Investors had a positive early reaction to Constellation Brands‘ (NYSE:STZ) third-quarter earnings report earlier this week. Yes, the alcoholic beverage giant reduced its outlook for growth in the core beer segment. But that slight downgrade was offset by improving profitability across its portfolio of beer, wine, and spirits brands.
In a conference call with Wall Street analysts, CEO Bill Newlands and his team discussed the trends affecting results over the last few months and looked out to a fiscal 2020 that will be influenced by major new beverage launches such as Corona Hard Seltzer.
Let’s look at some highlights from that presentation.
No signs of weakness in beer
Calendar 2019 marked the 10th consecutive year of volume growth for Constellation beer business and solidified our position as the leader in the high-end of the U.S. beer business. These trends were driven by Corona Extra, Modelo Especial’s explosive growth, and our successful innovation initiatives.
Shifting consumer tastes have pressured demand for many leading beer brands. Constellation’s portfolio of imported brands has been immune to that slump, though. The Corona franchise expanded sales by 7% this quarter, which pushed annual volume up to 110 million cases, compared with 90 million in 2010. That success made Corona one of just a few major beer brands to grow volume during this past decade.
Executives highlighted other major wins in this consumer staples niche, including booming growth for Modelo and Pacifico, that allowed beer volume growth to accelerate between the fiscal second and third quarters.
This boost occurred even as pricing increased and marketing spending ticked lower. “Our beer business continues to be a powerhouse for growth as the No. 1 brewer and seller of imported beer in the U.S. market,” Newlands said.
The wine and spirits rebound is still coming
We are already actively pursuing other opportunities to divest most, if not all brands in these [low-margin wine and spirits] categories, as we believe this is the best path to optimize our portfolio going forward.
Constellation has had to scale back its original deal with Gallo to sell lower-priced wine and spirit brands. The timing has been pushed back, too. But it is encouraged by the improving growth trends in its remaining wine and spirits franchises, including Meiomi, Kim Crawford, and Svedka. Management reiterated its wider goals that target a quick return to volume growth in this segment and a steady climb toward 30% operating margins.
A big year ahead
Corona Hard Seltzer will be introduced in four flavors, including tropical lime, mango, cherry, and blackberry lime. Corona carries unbelievably strong brand equity as the No. 1 most-loved brand among both Hispanic and total population drinkers aged 21 to 54, and that’s why we’ve decided to put the Corona brand name on our new seltzer. And of course the refreshment characteristics of seltzers perfectly matches with Corona’s refreshment DNA.
Management is optimistic that a change in leadership at Canopy Growth will help long-term returns for the company’s investment in the marijuana space. But the bigger impact on Constellation’s fiscal 2021 will come from product introductions like the hard seltzer it is aiming to launch in the spring.
Alcoholic seltzer drinks have been growing quickly in recent quarters, and Constellation’s research suggests that they’re mostly taking market share away from domestic premium and craft beers. As a result, a successful Corona-branded seltzer would fit perfectly into the company’s decadelong growth strategy that has used imported brands to grow beer sales at the expense of traditional brands like Bud Light and Miller.