Introduction to Italian Wine Brands
Italian Wine Brands (IWB) is a leading producer in the Italian wine sector covering the entire value chain of wine, excluding the production of grapes. It trades on the Milan Stock Exchange with a market cap of €182MM (9.45MM shares – €19.30) and its Enterprise Value around €285MM.
One of the main differences of IWB compared to other European players is that IWB has a capital-light business model, which means that it does not own vineyards. The raw materials (grapes, must and bulk wine) are purchased from around 200 Italian vineyards and wine producers and then processed in the group’s cellars (65%) and third parties’ facilities (35%). This is important because the results of the harvests and intermediate prices affect them differently than the rest of the players, as we will see in detail later.
Another key point of interest for IWB is the quality of its management and their skin in the game – honestly, it is one of the managements we like the most among the companies we analyse. They are characterised by playing the role of consolidator (in a very fragmented industry) of companies as they take advantage of macro conditions and the weakness of several competitors to be active in M&A (they have acquired 4 companies between 2021 and 2022 and after consolidating them in 2023, they are preparing for new moves again).
They sell their product mainly through wholesale, but they also have segments of direct selling and Ho.Re.Ca. and in international countries (growing especially in the American market, but with a very prominent presence in Germany and the UK – its main markets.).
After two challenging years in the sector – due to material inflation (such as glass) and the global decline in sales due to the loss of purchasing power of customers in general and the trend of aperitifs mainly in the local market – which IWB has taken advantage of to increase its market share, reduce debt, and buyback shares. The horizon seems to be filled with opportunities as we have seen with the recovery of margins, entry into new countries (they already have 90) and the focus on new M&A moves in the center of the roadmap.
Today we present one of the main companies in our portfolio and with which we are most optimistic in the short/medium term. For this, we will briefly review the wine sector (soon we will publish analyses of the main players in the sector), analyze the company’s growth, its business model, the drivers of its growth, and evaluate the company with its valuation model.
Disclaimer: Nothing we write here is investment advice but simply for educational purposes. Please note that the authors have exposure to the stock so they could have a bias towards it.
Wine Industry
The production of wine is quite concentrated (80% is produced by only 10 countries). Global terrain dedicated to grape production has gradually decreased since 2014. However, production remained stable at around 260-270MM hl per year on average (affected by weather trends) until 2023, where it has fallen considerably to 244 million hectoliters, marking the lowest level in the last 60 years. In an era of reduced worldwide demand and substantial existing inventories, this might not be bad news.
The case of Italy, which is the focus of our thesis today, has experienced a nearly 30% drop in production in the southern part of the country. This impacts IWB because the grapes they purchase are more expensive (they handle the bottling process but buy the grapes from third parties – and from lands owned by the Barbarena group under a contract from when they acquired part of the family’s assets). However, thanks to the excess inventory from the previous year, IWB will not be penalized by the decline in the Italian harvest.
The key growth driver for Southern European producers is exports. Italy is the largest export country followed by Spain and France (2023 ranking is affected by crop problems in both countries). In fact, Italian wine exports have decreased by 4.4% in 2023 (and by 7.3% in million euros).
Wine consumption is around 240 million hectoliters. The largest markets for producers are the US, the UK, Germany, China, Canada, and Japan. The US is the largest domestic market and grows slowly (1-1.5% per year), followed by France, Italy, Germany, China, and the UK. However, in the last year, consumption has also experienced a reduction due to soaring inflation.
Particularly in the Italian market, wine consumption is decreasing both in overall volume and on a per capita basis due to two factors: the persistent economic crisis that has affected wine consumption both at home and in restaurants, and the shift towards spirits for aperitifs. On the other hand, the total size of the market is growing. This can be explained by exports, which have become the main driver for growth (apart from the sparkling wine segment, which is also growing considerably).
Italian Wine Brands is taking advantage of the economic problems faced by small Italian players to continue growing and consolidating its role as the leading Italian distribution group. Specifically, it is now looking at Premium wine targets to further improve margins (and capitalize on its acquisition of Enovation Brands in 2022 to continue growing in the US and Canada).
Business Model
The IWB business model is asset-light and quite flexible as IWB does not own vineyards, this allows IWB to quickly respond to short-term changes in demand and it employs a relatively low amount of capital.
IWB is present in the value chain from the winemaking and bottling process, producing the wine in its two cellars, one in Puglia and another in Piedmont. The product is bottled both internally through three proprietary lines (65% of the volume) and externally (35% of the volume).
Later, they handle all the marketing and sales leveraging their Digital platform, which is truly distinctive in the sector since they acquired it in 2018 and have been investing in it since then. It gives IWB a competitive advantage in terms of client data to target and market customers. Covid accelerated people’s digitization, and IWB was already well-positioned as a pioneer in the industry. Moreover, sales through this platform eliminate credit risk as clients pay by card in advance.
IWB mainly has three segments:
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Wholesale (B2B): focused on international markets and in particular on mass distribution through its own brands (>90%) and private label products (<10%). IWB’s main clients in this channel are giants of organised distribution such as Tesco, Aldi, Costco, etc…
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Ho.Re.Ca (B2B): (sales at Hotels, Restaurants and catering) in which the group is active thanks to the acquisition of EnoItalia in 2021 (and it has doubled its business volume in just two years)
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Distance selling (B2C): IWB deals with the direct sale of products in the portfolio to end consumers in Italy, the UK, Germany, Switzerland, US, Canada, Netherlands, Austria, France and the US. IWB’s competitive advantage in this channel comes from a logistics platform without precedent in the sector and long experience.
