The effects of climate change—particularly the warming of the planet, water scarcity, and extreme weather—are already beginning to impact agriculture. Compared to other agricultural products, wine is especially sensitive to variations in climate. Even by conservative estimates, the area suitable for wine production is projected to decrease by 19-62% in major wine producing regions by 2050 . A key driver of this decline is the water intensity of wine production, requiring nearly 1,000 liters of water per liter of wine produced [6,8]. As the climate shifts, water management will likely become increasingly important to offset its destructive effects: a warmer growing season and more frequent droughts.
With global operations in wine, beer, and spirits, Constellation Brands (CB) is one of the largest alcoholic beverages companies in the world. While shrinking as a percentage of its portfolio (from 42% of net sales in 2015 to 37% in 2017), wine production remains a significant portion of CB’s volume . Estimates indicate that the magnitude of climate-related changes will vary highly by geography, and researchers believe that California vineyards, particularly “regions known for fine wine, like Napa and Sonoma… [may be] too hot to produce premium wines in the future” [6, 3]. CB is particularly exposed to climate risk in that its facilities are highly concentrated in risky geographies . CB owns or operates 13,600 acres of vineyards in California, where all but two of its 18 wineries are located .
In terms of climate risk management, CB already operates a somewhat flexible and diversified supply chain—many of the grapes used for production are purchased from approximately 950 independent growers . Additionally, CB has implemented recent changes to become more water efficient. CB has invested in a wide range of projects, including glycol heat exchangers, landscape irrigation projects, and wastewater recovery and reuse lines . CB collaborates with peers in the Beverage Industry Environmental Roundtable (BIER) to better evaluate and manage water risk. Partnering with the EPA and conservation groups, CB has invested in projects to maintain and protect rivers and water sources near production sites . The company has also launched internal water conservation awards to its wineries that achieve or exceed conservation targets . In the medium term, CB’s Water Policy outlines seven strategies: increase water efficiency, ensure water source availability and quality, raise awareness, engaging supply chain, maintain alignment with strategic goals, and ensure transparency and reporting . Furthermore, CB seems to be diversifying its portfolio by growing acquisitions in beer, spirits, and even marijuana .
Still, CB’s efforts appear to fall short. According to company reports, CB’s production is significantly more water intensive than the industry average [9,2]. This metric excludes water usage related to irrigation, which may be increasingly necessary to combat extreme weather patterns like droughts. Given that an effective response to water concerns will be highly localized, CB should begin a thorough evaluation of each winery to identify short- and medium-term strategies. In the next two years, CB should look to identify and implement best practices in water management across its vineyards and wineries, particularly in its recent acquisitions. In addition, CB should partner with its many independent grape suppliers to improve water efficiency up the supply chain. Hiring specialized personnel or enhancing training programs may support these efforts. CB may also consider financial incentives at its vineyards and wineries to tie water conservation to performance evaluation or compensation. Establishing new strategic partnerships, like the water source initiative with the EPA, will be essential.
[Source: Company documents, BIER, author’s analysis]
In the medium term, CB may be able to transition some of its production to less water intensive and more resilient varietals by building new supplier relationships or replanting vineyards under CB management. Nevertheless, while varietal and region play a large role in the water intensity of operations, strong consumer preferences may limit the feasibility of pulling these levers. CB should consider investing in cutting edge technologies, such as precision irrigation systems and integrated water management systems. In addition, as CB continues to grow, the company should look for acquisition targets and suppliers in geographic areas that are less at risk, including the Pacific Northwest and Northern Europe .
Nevertheless, the path ahead for CB is not fully clear. How should the company think about largescale investment in water initiatives, which may not be NPV positive in the short or medium term? Also, effective investments in water management may not replace the need for contingency plans in the case of climate-induced complications. CB must consider: What are the essential elements and tradeoffs of a comprehensive contingency plan? For example, CB may be able to offset shortfalls in grape supply with new suppliers from less impacted regions, but margins will likely suffer due to 1) higher market rates reflecting decreased supply, and 2) transportation costs to its California-based wineries.
- “Annual Report.” Constellation Brands. April 2017. http://www.cbrands.com/sites/default/files/2017-Annual-Report.pdf, Accessed November 2017
- “Beverage Industry Continues to Drive Improvement in Water and Energy Use.” Beverage Industry Environmental Roundtable. December 2016. http://media.wix.com/ugd/49d7a0_fb6ab6f0359c45d89b6e0a72a42988d1.pdf, Accessed November 2017.
- Blaind, Alastair. “An Upside to Climate Change? Better French Wine.” NPR. March 21, 2016. https://www.npr.org/sections/thesalt/2016/03/21/470872883/an-upside-to-climate-change-better-french-wine, Accessed November 2017
- “Constellation Brands Announces Franciscan Estate Winery As Its 2016 Internal Sustainability Award Winner.” Water Online. January 16, 2017. https://www.wateronline.com/doc/constellation-brands-announces-winery-as-its-internal-sustainability-award-winner-0001, Accessed November 2017 
- “Constellation Brands: Water Policy.” July 30, 2013. https://static1.squarespace.com/static/569fcae3e0327ce43da144e0/t/56d9b7534d088e73108ab7dc/1457108819940/CBI+Water+Policy.pdf, Accessed November 2017 
- Hannah, Lee et al. “Climate change, wine, and conservation.” PNAS. February 19, 2013. https://www.conservation.org/publications/Documents/CI_PNAS_Climate-Change-Wine-Production-Conservation_Lee-Hannah_March-2013.pdf, Accessed November 2017 
- Kell, John. “Constellation Brands Inks $900M in New Deals.” October 17, 2016. http://fortune.com/2016/10/17/constellation-brands-deals/, Accessed November 2017 
- Veseth, Mike. “Turning Water into Wine.” The Wine Economist. November 27, 2008. https://wineeconomist.com/2008/11/27/turning-water-into-wine/, Accessed November 2017
- “2017 Corporate Social Responsibility Report.” Constellation Brands. April 2017. https://static1.squarespace.com/static/569fcae3e0327ce43da144e0/t/59347571d1758ee8c2042237/1496610172775/CBI+2017+CSR+Report.pdf, Accessed November 2017.
- Image. Penn State Sites. http://sites.psu.edu/siowfa15/wp-content/uploads/sites/29639/2015/12/28curious-span-articleLarge.jpg, Accessed November 2017.