Analysis - Constellation Brands grapples with glass as reality bites with recall
Constellation Brands is unlikely to see much effect from the Corona recall, analysts suggest
Constellation Brands has enjoyed quite a honeymoon period since taking full control of Grupo Modelo's brands in the US.
The New York state-based firm became the country's third biggest beer company overnight last year, after securing 100% of the Crown Import JV, in the wake of Anheuser-Busch InBev's capture of Grupo Modelo. As a result, Constellation's bottom line has seen a healthy boost.
But, the company's affection for its new assets took a slight knock late last week, when it issued a recall for “select packages” of Corona Extra that it said could contain “small particles of glass”. Although Constellation believes “less than 1%” of bottles produced at a single plant are affected, it said the recall was for the “safety of consumers”.
Will Constellation see much impact on its business?
Analysts at Goldman Sachs suggest there could be a “temporary impact” on shipment volumes as returned products will count against the group's net volumes. In addition, Goldman suggests the firm will incur extra costs from “drinker rebates, product credits, fees and incentives to retailers and wholesalers for the recall, freight and destruction charges for returned product and other costs”.
Ultimately, however, the analysts believe the impact on consumer demand is likely to be “very limited” and have no “material impact” on Constellation.
A scan of Twitter suggests that Goldman Sachs is right. Normally you would expect product recalls – particularly ones involving glass – to attract plenty of comment. But, despite a good chunk of media coverage, this appears not to be the case.
The analysts also point to the situation that faced Boston Beer Co, when it issued a similar recall over glass in 2008. The Samuel Adams brewer's sales appeared unaffected by the incident (although its bottom line took quite a hammering in full-year results).
Coincidentally, Constellation announced last week it has signed a new seven-year contract with Mexican glass company Vitro. However, this will account for only 25% to 30% of its glass needs for beer. “The company is currently in the process of finalising a comprehensive, optimal glass sourcing strategy for its beer business,” it said. In June, it was forced to deny reports that it had run out of glass bottles for Corona.
Judging by last week's events, the company will be choosing its glass suppliers extra carefully, going forward.
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