THE GIST
As some of its Mexican beer brands show staggering growth in the United States, Constellation Brands’ plans for a $1.5 billion production brewery in the border city of Mexicali—the capital of Baja California, Mexico—have been scuttled. A Constellation spokesperson tells GBH construction on the Mexicali plant has stopped completely, following a years-long campaign by local water rights activists.
That brewery was intended to produce beer exclusively for the U.S. market, where Constellation has seen a swell in demand for packaged beers—including its Corona and Modelo portfolios—during the COVID-19 pandemic. Constellation’s entire import portfolio grew +14.3% in 2020, adding $777 million compared to 2019. That surge was led by Modelo Especial, which has become the #3 beer in grocery, convenience, liquor, and other retail chains after growing +21.3% last year, as tracked by market research company IRI. Sales jumped despite an increase in demand and pandemic-based disruptions to Mexican brewing operations, which together led to shortages (called out-of-stocks) of some of Constellation’s beer brands last spring.
On a Jan. 7 earnings call, Constellation executives made no mention of the Mexicali facility, instead discussing plans to expand production in another facility to Mexicali’s southeast in Obregón, in the Mexican state of Sonora. Constellation plans to add 5 million hectoliters (4.2 million barrels) of capacity to its Obregón facility, an expansion it expects to complete in fall 2021. That capacity is nearly as much beer as D. G. Yuengling & Son and Sam Adams produced, combined, in 2019.
“We continue to work with Mexican government officials on plans for our long-term production needs in Mexico and talks continue to be productive,” the company told GBH in a written statement. “We have ample production capacity in the meantime to meet consumer needs over the medium-term.”
Activists opposed construction of the Mexicali brewery, saying it would divert precious water resources from an area of Mexico where residents often wake up to find no water running through their taps. NPR reported the Constellation plant would have used 1.8 billion gallons of water annually, with all of the resulting beer destined for sale in the U.S. For context: New York State uses about 1.5 billion gallons of water daily.
WHY IT MATTERS
Mexicali Resiste, a grassroots organization, has been fighting Constellation’s plans for the Mexicali facility for more than four years—and for now, it seems to have won. The battle to stop construction of that brewery is a microcosm of larger water-rights issues that are sure to play a greater role in the global brewing industry in the future. As climate change makes water an even more precious commodity—water futures are now tradeable on the Chicago Mercantile Exchange—breweries will face increased scrutiny over their use of natural resources.
In Mexicali, citizens opposed to Constellation’s brewery have taken to the streets and ultimately voted against brewery construction that would have strained already low water supplies. “El agua no se vende. El agua se defiende” (“Water is not for sale. Water is to be defended”) was their rallying cry. Roughly 30% of Mexican households in 2016 experienced daily cuts or interruptions to their water supply.
Despite that resistance, Constellation needs its Mexican beer brands to post strong sales in the U.S. Those brands are critical to the company’s growth, and are fueling almost all of the growth in imported beer sales overall. Mexican imports were up just shy of +12% in 2020 in chain retail stores, but Constellation’s import portfolio slightly outpaced this, with an increase of +14.2% last year. Modelo Especial was the #3 beer in U.S. chain retail sales in 2020, behind Bud Light and Michelob Ultra.
To meet U.S. demand for imported beer brands like Modelo, Pacifico, and Corona, Constellation will continue its expansion of the Obregón facility. (The company also operates a brewery in Nava, in the Mexican state of Coahuila.) Product inventory will return to normal levels, the company said, by the end of March. But Constellation representatives on the earnings call admitted that construction there had been hampered by delays related to COVID-19.
The company needs the Obregón expansion to move along quickly with the Mexicali plant scrapped. In March 2020, Mexicali voters passed a referendum blocking further construction of Constellation’s plant. Though turnout was extremely low—less than 5% of eligible voters—76% of votes cast rejected the brewery. The referendum had the backing of Mexican President Andrés Manuel López Obrador, who in a subsequent press conference said he had revoked the company’s construction permits and water rights in the area. At the time of the referendum’s passage, construction on the facility was reportedly 70% complete.
In July 2020, Reuters reported Constellation and the Mexican government aimed to reach “an alternative agreement” on the Mexicali brewery, but gave no further details. Based on Constellation’s Jan. 7 earnings call, there are no plans for the Mexicali facility that would have an effect on U.S. supplies of Constellation beer.
As 2021 opens, Constellation is tasked with meeting demand not just for its beer brands, but for hard seltzer. The company says it will “more than double” hard seltzer production capacity by the end of 2021. But without progress on the Mexicali plant, this capacity all has to come from existing breweries in Obregón and Nava. That added stress comes as the company is under pressure to ramp up production of Corona Hard Seltzer, the fourth-best-selling hard seltzer brand in the U.S. Currently, Corona Hard Seltzer is available in just one format, a variety pack. But Constellation says it will launch a second variety pack with new flavors by the end of the year, with “a new hard seltzer initiative” to follow after that.
Demand for a company’s products is a good thing, but failure to meet demand can have consequences. Constellation’s stock was trading at $105 per share in March, down from a pre-COVID February high of $205 per share. That’s due in part to out-of-stocks, production stoppages at its Mexican breweries, and concerns about the lack of on-premise sales during the pandemic.
In downgrading Constellation’s stock rating in May, analyst Bill Kirk of equity research and trading company MKM Partners wrote that out-of-stocks could cause the company lasting damage. He added that if drinkers don’t see Mexican imports on the shelf, they might be drawn to generally less expensive “premium light” brands like Coors Light and Bud Light.
All this is compounded by a lack of inspiration coming from the rest of Constellation’s beer division, which includes Florida’s Funky Buddha Brewery and Texas’ Four Corners Brewing Co. Neither of those breweries had packaged retail sales that kept pace with the overall craft beer market in 2020. Four Corners’ IRI-tracked sales were up +12.4% in 2020, below overall craft’s +13.2% growth. And Funky Buddha’s IRI-tracked sales were down -7% last year. In the past, Constellation has struggled to find success for its acquired craft brands; it saw the departure of nearly all of Ballast Point’s high-level employees before eventually selling the brand in 2019 for a fraction of the $1 billion it had paid to acquire it just four years prior.
To offset mediocre performance from the rest of its beer portfolio, Constellation’s priority for 2021 will be simply keeping enough of its Mexican beer and hard seltzer on shelves. And it will have to do so without the capacity of its scuttled plant in Mexicali.
Words by Kate Bernot Language
