How Grapes Affect These 3 Stockshttp://www.fool.com/investing/general/2013/10/29/grape-escape.aspx Ben Popkin
October 29, 2013
The demand for wine in the United States has steadily increased over the past few years, forcing wineries to raise their production. While wineries are capable of making more wine, producing the grapes needed is also a challenging endeavor. If grape costs rise too high, American wine producers could find the already-challenging industry even trickier.
Constellation has purchase agreements with most of its grape growers. Prices vary from year to year. If grape prices fluctuate this can cut into the company's margins. In the most recent quarter, the company's gross margin was 40.37% versus 41% the previous year, due to an increase in grape prices.
Wine and spirit producer Brown-Forman (NYSE: BF-B) explained the risks of grape and other agricultural dependency in its most recent 10-K report. Grapes are a challenging fruit to grow, and the yield of a harvest depends on the year's weather. If yield is low, then price will increase. The company might not be able to be able to pass the cost to the consumer, which then cuts into its margins. Weather also influences the quality of the year's grapes, which makes it hard to produce a consistent product every year. This is a major difference between wine and other types of alcohol.
Another of Constellation's close competitors, Diageo (NYSE: DEO), focuses mainly on producing spirits but it also sells smaller amounts of wine. The company's principal wineries are in the United States, Argentina, and Turkey with wines being sold locally and overseas. The company has long term contracts with grape growers to meet demand and mitigate grape expenses. Diageo only has seven wines that account for roughly 4% of the company's net sales. This is much smaller than Co