Bailamos - Constellation’s Imports, Refocus on Craft are Reason to Dance

Michael Kiser

THE GIST
Last week, Constellation Brands announced their Q2 financial results, which showed a near-12% increase in shipment volume for summer 2017 compared to the same time last year. Per usual, its imported brands like Corona, Modelo and Pacifico played a large role, but the regular presentation to stockholders also bookended a summer in which a Wells Fargo survey of beer wholesalers declared Constellation to be “best positioned” between June and August to hold its steady growth against a continually shifting beer industry as well as wine and spirits. Some dreams do come true, with Constellation’s stock price rising 8.3% in the quarter and year-to-date, is up almost 36%.

WHY IT MATTERS
For all the talk of AB InBev’s encroachment on craft’s space and the slowdown of Brewers Association-defined craft beer, imports continue to be a huge hit in America, partially due to the unstoppable portfolio held by Constellation. According to analysis by the Beer Institute, imported beer volume was up 19.4% in August, the largest percentage increase in 2017, with Mexican imports seeing a bump of more than 30% in the same month. Looking at annual January to August growth rates in Mexican imports, there has been a 156.5 million barrel increase in shipments over the past five years, an increase of 45.1%.

That’s a lot of numbers, so why does it matter so much when it comes to Constellation? According to CEO Rob Sands, his company is to thank.

"So it's a little bit of a misnomer to think that the growth in the beer category, to the extent that there is any, is coming from [total] imports,” he told CNBC. “It is not. It is coming from Constellation's portfolio of Mexican beers. And then there is also growth coming from the craft segment, and that's about it.”

Based on this alone, it would be easy to declare the bet of Constellation as summertime winner a successful one, especially at a time when main competitors are cutting jobs amid underperforming brands (AB InBev) or just now getting into Mexican imports (MillerCoors). That’s on top of continued success at a time when so many other American brewers are getting involved in producing Mexican lagers with an eye toward cornering part of the market for themselves. All the same, Constellation’s Corona (1), Modelo (2), Corona Light (6), Pacifico (8) and Modelo Especial Chelada (9) were all among the top-10 American imports to start the year and Modelo had a 20% increase in volume this past quarter.

For Constellation, there appears to be no end in sight for their upward trajectory, and that’s even before taking into consideration how a weaker Mexican peso is making it cheaper to export products to America.

But the biggest growth in Constellation’s beer portfolio this summer may not have come from its financial success, but the business side.

August’s announcement of the purchase of Florida’s Funky Buddha was paired with the creation of a new “High End Craft and Specialty” group to focus on the beer side of a company with plenty of connections across wine and spirits. Until that point, Constellation’s other foray into beer acquisition with Ballast Point proved to be an important learning experience.

“At the time we acquired Ballast Point, we thought there would be more national brands that broke out,” executive vice president Paul Hetterich told Brewbound in August. “Things went more local, and it doesn’t appear that you’re going to be able to build new national brands in the space really quickly. That made us recognize – we need a lot more brands in the portfolio to build up a reasonable presence in the craft space overall.”

Cited at the time as the fastest growing craft brewery in Florida, the purchase of Funky Buddha is certain to create an important pivot for Constellation as it looks for ways to compete in an ever-expanding industry. They’ve long been able to coast on the monumental success of Corona and company, but a new focus on beer emphasizes a change of pace.

One part is placing an anchor in Florida, among the fastest-growing states for craft beer in the country. According to data from the Beverage Marketing Corporation, Florida was only behind Alabama for the most growth in craft sales between 2011 and 2016, which means that Constellation now has the top shower in a growing state. A companion to that, with Ballast Point now operating hubs on both costs in San Diego and Daleville, Virginia, is a changing packaging and price structure, rebranding Even Keel Session IPA, Bonito Blonde, Longfin Lager, Grunion Pale Ale and updating their prices to costs more familiar with craft beer customers, between $9.99 and $10.99.

These decisions, combined with Constellation’s increasing position within the beer space, show a successful company now more determined to extend their reach and disruption capabilities. There were some growing pains along the way, including an $87M writedown on the value of the Ballast Point brand this year, signaling that they $1B price tag was an overpayment. But if a company can manage some of the most popular beer brands in the country while at the same time picking up new lessons, it seems Constellation is primed to compete with the likes of AB InBev, MillerCoors and Heineken, which have their own problems to deal with in terms of creating national brands out of regional ones while simultaneously eyeing international growth.

Meanwhile, Constellation is chugging along. In July Impact Magazine named six of its beers to its list of “Hot Brand Awards” and in their Q2 results, the company said their beer business drove more than 60% of high-end (price) category growth. The stars continue to align for Constellation.

— Bryan Roth