Constellation Brands credited its fall price increases for its beer business’ slowed depletion growth, during the company’s Q3 2023 earnings call with investors Thursday.
Constellation’s beer shipments were up +2.7% in Q3, while depletions were up +5.7%, the company reported earlier today. The beer portfolio – including Mexican imports Modelo, Corona, Pacifico, Victoria, and craft offerings Funky Buddha and Four Corners – reported net sales growth of +8% year-over-year (YoY), to more than $1.89 billion.
Beer price increases in October lifted Constellation’s FY23 pricing above its average price increase of +1-2%. The company now expects its full-year price increase to be above the +2-3% increase it projected in Q2, Constellation president and CEO Bill Newlands said during the call.
Newlands did not put a specific number on Constellation’s final year price increase. In FY2022, the company increased beer prices +3.5%.
For FY24, Constellation expects its pricing to be “more muted” and return to its average +1-2% rate, as “continued inflationary pressures and the potential impact of recessionary environment” will make consumers “overly sensitive to pricing actions.”
“Based on our current expectations of the presence that the consumer will continue to face in the near term, we are giving even more careful consideration for our pricing actions in fiscal year ’24,” Newlands said. “While input costs remain a historically elevated price, we strongly believe that additional consideration in our approach to pricing fiscal ’24 is warranted to sustain healthy growth for our brands.”
As a result of these headwinds, Constellation now expects its operating margins to be similar in FY24 to FY23, below its previously expected 39-40% range.
Constellation’s beer operating margins fell 380 basis points to 37.5% in the quarter, as net sales growth was “more than offset” by increased costs for raw materials and packaging, increased marketing spend, and operating costs from its capacity expansion projects.
More detail on FY24 expectations will be shared during the company’s Q4 earnings call.
Pricing Impact Expected to Settle in Coming Months
The “impact of incremental pricing” is expected to “settle” in the coming months, with distribution growth also returning to “normalized levels,” Constellation CFO Garth Hankinson said.
Constellation forecasts a beer business net sales growth of +9-10% for the full-year 2023 and an operating income growth of +4-5%. In Q2, the company projected a net sales growth of +8-10% and operating income growth of +3-5%.
The narrowed projection, while closer to the higher end, would imply a Q4 beer net sales decline of -6.5%, “with an even bigger decline in shipments if one assumes positive price-mix,” according to Bernstein equity research analyst Nadine Sarwat in a report following the initial earnings release.
When asked to address the implication that shipments will be down “as much as high single digits in Q4,” Hankinson told analysts to view FY23 performance through the full-year lens, as Constellation had previously warned difficult YoY overlaps would cause “uneven or choppy results throughout the year.”
“[We’re] dealing with some production related issues, and in the second half of the year we’re building back inventories,” Hankinson said. “So Q4 will certainly be muted this year versus what it was last year, as last year was sort of artificially high, due to those rebuilding efforts”
“We’re comfortable where we think December is going to land, otherwise we wouldn’t have raised our guidance,” Newlands added.
Lower Modelo Growth Not An Indication of Long-Term Trends
Modelo Especial – a leader in Constellation’s recent growth – grew depletions +4.4% in Q3. While it was not the double-digit growth the brand typically achieves, it lapped the +13.2% depletion growth it recorded in the same quarter in 2022. The brand has recorded depletion growth of +9.9% year-to-date for FY23.
While Modelo’s depletion growth was lower in the quarter than historical trends, the brand still recorded share gains in its five biggest markets and “several times those gains” in other markets, Newlands said.
Constellation did not go into specifics about what may be causing the slowdown. Prior to the call, Sarwat noted that the company had “previously called out a tough weather comp in California,” but had provided “no additional explanation for this relative weakness.”
“We suspect this lack of visibility will disappoint investors, who are already worried
about a backdrop of a weakening consumer,” Sarwat wrote.
Constellation Brands’ stock has dipped since the Q3 earnings release, declining more than $22 per share (-9.7%) as of press time.
Newlands attempted to ease investor concerns that any “long-term trend issues” are occurring, and noted there are still “significant incremental opportunities to maintain the momentum” of the brand, particularly with distribution gains in states “where it is underrepresented.”
“This brand is still under-shared in terms of its household penetration compared to Corona Extra, as an example,” Newlands said. “So there’s just a lot of runway for growth for Modelo and we remain very, very comfortable and confident in that brand’s ability to continue to accelerate.”
Newlands added that Constellation is “not a one trick pony” and its other Mexican import brands are also gaining share. He pointed to Pacifico, which was the “No. 1 share gainer in the state of California in the last four weeks,” and recorded depletions growth of +40% in the quarter.
‘Very Little’ Trade Down Seen, but Rather ‘Trading Around’ Constellation’s Portfolio
“There has been trade-down, but it has tended to be from price points below us going even lower, rather than trade down from our brands, which I think speaks very strongly to the sheer strength of those brands,” Newlands said.
He did acknowledge some “trading around” within Constellation’s beer portfolio, pointing to the recent growth of Pacifico in California.
“And remember, we are continuing to market these brands in the same way that we have historically,” Newlands said. “We continue to invest behind our brands to support those in the eye and the mind of the consumer, and that’s going to be critically important during a time when there could be some trade down lower in the category.”
Other Brand Performances
Constellation still sees “growth potential” for Corona Extra, particularly with younger legal-drinking-age and multicultural consumers, according to Newlands. The brand recorded a slowed +1.2% growth in depletions in Q3, but is up +4% year-to-date through November.
Pacifico recorded +40.7% depletions growth in Q3, and +32.9% growth YTD. The brand is a top 10 share gainer in IRI-tracked channels, “mainly supported by its growing footprint in states like California, Nevada, Utah and Colorado and Arizona,” Newlands said.
“We continue to see fantastic growth runway for Pacifico as one of our new wave brands, with significant distribution potential relative to Modelo, and even more so relative to Corona Extra, particularly as the brand also continues to build momentum by shifting east in the U.S.,” Newlands said.
Modelo Chelada recorded +44% depletions growth in Q3 and +48% growth YTD. In the quarter, the chelada brand gained nearly half a share point in total beer in IRI-track channels – on par with Corona Extra’s share gains. The gains are “largely driven” by innovations launched FY23, including its Limon y Sal 12 oz. 12-pack and a new variety pack.
Constellation plans to broaden the “demographic appeal” of Modelo Chelada moving forward, investing in marketing targeting “the general market consumer.”
Innovation sales have contributed about 8% to Constellation’s net sales through FY23, compared to about 1% in FY20, according to Newlands.
“We’re reaching more consumers and more consumer occasions than what we have done and therefore we continue to expect innovation to be an ongoing part of our success,” Newlands said.