The just-drinks interview – Constellation Brands, part two

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A net loss in the last fiscal year and the global credit crunch may have led some to believe that Constellation Brands' rampaging acquisitive growth strategy may have to be put on hold. In the second part of this month's just-drinks interview, Constellation CEO Rob Sands suggests the emphasis is currently on creating efficiencies in existing businesses but that Constellation has lost neither its will nor the wherewithal to make further acquisitions.

Aggressive acquisitive growth has defined the progress of US wines and spirits group Constellation Brands in recent years as it has expanded to become a leading player in the global wines and spirits market, and the world's number one wine company.

But having recorded a net loss of US$610m for the year to February, albeit one attributed to non-recurring charges with no bearing on its future performance, and facing a global credit crunch, some have begun to wonder whether Constellation's progress on the acquisition front might be checked.

Not so, says Rob Sands, Constellation's CEO, who has clearly come out fighting since the company published its annual results last month.

"We have no problem raising money whatsoever," he says. "We can get all the money that we want. The beverage alcohol business is a very cashflow generative business - it's not a business that's cyclical. It's the kind of credit that, even in the difficult lending environment, everyone wants to lend to because of the great cashflow generative nature and stability of it."

Constellation Brands CEO Rob Sands

Sands proffers Pernod Ricard's purchase of Vin & Sprit for EUR5.63bn (US$8.88bn) in March as an example of how attractive the drinks industry is for those who still have money to lend. "It's because everybody knows beverage alcohol is amongst the best credit and most stable businesses to lend to. So, it's really not an issue from our perspective."
What is more of an issue for Sands, then, is: Is there anything Constellation wants to acquire? "We never rule out acquisitions categorically; it is part of our strategy. But I would say, right now, with all the things we've been able to do, we're pretty focused on creating efficiencies in our existing business as well as generating cashflow and paying down debt. Our credit situation is highly stable and if we wanted to borrow more money, we could."
Late last year, Constellation stepped in to acquire Beam Global Spirits & Wine's US wine operations for US$885m. Could it be that the purchase could have been timed better, with the world very soon afterwards having turned the corner into penny-watching? "No," says sands, "it was great timing. The categories that those wines perform in are growing at high double-digit rates. We just plan to keep doing what we're doing with them. If you look at the super-premium wine category, it's growing at very high double-digit rates. Those brands were growing at about 18% when we acquired them, and we expect nothing but good things from them. We took pricing on that portfolio at the beginning of the year as well, and there would be no reason why they shouldn't perform very well."
Indeed, with the acquisition of brands including Clos du Bois and Wild Horse from Beam, and the $134m sale of the Almaden and Inglenook brands and the Paul Masson Winery to The Wine Group (TWG) earlier this year, Sands believes Constellation has moulded its wine portfolio into a more premium offering. "(Today,) only 15% of our business is value and 85% is in the fastest growing premium segments of the wine business," he says. "We're actually pretty excited about our wine business in general."
One other area giving Sands cause for excitement is the performance of Constellation's joint imported beer operations in the US. In January last year, the company took full control of Crown Imports, the joint distribution venture - with Mexico's Grupo Modelo - for Modelo's portfolio in the country. "That was a big transaction," Sands says. "We also took pricing at the beginning of 2007, and when we take pricing, we usually have a flat year, which is what we had. We're seeing now the overlapping of the pricing and we're pretty confident with the organisation we have in place - not to mention our new marketing and the strength of brands - the business should perform pretty well this year. We're very optimistic about it.
"We're the largest beer importer in the US and (Modelo's) Corona is the number one brand (in the country). Imported beers in general have been very strong, and the beer business is very strong in trading up. The domestic premium business is down, and people are drinking more imported and craft beers."
One final base to cover is Constellation's spirits offering. The brand grabbing the headlines for the company is Svedka vodka, which it bought just over a year ago from Guillaume Cuvelier and Belgian-based Alcofinance for US$384m.  "Svedka's doing fantastic," Sands boasts."It's growing at 40% to 50% on an annual basis; it's been named the fastest growing major spirits brand in the world. Basically, it's a brand that's on fire. We couldn't be happier with the performance of the brand and it's going to be a major vodka brand around the world."
Sands concedes that there are gaps in the company's spirits portfolio but, in terms of filling them through acquisitions, "we don't have any plans in that regard", he says. Constellation is keener to focus on NPD in this area at this particular time. "We do a lot of NPD, we have lots of new products that we've introduced recently. We've got quite a pipeline of NPD to fill gaps so we're pretty excited about all that."

So even if Constellation does decide to eschew the acquisition trail for a little while at least, which Sands is adamant would be out of choice rather than necessity, there seems to be plenty to keep the company occupied over the coming months, both in new products or bedding down previous substantial acquisitions it has made, such as Svedka and the Beam wine portfolio.

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