened to the wine cooler?"

Truth is, most cooler makers shot themselves in the foot by saturating the market with products that, being malt-based (to skirt wine's higher tax rates), taste somewhere between a malt liquor and Kool-Aid, something the teen drinking crowd saw as ultrasweet alternatives to beer.

Gallo

,

Seagram

(VO) - Get Report

and

Coors

(ACCOB)

remain the cooler kings, but all are experiencing sales slowdowns.

Arbor Mist is entirely different, as I learned. For taste, think

Snapple

with an attitude. Its slight fizz made it go very well over ice. But we're talking about a low-alcohol (relative to the 12% you normally find in wine) fruity, juicy beverage that -- here's the point to remember -- is a light-sippin' substitute to beer, soda or fruit-based drinks.

Oh yes, Arbor Mist also has a screw top, a nice substantial plastic one you can't cut your fingers on. This was inspired, no doubt, by a survey that indicated only 20% of American homes own a corkscrew. The marketers obviously did their homework on this product.

What Canandaigua has done, in fact, is tailor a cruise missile aimed right at the heart of beer and soda. For, by targeting a 6% alcohol level, Arbor Mist can break out of the local liquor store, and out into the nation's vast ranks of 7-11s. AM-PMs, and Circle-Ks.

"It's moving very fast," said the clerk at my local Beverages & More, known affectionately as BevMo. "Even more so in our stores that are in more ethnically diverse neighborhoods," he says, a little carefully.

That's important: Consider that the average wine drinker is an upper-income suburban woman with a college degree and a tendency to vote Republican. Wine sales to Blacks and Latinos are almost nonexistent. Canandaigua can see the writing on the wall even if the wine establishment can't -- or won't.

So how fast is it moving? Canandaigua says it sold a million cases in the first 100 days since the first week in July. This kind of success has given the company's wine division a healthy boost, even though it doesn't show up fully in the latest 10-Q. Before Arbor Mist, wine sales were up an anemic 1.3% for six months ended in August. But Arbor Mist didn't hit the store shelves in July, and its appearance midway through the second fiscal quarter helped boost wine revenues 8.2% for the quarter over 1998.

Canandaigua is long overdue for a hit product. Despite its size (it is America's second-largest wine company) and smarts (it has a take-no-prisoners, eat-your-young sales force), Canandaigua has had a rough time of things in the past few years, the result of some troublesome acquisitions, a lackluster spirits market and flat wine sales.

The share price has reflected the potholes, trading recently at about 41, substantially discounted from its all-time high in April of almost 60. Fortunately, beer has been its saving grace. As the American importers of

Corona

,

Tsingtao

,

St. Pauli Girl

and others, Canandaigua saw fiscal 1998 beer revenue jamming at 26% over 1997 to $326 million, while wine crept up 4% to $533 million and spirits rose almost 9% to about $200 million.

Arbor Mist has another important financial implication. Read the label: wine comes first, then water, corn syrup, fruit flavors, CO2 and the preservatives you find in soft drinks. Assuming that Arbor Mist is indeed about half wine, this means Canandaigua is retailing white zin for the equivalent of at least $7 per bottle. Look across the aisle, and the best Beringer or

Mondavi

(MOND)

can do is $4 a bottle or less. So who has the margins here? Water and sugar cost a lot less than wine. And the consumer

likes

it that way.

For investors, Arbor Mist looks like a very profitable reinvention of the wine cooler,

if

it can survive the regulatory challenges brought by the wine establishment. And for the consumer, let's just say Canandaigua has made them a quaffer they can't refuse.

Lewis Perdue is the editor and publisher of

Wine Investment News

, a comprehensive site offering breaking news and analysis of the 22 publicly traded wine and liquor companies, and private wine partnerships. He can be reached at

lperdue@ideaworx.com.