Constellation Brands continues to grow its beer business, increasing net beer sales +12% year-over-year (YoY) in Q2 of fiscal year 2024 (+$253 million), to more than $2.39 billion.
Q2 shipments (sales to wholesalers) were up +8.7% YoY, while depletions (sales to retailers) increased +7.9%, driven by a nearly +9% increase in depletions for Modelo Especial. Depletions also increased for Modelo Chelada (more than +40% YoY), Corona Extra (+1%) and Pacifico (+15%).
Constellation remained the No. 1 beer dollar share gainer in Circana-tracked off-premise channels for the ninth consecutive quarter. The company now accounts for six of the top 15 share gainer brands in beer, including No. 1 Modelo Especial. The Mexican import brand is now the No. 1 beer brand by dollar sales in Circana-tracked channels.
Modelo Chelada remains the No. 1 chelada brand in the U.S., with nearly 70% share of the segment through Q2 (ending August 31). Corona Extra was the No. 3 high-end beer brand, while Pacifico was the No. 7 high-end beer share gainer.
Because of Constellation’s continued growth, the company has updated its full year guidance, projecting net sales growth of +8% to +9% (previously +7% to +9%), and operating income growth of +6% to +7% (previously +5% to +7%).
Through the first half of FY24, Constellation’s net beer sales are up +11% YoY, with beer operating income up +8%. The lower full-year guidance compared to the company’s performance so far suggests a slower second half of the year, which is on track with previous seasonal patterns, CEO Bill Newlands said today during an earnings call with investors.
“Only 45% of total volume for the fiscal year will be shipped in the second half, which aligns with the regular seasonality of beer demand in the U.S., and the timing of our brewery maintenance activities,” Newlands said.
Asked why the guidance wasn’t increased more, Newlands said the company remains ”very positive about the back half of the year” in terms of brand performance, but that Q3 will be “somewhat” limited due to the company’s usual maintenance costs in the quarter, as well as “normal seasonality” and the lapping of price increases from 2022.
Constellation’s beer operating income increased +10% in the quarter, to $953.9 million (+$89 million). However, the company’s operating margin declined -60 basis points, to 39.9% as “net sales growth, pricing and cost efficiency initiatives” were offset by “higher raw materials costs due to ongoing inflationary pressures, costs related to a voluntary keg product recall and incremental depreciation and operating costs from brewery capacity expansions,” the company wrote in its report.
Constellation’s overall costs increased +17%. Beer marketing spend decreased -2% (-$4 million), “primarily driven by the divestiture of our craft beer business,” CFO Garth Hankinson said during the investor call.
Constellation exited the craft beer business in Q1 to focus on its core brands. As a result, its full year marketing expenses are expected to be “on the lower end” of its previous project 9-10% of net sales, Hankinson said.
Inventory Levels “Healthy” to Meet Demand
Hankinson insisted that Constellation’s inventories are “at healthy levels to support the ongoing growth of our brands.” He acknowledged supply disruptions in Q2 from the “voluntary” pulling of several kegs, noting that the “impact was entirely in the cost of goods as related to shipping and destruction of product, as well as the initial cost to produce the product.”
“Importantly, while there is some disruption in the near term, we are currently producing and shipping kegs and fully expected to offset the impact of the disruptions as quickly as possible,” Hankinson continued.
Constellation’s on-premise beer business recorded “essentially flat” depletions YoY, with the on-premise accounting for about 10.3% of the company’s total beer volume, Hankinson said.
For the off-premise, Newlands once again reiterated that while some retailers have accelerated resets this fall, Constellation still expects the majority of resets to happen in the spring.
There is opportunity for Constellation to increase its shelf space with not only its core beer offerings, but also its innovations such as Modelo Oro and Chelada, Newlands said.
“We need to think about this very broadly because we expect the game both in what I would call the core beer shelf, as well as the ancillary beer shelf as well, with things like Chelada,” he said.
Modelo Oro, Constellation’s low-carb challenger to Anheuser-Busch InBev’s Michelob Ultra, launched nationally this year and is “off to a really good start,” with cannibalization rates “less than we had anticipated,” Newlands said.
Modelo Oro was the No. 2 new brand through Q2, Constellation reported. The company plans to expand its opportunities with the brand by adding additional SKUs in 2024.
Modelo Chelada Sandia Picante was the No. 5 overall new brand in Circana-tracked channels, according to Constellation’s report. Corona NA, the company’s non-alcoholic (NA) offering, was also the No. 1 share gainer in NA beer, Constellation reported.