Tobacco giant Altria Group (MO -0.31%) prides itself on having been the leader in the U.S. tobacco market for decades, with its Marlboro cigarette brand dominating the industry landscape. What many people don't know is that Altria has other businesses beyond tobacco, and interestingly, Altria's most success segment in 2015 had nothing to do with cigarettes or smokeless products. Let's look more closely at how the Ste. Michelle Wine Estates segment has managed to produce outpaced growth that left the rest of Altria's business segments behind.
Altria's wine business
The Ste. Michelle Wine Estates unit is among the top 10 producers of premium wines in the U.S. market. The company includes a collection of distinctive estate wineries that were among the first to make wines and plant classic varieties of grape-producing vines in the state of Washington. Ste. Michelle boasts 180 different wines that obtained ratings of 90 or higher, with one of its 2012 wines obtaining a prestigious 100-point rating.
Ste. Michelle Wine Estate has a hands-off corporate philosophy that encourages decision-making at the individual winery level. Starting with the Chateau Ste. Michelle brand and incorporating other wineries over the years, segment CEO Ted Baseler argues that the company's wines "reflect the place where they are grown," helping to make them distinctive enough to stand up to critical standards. The company now includes wineries in Oregon's Willamette Valley as well as California's famous Napa Valley wine country.
Why Ste. Michelle has been a success
So far in 2015, the numbers for Altria's wine business show how strong a year it has had. Through the first three quarters of the year, revenue for Ste. Michelle has jumped nearly 8%, outpacing the 5% pace of sales growth for the smokeable products segment. Pre-tax operating profit growth has been even more impressive, with Ste. Michelle producing gains of nearly 20% year over year. That's far faster than Altria Group's overall 12% rise in pre-tax operating profits.
Altria attributes Ste. Michelle's growth to several factors. In its October conference call, Altria CEO Martin Barrington noted how a combination of improved sales mix of its top premium brands and increased volumes helped to boost the segment's results. Margins for the unit have climbed by more than 2 percentage points year to date.
CFO William Gifford recently set out the wine segment's overall strategic vision, noting how the business complements Altria's tobacco holdings. Ste. Michelle's goal is simply to grow income by expanding its share and distribution of the premium wines in its portfolio, and it also fits together well with the equity investment that Altria has made in beer maker SABMiller. If the planned acquisition of SABMiller by Anheuser-Busch InBev (BUD 0.14%) goes through, then Ste. Michelle could see even wider distribution if Altria can create a deeper partnership with Anheuser-Busch that would let the wine segment take advantage of joint channels for marketing.
A small but useful piece of the Altria puzzle
It's important to understand that as well as Ste. Michelle has done in 2015, it isn't large enough to have a dramatic impact on Altria's overall business. The wine segment brought in less than 2.5% of Altria's total revenue during the first nine months of 2015, and its operating profit through September was just $97 million, compared to total companywide profits approaching $6.4 billion.
Nevertheless, Ste. Michelle has worked hard to get to where it is today, and the popularity of wine gives the business a much more positive reputation than Altria's bread-and-butter cigarette and smokeless tobacco units. Altria's wine segment plays a vital role in diversifying the conglomerate's business, and it has rewarded shareholders with its growth over the years.