After announcing a partnership with Coca-Cola to launch spirits-based canned cocktail Fresca Mixed earlier today, Constellation Brands reported increases in shipments (+3.1%) and depletions (+8.4%) for its beer business in the third quarter of the company’s 2022 fiscal year.
Constellation’s beer portfolio – which includes Mexican import brands Corona, Modelo and Pacifico – increased sales in Q3 FY 2022 (for the three months ending November 30, 2021) on top of difficult comps from elevated off-premise spending driven by the pandemic era fridge stocking in 2020.
During the quarter, Constellation’s beer division increased net sales +4%, to $1.752 billion. The company’s overall business, including its wine and spirits portfolios, posted a decline of -5% in net sales, to $2.321 billion. Declines were driven by the wine and spirits portfolio, which posted declines in shipments (-38.6%), depletions (-6.8%) and net sales (-25%).
“We continue to see robust consumer demand yielding high single-digit deflation growth,” CEO Bill Newlands said during a conference call to discuss the quarter’s results. “We extended our leadership position as the top share gainer in the high end of the U.S. beer market behind the strength of our Modelo and Corona brand families while improving our inventory position.”
The company’s on-premise business has nearly recovered to pre-pandemic levels. On-premise depletions accounted for about 12% of its business during the quarter, close to Constellation’s usual rate of 15%. During the same quarter in the 2021 fiscal year, on-premise depletions accounted for 8% of its beer business.
Depletions (sales to retailers) of Modelo Especial increased 13% in the quarter, which amounted to nearly 5 million cases, Newlands said.
Year-to-date through November 28, dollar sales of the Modelo brand family have increased 13.8%, to more than $3 billion, at off-premise retailers tracked by market research IRI, making it the second-best selling beer brand family behind Bud.
“It remains the brightest star in our portfolio as the top share gainer across the entire U.S. beer category in IRI channels while maintaining its position as the No. 1 high-end beer brand,” Newlands said.
Modelo Chelada, the beer cocktail-inspired brand extension, posted “explosive growth” with +35% depletions in Q3, Newlands said.
Dollar sales of the Corona brand family have declined -2.4%, to $2.64 billion year-to-date through November 28, according to IRI. Depletions of flagship Corona Extra increased 11% in the quarter, according to the release. The brand was the No. 2 import share gainer and No. 3 high-end beer category brand in IRI-tracked channels. Corona Premier, the brand’s low-carb offering, posted depletions growth of 8%.
The company is working on reformulating Corona Hard Seltzer, which holds a 3.3% share of the segment according to Fintech data shared by National Beer Wholesalers Association chief economist Lester Jones last month.
The brand is competing with Molson Coors’ Vizzy Hard Seltzer and Anheuser-Busch InBev’s Michelob Ultra Organic Seltzer for fourth place behind Mark Anthony Brands’ White Claw, Boston Beer Company’s Truly Hard Seltzer and A-B’s Bud Light Seltzer.
In addition to reformulating Corona Hard Seltzer, Constellation Brands plans to introduce new berry- and tropical-themed seltzer variety packs during the first quarter of its 2023 fiscal year, which begins in March.
Sales of Pacifico, Constellation’s third Mexican import brand, were hampered by inventory issues of brown glass bottles.
“It had some bearing on our ability to deliver in the quarter as we said,” chief financial officer Garth Hankinson added. “Brown glass has been a drag but, yes, otherwise outstanding results. We expect as we begin a new fiscal year that that will balance out quite a bit and we will see Pacifico get back to the double-digit growth profile that we’ve enjoyed for the last several years.”
Off-premise dollar sales of Pacifico declined -12.1% for the 12-week period ending November 28, compared to the same period in 2021, according to IRI. However, year-to-date through November 28, the brand’s dollar sales have increased +4% over 2020.
Increased Investment in Brewery Expansion Plans in Mexico
Constellation expects capital expenditures for its beer business to reach as much as $5.5 billion over the course of the next three fiscal years.
“It is essential that we invest appropriately to support the expected ongoing growth momentum for our exceptional beer brands,” Hankinson said.
Much of the cap-ex spending is allotted to the new brewery Constellation is building in the state of Veracruz in southeastern Mexico, with some funds going to continued expansion of its facilities in Nava and Obregon.
The investment will increase capacity by 25-30 million hectoliters, roughly 21-25 million barrels of beer. Constellation’s current volume capacity at its existing breweries is about 39 million hectoliters.
With the added capacity, Constellation projects 7-9% top-line growth for its beer business in the next three to five years, Hankinson said.
Margin Declined, Price Increases of +2% Expected
During the quarter, operating margins for Constellation’s beer business declined by 130 basis points, to 41.3%, which the company attributed to “increased [cost of goods sold] driven by expected higher material and brewery costs, as well as increased depreciation.”
“We’re seeing a wide range of increases year-over-year from low- to mid-single digits for things like corn and hops and glass, which obviously is a big driver of our cost buildup,” Hankinson said.
In addition to increased costs of ingredients, the cost of other inputs such as cartons (“mid-teens”) and wood pallets (“over 30%”) have also risen, he added.
The 41.3% margin is slightly outside of Constellation’s typical 39-40% range and attributable to factors beyond the company’s control, Newlands said.
“There will be individual years and times where we have seen that, when things go in our favor, and there may be occasions where, based on certain headwinds and fall slightly below that,” he said. “But as far as we’re concerned and as Garth pointed out earlier today, these remain best of class margins.”
Due to the inflationary pressures at play, Constellation expects to increase price more than its typical 1-2% raise this year, because, “given the current economic environment this year, we’ve determined that we can take more pricing than we typically have,” Hankinson said.
Price increases vary across brands and markets and Constellation considers its brands’ consumer base and their economic conditions when weighing price increases.
“We have a consumer sector that skews more Hispanic than some of our competitors and in times of economic downturn or weakness, they tend to get hit a little bit harder and they recover a little bit slower,” Hankinson said. “We want to make sure that we’re not leaving any pricing on the table. We want to take as much as we can, but we also don’t want to take so much pricing that we impair the performance of our brands, or impair the growth of our brands.”
Fresca Mixed to Flow Through Gold Network
Fresca Mixed, which was announced hours before the earnings call, will be primarily sold through the company’s beer wholesaler network, except in states where those wholesalers are not permitted to carry spirit-based products. In those states, Fresca Mixed will be sold by Constellation’s wine and spirits partners.
The product, about which little else was shared, will give Constellation an offering in the fast-growing, spirit-based RTD canned cocktail segment. The non-alcohol version of the brand of fruit-flavored diet soda waters includes grapefruit citrus, black cherry citrus, peach citrus and blackberry citrus flavors.
“Fresca hits on a number of key consumer attributes – everything from convenience to flavor, and is the hottest diet soda in their portfolio,” Newlands said. “When you consider that more than 50% of Fresca consumers already mix it with spirits, it seemed like a natural one for us and certainly they thought the same way.”
Constellation will purchase Fresca concentrate from Coca-Cola and produce Fresca Mixed at its own facilities. Other than that, it will be a distilled spirit and not a fermented sugar brew; it is not yet known which base alcohol will be used.