Constellation Brands Performance Trends 2015-2019 - results data

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Earlier this year, Constellation Brands reported its results for the 12 months to the end of February. Sales in fiscal-2019 came in 7% up on the corresponding period a year earlier, when the group's topline also increased by the same percentage. Here, just-drinks considers Constellation's performance over the last five years.

Bill Newlands assumed the CEO role at Constellation Brands in March 2019

Bill Newlands assumed the CEO role at Constellation Brands in March 2019

Change continues to be the dominant theme for multi-category beverage company Constellation Brands, from its growing reliance on beer to generate sales, to its divestment of a large chunk of its wine business and its much-talked-about - and expensive - exploration of the world of cannabis beverages. This state of flux predates the five-year cycle of this report, taking in Constellation's vitally important takeover of the Crown Imports joint venture in 2013, which secured the lucrative revenues of Corona and Modelo in the US.

The company's wine operations have also been undergoing a slow process of transformation, as Constellation prioritises value over volume. In 2010, the group sold an 80% stake in its UK, Australia and South Africa wine operations to private equity group CHAMP, with the remaining 20% going when CHAMP sold the Accolade Wines business to fellow private equity firm The Carlyle Group in 2018.

This process is still continuing: In late-2016, Constellation's Canadian wine operations were divested to the Ontario Teachers' Pension Plan for US$761m, and (at time of writing) the company is awaiting Federal Trade Commission (FTC) approval for the $1.7bn sale of mostly low-margin wine assets to E&J Gallo.

In spirits, Constellation has been focusing most of its activity on a succession of acquisitions of mostly minority stakes in emerging US craft distillers. That's a reflection of the company's prioritisation, through venture capital arm Constellation Ventures, of taking tactical stakes in businesses that have "scalability and consumer appeal".

More broadly, the buys reflect a value focus that dates back to earlier acquisitions such as Casa Noble Tequila in 2014 and the $160m purchase of High West Distillery in 2016. But, it is the company's activities in the nascent cannabis sector that have generated the most headlines over the past two years, thanks to its now-38% stake in cannabis company Canopy Growth.

Constellation's recently-installed CEO, Bill Newlands, has described cannabis as "one of the biggest growth opportunities of our lifetime" – reflecting the group's hope that it will reap the rewards of being one of the first to exploit the future non-alcoholic cannabis beverage market in Canada, the US and beyond.

Constellation Brands Sales 2015-2019


Source: Company results

The past five years have seen a steady improvement in Constellation's revenues, largely driven by robust growth for the company's beer business in the US. In fiscal-2015, total company sales topped $6bn, moving above $7.5bn in 2018, and then exceeding $8bn in 2019. Over this timescale, beer has been in double-digit growth, with its 11% sales increase in 2019 driving the company's overall sales increase of 7%.

As these figures imply, the performance of the company's wine and spirits assets has been more patchy; fiscal-2017 witnessed a 6% sales increase, but this was largely driven by acquisitions, particularly of premium wine brands Meiomi and The Prisoner. In fiscal-2018, volumes dropped back by 1%, but revenues rose 3% on an organic basis. In 2019, wine revenues dropped back slightly, while spirits sales rose by about 5%, but the company admitted that depletions were "below expectations", despite distribution gains for priority higher-end products, such as Kim Crawford, Meiomi, Ruffino Sparkling, Cooper & Thief, and High West whiskey.

The company's planned divestment of about 30 of its wine brands will have a big impact on future sales, with the top-line set to drop by 20%-30% in the full-year as a result of the sell-off.

Revenue growth slowed notably in Constellation's first-quarter results for fiscal-2020, released at the end of June, with total sales up by only 2% to $2.1bn. There was a 10% revenue dip for wines to $535m (spirits were up 6% to $84.8m), and a slowing of growth for beer, which rose 7.4% to just under $1.5bn.

Constellation Brands Sales by Category 2015-2019

Source: Company results

  • Beer

The activities of the past few years have already repositioned Constellation as a multi-category beverage business with a heavy reliance on beer; as the category's growth continues to outstrip the performance of wine and spirits, this is becoming more pronounced.

In fiscal-2019, beer accounted for just over 64% of the company's revenues; in the first quarter of fiscal-2020, this had increased to 70%. The share figure will expand even further when the planned sell-off of wine brands is completed.

Constellation Brands Beer Sales 2015-2019

2015201620172018 (restated)2019

Source: Company results

Constellation's recent success in beer, kickstarted by its 2013 takeover of the Crown Imports joint venture, has been largely due to the stellar performance of Corona, which stands at around 150m cases a year, and Modelo, at 125m cases. The company has looked to build on this success by investing further in brewing capacity, announcing a $900m investment in March 2018 to increase production at the Obregon brewery in Mexico by 5m hectolitres over the next few years.

The group has supplemented this investment by focusing on product innovation - and the search for another brand to emulate the success of its big two. That new brand seems to be Pacifico, described in early-2019 as an "up-and-comer" by Newlands, with large-scale investments planned for fiscal-2020, when double-digit sales hikes are anticipated. For the moment, Pacifico remains a long way behind stablemates Corona and Modelo at roughly 10m cases - which could at least be said to leave ample headroom for future growth.

Meanwhile, a series of new product launches has aimed to extend the franchises of Constellation's twin core beer brands, among them Modelo Chelada Limón y Sal in March 2019, a low-alcohol product modelled on the chelada Mexican beer cocktail. The same month saw the unveiling of Corona's first flavoured malt beverage, Corona Refresca – part of the Alternative Beverage Alcohol (ABA) segment favoured by former CEO Rob Sands, who believes such products will offer incremental growth, rather than cannibalising core beer SKUs.

Great hopes are pinned on Corona Premier, a low-calorie, low-carb variant designed to take on AB-InBev's Michelob Ultra. Unveiled in October 2017, the launch attracted a reported $35m of investment, with the company making positive noises about its progress to date.

Constellation's activities in craft brewing have become increasingly tentative in recent years, following the company's $1bn acquisition of Ballast Point Brewing in 2015, and the purchase of Funky Buddha Brewery in Florida two years later.

In August 2018, reports emerged that Constellation had axed 60 out of its 100 craft beer sales and rep staff in the US, while Ballast Point has largely failed to live up to its hefty price tag, and the company's own expectations for its performance. As early as June 2017, Constellation admitted that Ballast Point was not performing well, taking an $87m non-cash charge on the business. Then, in April 2019, it announced the closure of two brewing facilities - a brewpub and an R&D brewery - thanks to "declining craft trends" in California.

  • Wine

Constellation Brands Wine Sales 2015-2019

2015201620172018 (restated)2019

Source: Company results

Constellation's wine focus has shifted in recent years, with the company focusing on higher price-points rather than shifting millions of cases. This thinking shaped the sale of its Australian, South African and UK operations in 2010, its Canadian divestment in 2016, and now the planned $1.7bn sale to Gallo. The latter deal, assuming it meets with FTC approval, will see about 30 brands pass to Gallo, as well as facilities in California, New York and Washington State, as part of Constellation's "business transformation strategy" to sell low-priority, sub-premium brands.

While the sell-off makes sense in terms of premiumisation, questions have been asked about some of the detail. Some analysts expected a price-tag of $2.3bn or even $3bn, rather than the $1.7bn agreed - raising the suspicion that Constellation has agreed a low price to get the deal done.

The brands concerned are largely priced at $11 and below a bottle - the likes of Arbor Mist (3m cases) and Cooks (2m). There are signs, however, that Constellation may have had to "sweeten" the deal by including Black Box, a $14-$17 wine that has enjoyed recent compound annual growth of 18%.

Assuming the Gallo deal goes ahead as planned, Constellation will be left with a range of higher-priced brands, some of them historic, such as Robert Mondavi and Kim Crawford. Mondavi, once one of the most lucrative names in the US wine industry, has suffered in recent years, but the 2016 introduction of Robert Mondavi Bourbon Barrel-Aged Cabernet Sauvignon set in motion a transformation, with a rum barrel-aged Merlot added to the range, as Constellation's total sales for Bourbon-aged wines hit roughly 1m cases in fiscal-2019. This, Newlands told analysts in early-2019, had turned Mondavi from "one of our single biggest drags" into one of the company's fastest drivers.

Other priority wine brands are relatively recent acquisitions: Constellation paid $315m for California's Meiomi, priced at $20-plus, in 2015, $285m for The Prisoner Wine Co in 2016 ($40-a-bottle) and, later the same year, $120m for five super-premium brands from the Charles Smith Winery in Washington State.

  • Spirits

Constellation Brands Spirits Sales 2015-2019

2015201620172018 (restated)2019

Source: Company results

Accounting for around 4% of overall revenues in Q1 2020, Constellation's spirits sales are dwarfed by the company's beer and wine businesses. The category has witnessed a lot of corporate activity over the past few years, however.

The company's biggest sales driver, Svedka vodka, has attempted to offset category decline with NPD, such as the introduction of Svedka Rosé, a 30% abv flavoured offering, in early-2019.

Meanwhile, Constellation's inroads into premium and craft spirits have evolved in strategic terms over recent years. After taking over Casa Noble Tequila in 2014 and spending $160m on Utah whiskey maker High West Distillery in 2016, recent activity has been smaller-scale and more tactical. The company's venture capital arm, Constellation Ventures, has made a series of strategic investments - mostly minority stakes - in a raft of distillers, starting in January 2018 with the purchase of shares in Copper & Kings American Brandy Co, a Kentucky-based maker of gin, absinthe, brandy and liqueurs; and in The Real McCoy, a Caribbean rum brand made in Barbados by Foursquare.

So far, 2019 has seen further deals of a similar nature: a stake in New York Bourbon and gin producer Black Button Distilling, announced in February; a minority stake in El Silencio mezcal, announced in April; and another minority stake, through the company's Focus on Female Founders initiative, in Montanya Distillers, a Colorado-based rum producer, in July.

In May 2019, Constellation took a majority stake in Tennessee-based Nelson's Green Brier Distillery, the maker of Bellemeade Bourbon, following its purchase of a minority holding in January 2016.

This list of acquisitions reflects the ethos of Constellation Ventures, with its focus on assets that combine scalability with consumer appeal. None of these businesses are game-changers, but the company will hope that at least some of them will realise their potential in the years ahead.

  • Cannabis

Constellation has bet big on cannabis, investing $191m on a 10% stake in Canopy Growth in October 2017, then expanding that to a 38% stake - spending a cool $4bn in the process - a year later. In doing so, the group is relying on some seriously-bullish projections on the future size of the cannabis market, as well as the impact (or otherwise) of cannabis beverages on its other drinks activities.

Historically, it's been claimed that the global cannabis market will be worth $200bn by 2032 (and is already worth $50bn in the US alone), versus a US beer market worth $110bn and a US wine market valued at $60bn.

The company also believes that the exponential growth in non-alcoholic cannabis beverages will not have any serious impact on its alcohol brands, claiming that it will be "100% incremental". Indeed, in early-2019, CEO Newlands said cannabis offered one of the greatest growth opportunities "of our lifetime", highlighting how Canopy Growth had used Constellation's investment to fund acquisitions, strategic partnerships, and IP development in the medical and recreational areas.

The early signs, however, are not entirely positive: Newlands has admitted he is "not pleased" with Canopy Growth's fiscal-2019 performance, during which its annual loss swelled from CAD57m to CAD670m, despite a near-200% surge in sales. Shortly afterwards, the company announced that Canopy's co-CEO, Bruce Linton. was "stepping down", leaving Mark Zekulin as sole boss of the company. Linton swiftly picked up the 'phone to CNBC to claim that, far from stepping down, he had been "terminated".

The Future

In the second half of 2019, there's still plenty of change in the air for Constellation, with future success currently relying on a number of parts of the business realising their anticipated potential.

In beer, there are signs of slowing growth, reinforcing the need for the company to pick up the momentum for key brands Corona and Modelo, while supplementing their activities with a new success story (Pacifico?). Meanwhile, in wine, Constellation's footprint will be transformed – and much reduced – once the long-awaited sell-off to Gallo is completed. The company will have sacrificed volume for margin, with a serious short-term impact on revenues but, it hopes, a long-term benefit to its bottom line.

Then, in spirits, can we expect a continuation of the recent, somewhat speculative deals that have secured Constellation a small slice of a number of promising craft distillers?

The tactic of identifying talent with potential could be seen as an educated version of the roulette player who covers different sections of the wheel in the expectation that some - but not all - will be successful and reap a reward. Where success comes, the purchase of additional stakes - or outright acquisitions - can be expected to follow.

Finally, in cannabis, the runes are much harder to read. Constellation has made it clear this is a long-term bet that depends on IP ownership as much as shifting units. The group's success will largely depend on the opening up of the global marketplace – and the benefit of the company being such an early entrant.

It will be interesting to see what changes new CEO Bill Newlands makes to the strategic vision of his predecessor, Rob Sands. His first priority will be to execute on that vision, and to make a success of it. But, will he also seek to impose his own vision of the future of Constellation in the coming months and years?

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