Beer Marketer's Insights - A Helluva 5-Yr Plan; Constellation Jumped Bbls, Sales, Profits 60%, 80%, 310% Since 2013

Five yrs ago, US Justice Dept cleared final settlement allowing AB InBev to buy Modelo, setting up Constellation to be sole producer and importer of Modelo portfolio in US. Crown’s then-ceo Bill Hackett said Constellation looked at beer biz as an “engine of opportunity, engine of growth.” Well, turns out that little engine, which started with just a 1% gain in Q1 of 2013, surely could. Constellation announced fiscal 2018 results (thru Feb), with beer shipments volume up 10.2% to 19.45 mil bbls, depletions +11%, beer net sales +10.1% to $4.66 bil and beer operating income +19.8%, yes 19.8%, to $1.84 bil. What do 5-year numbers look like? Pretty damned good. Constellation Brands Beer Div boosted shipments by 7.4-7.5 mil bbls, over 60%, while total US beer volume declined about 1.7 mil bbls, 1% same period. So, Constellation’s mkt share rose from 5.6 to 8.9. Net sales expanded by over $2 bil, 80% since fiscal ’13. Operating income more than quadrupled: jumped $1.35 bil from $448 mil to $1.8 bil. (It was sharing profits with Modelo in fiscal ’13). Constellation fattened beer operating margin from 17.3% to 39.5%. Back in Apr 2013, Bill cited key question from distribs: could Constellation run a brewery? It’s now expanding 2 and plans a 3d. Capacity is 26.8 mil bbls. When current projects completed by 2023, it will have 37.5 mil bbls of capacity. Recall Constellation’s wildly ambitious “2-2-1-1” volume goal of 600 mil cases, 43.5 mil bbls, via organic growth, innovation and deals. Constellation’s remarkable growth record, tops by far in beer and among “top tier” in all of CPG, as ceo Rob Sands reminds, isn’t its only unique aspect. Constellation did not invent Total Beverage Alcohol approach, but it’s doin’ it better than anyone else, as between-bev lines continue to blur. (Latest: AB’s joint “beer-and-a-shot” promo with Jim Beam.) Constellation’s wine and spirits biz hasn’t shown same growth as beer, but revs grew 3% organically last yr to $2.9 bil, and operating income held even at $801 mil. It continues to bolt on new high-end spirits and wine brands. Then too, Constellation ran ahead of its competitors by making big bet on Canada’s largest cannabis company. Adult “relaxation and social occasions” not limited to alc bevs any more, Constellation knows. How else is Constellation unique? It does not see much “interaction” between beer category health and its own, sez Rob. If beer slows further, likely result would be “larger market share gains,” he told analysts recently. (That’s exactly what happened in final fiscal qtr.) And tho Bill Hackett always careful to “mind the gaps” between Corona prices and other segments, Rob insisted “anecdotal” reports of lower craft pricing “has zero interaction with us. It does not affect us whatsoever. We don’t see anything that’s going on in the industry or the category that will cause us to do anything differently” than typical 1-2% price increases. AB InBev and Molson Coors execs criticized looming aluminum and steel tariffs. But, due to hedging and “source of supply,” tariffs will “have a de minimis effect on Constellation,” cfo David Klein said on same call. Finally, while AB InBev and MC struggle mightily to return to growth after a decade of losing volume, Constellation investing heavily to continue growth, with a target of net sales and operating income being up in the 9-11% range in fiscal ’19, and 2-4% gains from wine and spirits. Will Next 5 Yrs Be As Rosy for Constellation? Past ain’t necessarily prologue. But Nik Modi of RBC Capital Markets reminded that “STZ has ended up beating the high end of its initial guidance for the last 4 consecutive years.” Meanwhile, Stifel’s Mark Swartzberg downgraded stock to hold based on valuation, tho he still thinks growth will come. (Stock value 11x as high as before deal). Others suggest numerous potential pitfalls ahead for Constellation, including taking on too much. Whatever happens, gotta tip cap to 5-yr run.

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A Helluva 5-Yr Plan; Constellation Jumped Bbls, Sales, Profits 60%, 80%, 310% Since 2013

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