ANDREW PELLER LIMITED

External Analysis 2018

Kaely Blanche

COMPANY PROFILE

Andrew Peller Limited (TSE: ADW.A) is a prominent manufacturer and marketer of wine
and wine-related goods and services in Canada.i Andrew Peller, a Hungarian
immigrant, started a wine business in 1961 called “Andrés Wines Ltd”, based out of Port
Moody, BC, with the dream of bringing wine culture to Canada.ii Fifty-seven years later
and “Andrés Wines”, now under the company name Andrew Peller Limited (“APL”), has
become an enormous success in the Canadian wine industry and within its other
complementary businesses. The company has seen steady growth, now up to well over
$300 million in annual revenue.iii
APL has a diverse range of wines, from value-priced all the way to ultra-premium.
Majority of their Vintners’ Quality Alliance (“VQA”) brands have won numerous awards
nationally and internationally.iv Combined, Andrew Peller’s wine brands form over 5% of
the total Canadian wine market share in 2016.v Andrew Peller wineries span across
Canada, with vineyards in BC, Ontario, and Nova Scotia.vi
Wine Brands
Peller Estates Sandhill Sommet
Thirty Bench Conviction Hochtaler
Trius Copper Moon Domaine D’Or
Red Rooster Black Cellar Schloss Laderheim
Wayne Gretzky XOXO Royal

To “focus on serving the needs of all wine consumers”, APL’s subsidiary, Global
Vintners Inc., produces personal wine-making kits under various brand names.vii APL
has also expanded into retail stores and production of whisky, liqueurs, cocktails, and
cider.viii They also have import businesses that bring premium wines into Canada from
various countries.ix
EXTERNAL ANALYSIS

GENERAL ENVIRONMENT ANALYSIS

Political/Legal

Trade Agreements
As ambiguity concerning The North American Free Trade Agreement (NAFTA)
continues, the renegotiations pose a threat to all future exports with the United States. x
It is predicted that a complete breakdown of NAFTA would result in a 0.7% decrease in
growth of Canada’s GDP.xi Meanwhile, Canada has signed Free Trade Agreements
with Europe, Latin America and the Middle East, including an upcoming one with India,
that will boost future trade with countries besides the U.S.xii

Regulations regarding grocery stores retailing alcohol

Provincial government in British Columbia and Ontario have recently allowed the retail
of beer, wine, and cider in numerous grocery retailers. They plan to ramp up the sales
with Ontario announcing an increase in the number of stores allowed to sell these
products from 70 stores to 300 by 2025.xiii This increase means nearly 20% of all
supermarkets in Ontario could sell wine products.xiv

U.S. Trade Dispute with BC Wine’s exclusive rights in Grocery Stores

The U.S. has filed two requests with the World Trade Organization (WTO) to investigate
what they call “unfair regulations governing the sale of wine in grocery stores in the
Canadian province of British Columbia.”xv Essentially, the regulations state that only BC
wine can be retailed on regular grocery store shelves, giving them an advantage over
the imported wine which can also be sold in grocery storesxvi, but only by a store-in-
store model that necessitates an independent area for liquor with its own designated
cashier.xvii The decision of the WTO will affect future regulation over the grocery store
retail channel of wine in Canada.

Increase in infrastructure to spur productivity

Government officials have announced an “Innovation and Skills Plan” to increase the
country’s productivity by upgrading the skills and competence of the labour force and
allocating approximately US$60 billion to improving infrastructure from now until
2026.xviii

Further restriction in drinking & driving laws

Numerous non-profit organizations, activist groups, and legislators have fought for
tougher drunk-driving laws to cut down on the amount of drinking and driving related
deaths. All provinces have began cracking down on more severe legislation and are
predicted to further stiffen those laws in the upcoming years.xix
Increasing provincial liquor board mark-ups on wine
The mark-up price imposed by each province provincial liquor boards are set to change
regularly causing unpredictability in the retail market.xx The Liquor Control Board of
Ontario has announced an increase in mark-ups for wine by one percentage point in
2019 after already raising is by four percentage points since 2016.xxi

Increasing minimum wages provincially

Provincial minimum wage increases have begun to take place across Canada. Ontario
has now raised their minimum wage to $14 an hour and three other provinces will
similarly be raising their minimum wages by the end of the year.xxii British Columbia has
also followed suit, announcing minimum wage increases to $15.20 by 2021.xxiii

Upcoming legalization of marijuana

As of October 17, 2018, marijuana will be legalized in Canada.xxiv Marijuana is
frequently used as a recreational substance, like alcohol.

Summary
NAFTA negotiations can affect APL directly as they conduct business with the United
States for exporting. A decline in Canada’s GDP from the collapse of NAFTA can also
hurt the economy and consumer spending levels which could have a correlation with
wine sales, especially premium brands. The Free Trade Agreement with Europe is
positive for APL as the European countries have healthy wine industries and can boost
imports and exports with that region. The government's decision to increase number of
grocery stores that can retail beer, wine, and cider has two side effects for Andrew
Peller. One, with an increase in retailers you can assume an increase in wine volume
sales, keeping the wine industry booming. Two, the retail-side of Andrew Peller - The
Wine Shop, Wine Country Vintners, and Wine Country Merchants - would likely be
negatively affected as they now have increased competition for wine retailers. In British
Columbia, the trade dispute with the Trump administration over BC wines exclusive
shelf-space in grocery stores creates uncertainty regarding what the WTO response will
be and how other provinces will future regulate grocery store wine distribution. The
current regulations provide an advantage for APL as they produce and sell BC wines as
part of their product mix. On the other hand, Canada’s dedication to improve the labour-
force and increase spending on infrastructure will boost overall productivity and supply
APL with a stronger labour-force and better ability to innovate. Stricter drinking and
driving laws affects retail sales of alcohol in food and liquor establishments and an
increase in minimum wage will provide a direct impact to APL’s bottom-line in areas in
which they employ low-wage workers. Lastly, legalization of marijuana could have a
negative effect on alcohol sales as consumers could now choose to smoke weed
recreationally instead of wine, beer, cider, or spirits.
Economic

Moderate growth in Gross Domestic Product (GDP)

Canada’s real GDP is forecasted to grow to about 1.7% by 2025, a smaller growth then
what was witnessed in previous years.xxv The service industry makes up a significant
amount of Canada’s GDP at 67.7%, while manufacturing is only 10.8%.xxvi

Consumers disposable income and spending levels

Due to Canada’s slow economic growth, rising housing costs and high household debt,
consumers will experience only a small growth in their disposable income.xxvii

Minimal rise in the Canadian Consumer Market

Canada’s consumer market is also predicted to slow down between now and 2030.xxviii
This is a result of Canadian households restricted ability to increase their household
debt.xxix The fastest-growing spending category over the next 10 years is health goods
and medical services.xxx

Growth in the Alcoholic Drinks Industry

Due to being predominantly a mature industry, the market for Alcoholic Drinks in
Canada will experience modest growth in the upcoming years, as seen in Figure 1.xxxi
The categories that are predicted to experience promising growth are non/low alcohol
beer, sparkling wines, whiskies, spirit-based ready-to-drink (RTD) beverages and
cider.xxxii This is due to altering consumer preferences, investment from major players,
and changes to regulations.xxxiii

Canadian Wine Industry growth

Figure 1
Source: Euromonitor International, “Alcoholic Drinks in Canada,”
Country Report, Jun 2017, Passport.
The wine industry in Canada will see rapid growth over the next few years with a 20.2%
increase in volume from 2016 to 2021, as seen in Figure 2.xxxiv Still light grape wine will
continue its steady growth with a total volume compound annual growth rate (CAGR)
increase of 3% by 2021, capturing a 94% total volume share of overall wine. xxxv
Fortified wine and vermouth are forecasted to decline in total volume, while, sparkling
wine will grow in volume size significantly.xxxvi The wine market growth is largely due to
greater consumption from younger consumers, reports of greater health benefits from
wine, and an aging population who are increasing their preference for wine.xxxvii

Figure 2
Source: Euromonitor International, “Wine in Canada,” Country Report, Jun 2017,
Passport.

Interest Rates
Since February 2017, the central bank has raised interest rates three times, but further
increases are predicted to be unlikely with the slowdown of the Canadian economy.

Decreasing unemployment rate

Employment is rising as the unemployment rate will decrease to 6.0% from 6.3% in
2017. The increase in employment is due to increase in part-time hiring from
businesses.

Summary
Canada’s Alcohol and Wine industry growth is exceptional for Andrew Peller. Despite
the alcohol industry only having modest growth, the promising categories of whiskey,
sparkling wine, RTDs, and cider fit perfectly in with APL’s product mix. The booming
wine industry will allow APL to reach further successes in their numerous wine brands.
Challenges come with predicted slow economic growth and limited increase in
consumers disposable income, a trend that benefits producers of essential items rather
than non-essentials like alcohol. A decreasing unemployment rate means more people
working and therefore making money to spend, however, Andrew Peller may face
problems in finding quality employees with so much of the labour force employed.

Socio-Cultural/Demographic

Population Growth
Looking forward, immigration will account for more than half of the population growth in
Canada.xxxviii Because of this, immigration will be liable for all future growth in Canada’s
labour force.xxxix Around one-fifth of the population in Canada is considered foreign-born
and of those foreign-born, the majority live in metropolitan areas.xl

Aging demographic
By 2030 the number of over-65-year old’s is forecasted to increase overall social
classes in Canada.xli The other growing age group, 55-59-year old’s, are likely to be in
the top income class making them a lucrative group with high purchasing power. xlii

Increase in health & wellness concerns

Along with an aging population comes greater concerns for health and wellness,
including as already previously mentioned, more spending on health goods and medical
services. Organic and biodynamic beverage offerings are predicted to rise in
popularity.xliii As well, when targeting younger, female consumers, there is a growing
demand for calorie-conscious options.xliv

Widening income gap

Canada’s income gap is continuing to expand with the second lowest-income class
predicted to make up the largest social class through to 2030, while the highest-income
class is on track to grow the fastest throughout the same period.xlv An imbalance in
urban and rural income and the continued arrival of low-skilled immigrants are the main
drivers of the divide.xlvi

Premiumization Trend
Premium and super premium products are set to gain an increase in popularity,
especially among younger consumers who are experiencing an increase in disposable
income.xlvii This trend is also due to the younger age cohort preferring quality over
quantity.xlviii

Increasing Craft Movement

The Craft Movement that has been evident throughout the beer industry is predicted to
flow into the spirits and cider category.xlix The appeal for craft spirits and cider is “small-
batch production, craftsmanship, unique tastes and local affinity.”l

Summary
An aging population is favorable for APL as wine is the main alcohol choice for that
demographic due to its higher sophistication levels.li The higher purchasing power of the
55-59-year-old cohort is also a promising market for APL’s premium brands, as well as
the overall trend towards premiumization for younger consumers with large spending
capabilities. The income gap is not a concern for APL as it creates opportunities for its
value-priced brands and premium lines. More opportunities come from the Craft
Movement and health and wellness trends in the sense of new and innovative product
offerings.

Technological

Online distribution channels

As Canadians become more comfortable with the concept of online ordering and further
investment in distribution and delivery technologies are made, online sales of alcoholic
beverages will continue to advance.lii

Mobile Innovations
The surge of app-based businesses is evident and will begin to trickle into the alcohol
industry with interactive wine apps like Vivino already proving success.liii

Summary
Digital advancement leaves many opportunities for APL in terms of revenue growth and
innovative investment. Consumers are becoming increasingly dependent on technology
and will eventually demand all businesses to be digitally accessible. Online distribution
also allows wine producers to save market costs and sell directly to consumers with full
control over retail price.

INDUSTRY ANALYSIS

THREAT OF NEW ENTRANTS Moderate-High

POWER OF SUPPLIERS Moderate
POWER OF BUYERS Moderate-High
THREAT OF SUBSTITUTES High
DEGREE OF RIVALRY Moderate-High

THREAT OF NEW ENTRANTS - moderate-high

In Canada, the winemaking industry has considerable entry barriers, such as

compliance with each provincial government regulation over production, marketing,
distribution, and retailing. These strict laws and the way they vary provincially can act as
an entry barrier for new start-ups or even established businesses looking to diversify
into wine. The other entry barrier is the need to access distribution channels.
Competition for shelf space in major retailers and liquor board stores can be tough,
leaving retailers with strong buyer power and better control over price. This creates a
need for wineries to seek better economies of scale, generally by making heavy capital
expenditures on larger production plants, thus adding to the barriers of entry. However,
some wineries have integrated forward to become retailers and others have begun to
sell their product online. Strong Canadian consumer loyalty is another concern for new
wineries, although the younger demographic is showing more interest in trying new
brands and flavours which is where smaller, newer wineries can shine. The forecasted
growth of the Canadian wine market and increase in available distribution channels, will
likely increase the number of new entrants in the future.

BARGAINING POWER OF SUPPLIERS - moderate

Many winemakers are vertically integrated in the sense that they grow, ferment, and
bottle the wine themselves.liv However, almost all wineries, including the major ones,
need to purchase some number of third-party grapes from farmers to add to their supply
of raw materials. Most commonly the wineries own grapes are used for their premium
brands while independently sourced grapes are used in value-priced brands.lv The
grapes are purchased at market price, implying that wineries do not have much power
over suppliers.lvi Even though there are a large number of grape suppliers which
weakens their power, growers have alternative buyers for their grapes such as fruit
sugar production or table grapes.lvii Lastly, supplier power is increased by their ability to
integrate forward and become winemakers as well.

BARGAINING POWER OF BUYERS - moderate-high

The two types of buyers in the winemaking industry are consumers and retailers. The
market is largely controlled by the preferences of consumers. Wine is very
differentiated, and retailers generally need to offer a variety of flavours and brands for
consumers, reducing their buyer power.lviii However, large chain retailers do have more
power over price due to their size, but the number of other retailers available diminishes
that power slightly.lix Buyer power increases due to retailers and consumers low
switching costs and because the chances of retailers integrating backwards is rare.
Some consumers take part in making wine at home for their own consumption.

THREAT OF SUBSTITUTES - high

Wine can be replaced by other alcoholic beverages or recreational substances. The

threat of substitutes for wine is high due to low switching costs and the vast number and
variety of substitutes. Even though various events and celebrations tend to have
different alcoholic beverage preferences (such as beer for BBQ’s or champagne for
New Year’s Eve), the consumers decision ultimately comes down to their taste
preference.lx The wide range of flavour options in all varieties of alcoholic beverages
makes substituting between types even easier as most alcoholic beverages offer easy,
approachable options for introducing a consumer into that beverage-type, such as light
lager or smooth citrus options for new beer drinkers.
DEGREE OF RIVALRY – moderate-high

The wine industry in Canada is competitive, with brands becoming more ambitious in
marketing and branding techniques. However, most wineries are quite differentiated
making them less susceptible to fierce competition. The market in Canada is also highly
fragmented, the top four wine producers account for just under 20% of the market. lxi A
fragmented market with no single major player leaves opportunities for producers to
grow and become superior. Rivalry also increases because of the wide variety of wine
options on the market and the fact that buyers have fairly low switching costs.

Summary
Overall the winemaking market in Canada is an attractive industry. The degree of
competition and power of suppliers and buyers are all considered to be moderate-high.
This leaves opportunities for Andrew Peller to increase market power and financial gain.
The threat of substitutes is concerning but APL’s diverse product mix allows them to
expand into other alcoholic beverage markets. High entry barriers decrease the number
of new entrants, but the threat is still considerable due to the forecasted growth in wine
volume sales in Canada over the next period.

COMPETITOR ANALYSIS

Canada Wine Market Share: % share, by value, 2016:

Figure 3
Source: MarketLine, “Wine Industry Profile: Canada.,” MarketLine Industry Profile, August 2017, 12,
https://web-a-ebscohost-com.ezproxy.langara.bc.ca/ehost/pdfviewer/pdfviewer?vid=4&sid=e3c2ccda-
723c-4e3f-8a6d-69dce8f7986f%40sessionmgr4006.
 Constellation Brands, Inc.
- American company
- Conducts business in multiple alcoholic
beverage segments (beer, wine, spirits)lxii
- “19 wineries in the US, eight wineries in
Canada, five wineries in Italy and four
wineries in New Zealand.”lxiii
- Covers the wide range of wine
segments (value-priced to ultra-premium)
- Key brands: Black Box, Kim Crawford,
Ruffinolxiv
- Fiscal year 2016 revenue: $6,548
millionlxv
Andrew Peller, Ltd.
- Canadian company
- Wine producer/marketer
- Covers wide range of wine segments
(value-priced to ultra-premium)
- Own vineyards only in Canada
- Complimentary businesses: retail
stores, import agency, wine-making kitslxvi
- Fiscal year 2016 revenue: $252
millionlxvii

Treasury Wine Estates Vintners Casella Wines PTY Ltd.

Limited
- Australian company - Australian company
- Manufactures wine - Privately held
- Owns vineyards around the worldlxviii - Wine producer
- Key Brands: Annie’s Lane, Pepperjack, - Key brands: Yellow Taillxxi
Castello di Gabbianolxix
Fiscal year 2016 revenue: $1,741
millionlxx

i Andrew Peller Limited, 2017 Annual Report, 4,

http://www.andrewpeller.com/UserFiles/File/Annual%20Report%202017%20(FINAL)%20v4.pdf.
ii Andrew Peller Limited, “History,” accessed July 29, 2018, http://www.andrewpeller.com/History.php.
iii Mergent, “Andrew Peller Estates (TSE: ADW.A),” Company Financials, accessed July 15, 2018,

http://www.mergentonline.com.ezproxy.langara.bc.ca/companyfinancials.php?compnumber=503
iv Andrew Peller Limited, 2017 Annual Report, 4,

http://www.andrewpeller.com/UserFiles/File/Annual%20Report%202017%20(FINAL)%20v4.pdf
v MarketLine, “Wine Industry Profile: Canada.,” MarketLine Industry Profile, August 2017, 12, https://web-

a-ebscohost-com.ezproxy.langara.bc.ca/ehost/pdfviewer/pdfviewer?vid=4&sid=e3c2ccda-723c-4e3f-
8a6d-69dce8f7986f%40sessionmgr4006.
vi Andrew Peller Limited, 2017 Annual Report, 4,

http://www.andrewpeller.com/UserFiles/File/Annual%20Report%202017%20(FINAL)%20v4.pdf
vii Ibid.
viii Ibid.
ix Ibid.
x Euromonitor International, “Canada: Country Profile,” Country Report, Jun 22, 2018, Passport.
xi Ibid.
xii Ibid.
xiii Euromonitor International, “Wine in Canada,” Country Report, Jun 2017, Passport.
xiv Ibid.
xv "US Trade Dispute with BC Wine on Grocery Shelves Heats Up – BC Wine Trends," BC Wine Trends,

May 26, 2018, accessed July 29, 2018, http://bcwinetrends.com/2018/05/25/us-trade-dispute-bc-wine-

grocery-shelves-heats/.
xvi Ibid.
xvii Karin Larsen, "Milk, Bread and Beer? Limited Grocery Store Liquor Sales Now Allowed in Vancouver |
CBC News," CBCnews, June 16, 2017, accessed July 27, 2018, https://www.cbc.ca/news/canada/british-
columbia/booze-sales-in-vancouver-grocery-stores-move-one-step-closer-to-reality-1.4162013.
xviii Euromonitor International, “Canada: Country Profile,” Country Report, Jun 22, 2018, Passport.
xix Euromonitor International, “Alcoholic Drinks in Canada,” Country Report, Jun 2017, Passport.
xx Ibid.
xxi Ibid.
xxii Pete, Evans, "Minimum Wage Hikes Could Cost 60,000 Jobs - and Maybe More, Bank of Canada

Report Calculates | CBC News," CBCnews, January 03, 2018, accessed July 27, 2018,
https://www.cbc.ca/news/business/bank-of-canada-minimum-wage-1.4469912.
xxiii "B.C.'s Move to Raise Minimum Wage to $15.20 by 2021 Too Slow Says B.C. Federation of Labour |

CBC News," CBCnews, February 09, 2018, accessed July 27, 2018.
https://www.cbc.ca/news/canada/british-columbia/minimum-wage-bc-1.4526320.
xxiv John Paul Tasker, "Legal Recreational Marijuana: What You Need to Know | CBC News," CBCnews,

June 22, 2018, accessed July 27, 2018, https://www.cbc.ca/news/politics/what-you-need-know-about-pot-

legalization-1.4715920.
xxv Euromonitor International, “Canada: Country Profile,” Country Report, Jun 22, 2018, Passport.
xxvi Ibid.
xxvii Euromonitor International, “Income and Expenditure: Canada,” Country Report, May 21, 2018,

Passport.
xxviii Ibid.
xxix Ibid.
xxx Ibid.
xxxi Euromonitor International, “Alcoholic Drinks in Canada,” Country Report, Jun 2017, Passport.
xxxii Ibid.
xxxiii Ibid.
xxxiv MarketLine, “Wine Industry Profile: Canada.,” MarketLine Industry Profile, August 2017, 15,

https://web-a-ebscohost-com.ezproxy.langara.bc.ca/ehost/pdfviewer/pdfviewer?vid=4&sid=e3c2ccda-
723c-4e3f-8a6d-69dce8f7986f%40sessionmgr4006.
xxxv Euromonitor International, “Wine in Canada,” Country Report, Jun 2017, Passport.
xxxvi Ibid.
xxxvii Andrew Peller Limited, 2017 Annual Report, 12,

http://www.andrewpeller.com/UserFiles/File/Annual%20Report%202017%20(FINAL)%20v4.pdf.
xxxviii Euromonitor International, “Canada: Country Profile,” Country Report, Jun 22, 2018, Passport.
xxxix Ibid.
xl Ibid.
xli Euromonitor International, “Income and Expenditure: Canada,” Country Report, May 21, 2018,

Passport.
xlii Ibid.
xliii Euromonitor International, “Wine in Canada,” Country Report, Jun 2017, Passport.
xliv Euromonitor International, “Alcoholic Drinks in Canada,” Country Report, Jun 2017, Passport.
xlv Euromonitor International, “Income and Expenditure: Canada,” Country Report, May 21, 2018,

Passport.
xlvi Ibid.
xlvii Euromonitor International, “Alcoholic Drinks in Canada,” Country Report, Jun 2017, Passport.
xlviii Ibid.
xlix Ibid.
l Ibid.
li Euromonitor International, “Wine in Canada,” Country Report, Jun 2017, Passport.
lii Euromonitor International, “Alcoholic Drinks in Canada,” Country Report, Jun 2017, Passport.
liii "2018 Wine Trends for BC Wine Enthusiasts – BC Wine Trends," BC Wine Trends, June 21, 2018,

accessed July 27, 2018, http://bcwinetrends.com/2017/12/01/2018-wine-trends/.

liv MarketLine, “Wine Industry Profile: Canada.,” MarketLine Industry Profile, August 2017, 18, https://web-
a-ebscohost-com.ezproxy.langara.bc.ca/ehost/pdfviewer/pdfviewer?vid=4&sid=e3c2ccda-723c-4e3f-
8a6d-69dce8f7986f%40sessionmgr4006.
lv Ibid.
lvi Ibid.
lvii Ibid.
lviii Ibid., 17.
lix Ibid.
lx Ibid., 20.
lxi Ibid., 21.
lxii Ibid., 26.
lxiii Ibid.
lxiv Ibid.
lxv Ibid., 27.
lxvi Ibid., 22.
lxvii Ibid., 23.
lxviii Ibid., 29.
lxix Ibid.
lxx Ibid.
lxxi Ibid., 25.