Constellation Brands executives addressed hard seltzer’s slowing sales during the company’s second quarter 2022 earnings call today, and assured investors and analysts that the success of its core beer brands would still drive growth.
Here are some of the highlights of the discussion:
Company Not Reliant on Hard Seltzer
Constellation president and CEO Bill Newlands emphasized several times over the course of the call that the company’s growth was not reliant on the success of hard seltzer.
“For us, it’s a relatively small percentage of our overall play,” he explained. “We continue to believe this is going to be an additive portion of our growth, but certainly not the largest portion of our growth. That will continue to be our core beer portfolio.”
Constellation raised its guidance with expected net sales growth between +9% and +11% for its beer division, driven by its Mexican imports Corona, Modelo and Pacifico. Newlands said the company was able to raise its guidance in large part due to the fact that it produced less hard seltzer, and as a result, was able to produce more beer.
“We still think that the overall ABA [alternative beverage alcohol] space is going to be a growth category,” Newlands added. “How much of that is going to be driven by the seltzer sub-segment remains to be seen. It clearly is going to be a lot less than what everyone anticipated coming into this year.
“We’re unique in our position versus our competitors in this space, as our primary growth is coming from our core beer portfolio, and we’re not reliant on the growth of hard seltzers and ABAs to achieve the medium-term growth goals for our beer business,” he continued.
Poor Hard Seltzer Performance Caused $66 Million Obsolescence Charge
While Constellation had slightly smaller growth predictions for hard seltzer in the first half of the fiscal year compared to some of its competitors, the segment and the performance of its Corona Hard Seltzer still did not meet expectations.
Due to production scheduling constraints, Constellation pre-produced the majority of its Corona Hard Seltzer to build inventory for the summer season based on early performance estimates for fiscal year 2022. As a result of slower hard seltzer sales, which CFO Garth Hankinson credited to an overall slowdown in the segment, the company was left with excess inventory and recorded a $66 million obsolescence charge to destroy out-of-code seltzer for Q2.
“We were probably a bit on the conservative end compared to some of the competition as to what they expected going into this year, where some of them were predicting in excess of 50% growth,” Newlands said. “We projected less, but even as it was, we were wrong. That is the fundamental issue.”
Overall, the company recorded $80 million in obsolescence charges for the first half of the fiscal year, Hankinson said. He noted that the company “[does] not expect to take any additional obsolescence charges in the back half of the fiscal year for hard seltzers.”
Reformulation of Hard Seltzer In the Works
Although hard seltzer is not the main focus of Constellation’s growth plans, the company is not drawing itself out of the segment, but is changing its approach.
“We’re going to have a little bit more of a watch-and-see effort than we had before,” Newlands said. “I think everyone got a little bit excited about seltzer, and frankly, the category has slowed significantly, so I think we will probably do a much better job of being guarded in terms of our expectation around that, while continuing to leverage our outstanding portfolio of beer brands.
“But let’s be clear, we continue to see the hard seltzer and broader ABA space as a meaningful sector in the beer market,” he continued. “And we continue to believe it’s important to participate in and gain our fair share in this segment to complement the growth of our core imported beer portfolio.”
Newlands predicted that the segment will steer away from its low carb and low calorie focus, and instead evolve to cater to consumers’ desires for more flavor, as well as different alcohol bases and added “functional benefits.”
“We obviously do a lot of consumer research and we track consumer perspectives, and we’ve found that consumers are desiring a bit more flavor and a bit more differentiation within their seltzer preferences, and we plan to address those concerns,” Newlands said. “As a result, we will be altering the flavor and taste profile of our seltzer portfolio to better align with the changing consumer preferences, while also introducing single-serve packages to better serve the growing convenience channel.”
Newlands pointed to Constellation’s Corona Refresca and Limonada brands as already catering somewhat to consumer desire for more flavor, and teased a reformulation of Corona Hard Seltzer.
Constellation initially announced it would invest $60 million this fiscal year into Corona Hard Seltzer. Asked during the call what the current plan for that investment would be, Hankinson said the majority of the $60 million was spent in the first half of the year, as previously planned, and that the remainder of the money would be “redirected to invest behind [its] core Mexican beer portfolio.”
“As we announced last spring, we were investing in 5 million hectoliters worth of ABA capacity. That is moving forward as planned and should come online earlier in our fiscal year 2023,” he added.
Beer Category Growth Driven by Modelo Especial
Execs highlighted the success of its Modelo Especial brand for driving its overall growth in the beer category, and projected that wouldn’t change anytime soon.
“The beer category has been roughly flat at a time when we are up roughly 8%,” Newlands said. “So there is a significant delta between what the overall category is performing and what we are performing [and] we’re radically outperforming the category.
“The majority of our growth continues to be driven by Modelo Especial, supported by strong consumer demand for Corona Extra and Pacifico, and we expect this to continue for the foreseeable future,” he continued.
Modelo Especial was the second best performing beer brand in multi-outlet and convenience stores year-to-date through September 5, 2021, with more than $2 billion in sales, according to the market research firm IRI. The beer brand recorded the most sales growth year-to-date of the top 10 beer brands, up +12.2% as of September 5.
Newlands credits this growth to Constellation’s new marketing strategy to target consumers outside of the brand’s core Hispanic consumer base.
“We only started advertising to the non-Hispanic community about three and a half years ago, so we’re really just getting started on Modelo and the opportunity that presents itself there,” he said. “We continue to believe the Modelo Especial in particular has a long runway for growth, given the steadily increasing household penetration for this brand.”
He also pointed to Pacifico as a potential future growth driver — referring to it as a “baby Modelo,” — but noted that it’s growth was slightly lower in Q2 than predicted, with depletion growth slowed to +5%, due in-part to supply chain challenges with brown glass.
Asked if any of the import brands’ growth could possibly cannibalize other Constellation brands, Newlands said while there is some overlap, there is still largely positive growth.
On-Premise Performing Still Below 2019, but Growing
Constellation credited some of its beer portfolio growth to the reopening of on-premise establishments, particularly with its Corona Extra brand.
Newlands estimated that 50% of Corona’s growth profile was due to on-premise reopenings.
During the height of COVID-19 pandemic shutdowns, Constellation’s business ebbed and flowed from low-single digits to up low double-digits. However, Newlands said on-premise performance varied significantly by city and state and Constellation’s overall on-premise sales remain below 2019 levels.
Regarding the on-premise, Newlands addressed issues with supply and demand. He said he expects its brands to return to normal inventory levels by the end of Q4 2022.
“In most instances if a consumer is looking for our brand, they have an issue at a particular point in time finding a SKU, but they don’t have trouble finding our brand,” he said of the current situation.
Canopy Not Relying on Federal Cannabis Legalization for Growth
Newlands briefly gave an update on Canopy Growth Corporation, the Canada-based cannabis company it invested $4 billion (USD) in in 2018.
While Constellation is optimistic about federal legislation of cannabis in the near future, Newlands said Canopy is not waiting for such legislation to materialize to determine its growth plans.
Canopy’s U.S. business grew 91%, year-over-year in its most recent quarter, driven by robust consumer demand for their CBD and packaged good products, including Biosteel ready-to-drink CBD beverages.
“Once THC permissibility becomes a reality in the U.S., Canopy expects their U.S. business to make a substantially greater contribution to their results,” Newlands added. “Canopy has scaled a multi-state route-to-market plan ready for legalization and has leveraged Constellation’s distributor relationships to fuel their U.S. non-THC business with more opportunities in a world post-federal permissibility.”