Constellation Brands — maker of popular import brands Corona, Modelo and Pacifico — called out a $12.5 million increase in logistics costs in the 10-Q form the company filed last week with the Securities and Exchange Commission as part of its 2022 first-quarter earnings report.
“The increase in logistics costs primarily consists of $12.5 million increased obsolescence resulting from conservative expiration dates on new SKUs,” the company wrote.
Put more simply, Constellation had to spend $12.5 million to recall Corona Hard Seltzer that was nearing its code date, according to a report by MKM Partners analyst Bill Kirk.
“Based on observed product codes in select markets and timing of launches, we believe the issue is/was limited to Variety Pack No. 1,” he wrote. “It appears that Constellation’s expectations for seltzer were not fully met and some product had to be pulled from distributors/retailers.”
Under Constellation’s standard operating procedure, new products are given shorter date code periods, which are extended if those products meet quality standards after a longer period of time, a company spokesperson told Brewbound. In the case of Corona Hard Seltzer, the product had shorter code periods and needed to be pulled from the market in Q1. Now that Corona Hard Seltzer has cycled through its first year in the market and has been observed for stability, it will have longer code periods.
The $12.5 million increase in costs was partially offset by a savings of $7.7 million obtained by switching some co-packing capabilities to the company’s brewery in Nava, Coahuila, Mexico.
Gross profits for Constellation’s beer division increased 16% in Q1, which the company said was “primarily due to $86.0 million of volume growth and $31.0 million of favorable impact from pricing, and $0.9 million of lower cost of product sold.” The beer division’s net sales increased 14% in Q1.
“While this is not a material issue for Constellation, and likely can be remedied after some additional product recall and longer dated codes (12 months from former six-month code), it is a big risk for seltzer-heavy Boston Beer,” Kirk wrote.
In the National Beer Wholesalers Association’s (NBWA) Beer Purchasers’ Index (BPI), the hard seltzer/flavored malt beverage segment posted a reading of 69 last month, a decline of 25 points from its June 2020 reading of 94.
“The lower index relative to June 2020 indicates that more distributors are reporting they are ordering ‘about the same’ amount of product as the same time last year,” NBWA chief economist Lester Jones said in a press release. “This is not a big surprise as the segment has experienced significant amounts of distribution growth over the past 12 months.”
The hard seltzer/FMB segment’s “at-risk” inventory reading (44) was higher than the rest of the beer category, indicating that the segment has more inventory on hand than other segments. The beer category’s general “at-risk” inventory reading is lower than 50, “signaling continued supply constraints in the system,” the NBWA wrote.
An overloading of hard seltzer at wholesalers and retailers could negatively affect the industry, Kirk wrote:
“Distributors sitting on excess seltzer/FMB inventory poses a two-fold risk: 1) manufacturers lower price in order to move cases, crippling margins for the segment; and/or 2) manufacturers like Boston Beer experience a dramatic mismatch between shipments and depletions (i.e., shipments disappoint) beginning in 3Q and bodes poorly for 2022 seltzer expectations.”
Corona Hard Seltzer Variety Pack No. 2 and Limonada, the brand’s lemonade-inspired offering, appear to have six-month code dates, Kirk noted.
“The risk of some obsolescence on these products won’t arrive until (at the absolute earliest) October and January, respectively,” he wrote.
Year-to-date through June 13, dollar sales of Corona Hard Seltzer Variety Pack No. 1 are relatively flat (-0.9%) compared to the same period last year, which included elevated off-premise sales due to pandemic-driven on-premise closures, according to market research firm IRI. Dollar sales of the brand’s single SKU variety 12-pack reached $166 million in 2020, the firm reported.
During last week’s earnings call, CEO Bill Newlands said the company sold “roughly 10 million cases last year with one SKU.”
Constellation’s hard seltzer portfolio holds the fifth most market share in the hard seltzer segment over the last four weeks, at 3.5%, with the Corona brand family accounting for nearly all of it at 3.3%, according to financial services company Jefferies, citing NielsenIQ AOC+C data. The company’s market share within the segment is 4.2% over the last 52 weeks.
On last week’s call, Newlands said Constellation’s hard seltzer aspirations are to be among the top-three players.
Dollar sales of the hard seltzer segment have increased 34.2%, to $1.9 billion at off-premise multi-outlet food and convenience stores year-to-date through June 13, according to IRI. The convenience channel (+52.1%, to $917 million) is outpacing grocery (+20.1%, to $756 million).