Constellation Brands, which begins its financial year in March, had a rollercoaster of a first quarter for FY 2021, with net sales declining 6%, to $1.9 billion, but beer depletions (sales to retailers) increasing 5.6%.
The Mexican government threw the beer, wine and spirits company a curveball when it issued a decree on March 31 shutting down all non-essential business operations in the country, which included breweries.
The shutdown lasted more than 70 days, and Constellation Brands CFO Garth Hankinson said during a conference call for investors and analysts on Wednesday that the company expects wholesaler inventory to return to normal levels by the third quarter. Beer production has since resumed at normal levels in Mexico, but the reduction caused Constellation’s beer operating margin to increase 240 basis points, to 41.7%, Hankinson said. The company expects the unfavorable margins to continue into Q2.
Nevertheless, Newlands insisted that the company’s best selling Mexican import brands — Corona and Modelo — will be available on shelves.
“Our belief is that our operations team is best in class, and we are doing everything we can do at the moment to expedite shipments from our breweries, through our distribution facilities, and out to our distributors, to consumers,” Newlands said. “It certainly reduced our ability to ship to normal levels. But let’s keep in mind that demand for our brands, for Modelo and Corona, has never been stronger. We were up almost 20% in the off-premise channel.”
The Corona brand family grew double-digits in channels tracked by market research firm IRI, due to growth of flagship Corona Extra and the launch of Corona Hard Seltzer, according to a press release. Modelo Especial depletions increased 12% during the Q1.
In addition to the Corona and Modelo families, the Constellation beer portfolio includes Pacifico and craft beer offerings Funky Buddha and Four Corners.
Beer shipments (sales to wholesalers) declined 6.3%, when adjusted to remove volume from Ballast Point, to 76.2 million case equivalents, down from 81.3 million during the same period last year.
Constellation’s sale of Ballast Point, which it acquired in 2015 for $1 billion, to Chicago-area upstart craft brewery Kings and Convicts for an undisclosed sum closed on March 2, leaving one day of overlap in the company’s first quarter.
So far, Constellation estimates that 90% of sales of its new Corona Hard Seltzer are incremental to the rest of its portfolio. Corona Hard Seltzer, which rolled out in March, has reached a 6% share of the hard seltzer segment, according to data from market research firm IRI, and generated an 80% repeat purchase intent rate, Newlands said.
“We’re also seeing high Hispanic penetration rates for the brand versus other hard seltzers, which we believe will be a key growth driver going forward, and a major point of differentiation within the fast-growing demographic in this country,” Newlands added.
Corona Hard Seltzer is available in a four-flavor variety can 12-pack, and Newlands said the company may introduce new packages later in the year.
The cancellation of televised sports, such as the NCAA basketball tournament, and other large events due to the COVID-19 pandemic caused Constellation’s marketing spend to decrease to 8.8% of sales, down from its normal 9.5% to 10% range. The company has reallocated advertising spending to digital channels, but will pause its investment in Facebook advertising for July, Newlands said.
“We think it’s very important to protect users from misinformation and hate speech,” Newlands said. “Those things run directly counter to our commitment to social justice and to racial equality. We have decided that we are going to do a comprehensive review of our social media work.”
Constellation is hardly alone in moving advertising dollars away from Facebook this month. The Stop Hate for Profit campaign — started by civil rights organizations including the NAACP, the Anti-Defamation League and Color of Change — encourages brands to pull their spends from the social media platform, saying Facebook does not do enough to combat hate speech. Companies that have signed on include Unilever, Verizon, Microsoft and Adidas.
On Monday, Constellation announced concurrent initiatives to invest $100 million in Black-owned beverage companies by 2030, donate $1 million to the Equal Justice Initiative, and review its internal hiring and marketing practices.
Also today, Constellation announced the acquisition of Empathy Wines, a “digitally native wine brand” with an established direct-to-consumer e-commerce platform founded by media personality Gary Vaynerchuk.
Canopy Growth, the Canadian cannabis company Constellation invested in in 2018, reported a $377.6 million loss for Q1. Nevertheless, Newlands said the company is confident in Canopy’s CEO, David Klein, who previously served as Constellation’s CFO. Newlands pointed to cannabis brand Tweed’s Houndstooth and Soda beverages as a way to drive conversion from the illicit market.
As of press time, STZ stock was trading at around $185, a more than 5% increase day over day.