Constellations new brewery is expected to be completed in 2020

Constellation's new brewery is expected to be completed in 2020

There was no real surprise to Constellation Brands' announcement yesterday that it is to build a second brewery in Mexico. In October, CEO Rob Sands hinted that an announcement was imminent on expanding capacity for the Mexican beer range it acquired the US rights to in 2012.

However, the nine-month results released at the same time yesterday - which revealed a Corona-fuelled performance - threw into relief just how much Constellation needs more supply. 

Q3 beer depletions in the US were up 16% compared to a 10% increase over the first half of the year, while quarterly beer sales increased by 9%. That's on the back of a fiscal 2014/15 that pushed net sales for Constellation's beer segment up by 12%, while beer depletions grew by 8%.

The question is, however, will the new brewery - expected to be competed by 2020 - come soon enough?

According to analysts, demand for Constellation's beers is only going to increase further. Nomura's Edward Mundy said the medium-term growth outlook for the portfolio "remains favourable", with opportunities to get Modelo Especial out to more distribution points and to have another bump-up for Corona in cans, a format that Constellation management has targeted before. (In September, Sands said there had been a big jump in canned sales of Corona Extra in the US over the past year and had previously pin-pointed the format as "the latest craze".)

Stifel's Mark Swartzberg said Constellation is continuing to benefit from more shelf space and tap handles in the US, and highlighted the acceleration in sales and depletions over the current fiscal year.

All of this growth may be about to hit a bottleneck, says CLSA's Caroline Levy, even with extra capacity at Constellation's current Nava brewery ready to come online at the end of 2018. At current growth trends, Levy argues, "Constellation will not have anything resembling spare capacity until the 10m hectolitres from Mexicali come online in full-year 2020".

In a call with analysts yesterday, Sands said the investments in production capacity have been designed to ensure the company can meet future demand for beer, saying that the current mid-to-high single digit growth is expected to remain for "the foreseeable future".

For the time being, however, the company is still using Anheuser-Busch InBev, which owns the non-US rights to Corona and Modelo, for extra supply. According to Sands, the ABI agreement accounts for about 15% to 20% of his company's US beer volumes.

That deal runs out in June next year, long before Constellation's new brewery is completed. If Levy is correct, that 2018 is going to be a "squeeze" for Constellation's supply, Sands better hope A-B InBev is willing to keep the beer tap flowing.