Constellation Finds Its Beach

By Chris Furnari

As the Corona commercials it’s paid for suggest, Constellation Brands has found its beach in Piedras Negras – and maybe a much bigger beachhead, as well.

After landing the U.S. rights to the Grupo Modelo brands as part of a Justice Department forced carve-out of Anheuser-Busch InBev’s $20.1 billion purchase of the maker of Corona Extra, Constellation has a clear opportunity to be a major force in the U.S. beer business.

Constellation – which already owned 50 percent of Modelo’s U.S. business through its stake in the company’s importer, Crown Imports – finalized the $4.75 billion acquisition of the rest of Modelo, including and a state-of-the-art brewery in Piedras Negras on June 7. The purchase immediately doubled Constellation’s sales and gave the company control over three of the top five best-selling U.S. import brands: Corona Extra, Modelo Especial and Corona Light.

With the brewery and the access that the hot-selling Mexibrews bring, the company’s potential to grow the share of existing brands, develop new products and become a craft acquirer has the industry abuzz.

“In the long-term, this deal will dramatically change the landscape of beer in the U.S.,” said Bump Williams, a beer industry consultant. “Size doesn’t matter. Crown is growing while the big brewers [ABI and MillerCoors] are getting their asses kicked, losing cases despite numerous new product launches.”

Williams, who provides distributors in the beer, wine and spirits industries with retail strategies and analytical insight, firmly believes that the addition of a third major supplier – especially one with the brand-building capabilities that Constellation has displayed in its wine business –provides some much needed competition to the U.S. beer market. He estimates that ABI and MillerCoors shipments have already declined by roughly 7 million cases in 2013. Meanwhile, Crown Imports continues to chug along through its 2014 fiscal first quarter, boasting net sales of $762 million, up 5 percent.

With Constellation in complete control of the sourcing, production, marketing and pricing of its newly acquired beer brands, it becomes the country’s third largest beer company, accounting for approximately 7 percent of total U.S. sales. That’s a far cry from ABI and MillerCoors, which collectively represent nearly 75 percent of total U.S. beer sales, but Constellation is no stranger to growing its own liquor and wine brands, like Svedka, Mondavi, and Ravenswood. It’s also no stranger to acquisition.

Still, Constellation’s initial sights are set on the growth of its core brands, which is quite a luxury indeed. While iconic top-10 domestic brands like Budweiser and Miller High Life bleed barrels, among top 20 imports– dollar sales for about half of which were down as much as 12 percent – Constellation brands outperform. IRI pegs dollar sales of the no. 1 import brand, Corona Extra, up one-half percent through June 16 in total U.S. multi-outlets (despite the growth of competitor Dos Equis). Modelo Especial, the no. 3 import, is up 23 percent and Corona Light, the no. 5 import, is up 1.5 percent during the same period. Pacifico and Negra Modelo also boasted positive gains, up 3 and 5 percent respectively.

Williams credits executive leadership, wholesaler execution and successful advertising campaigns as the keys to keeping those brands growing in spite of industry-wide volume declines.

In 2008, when the U.S. economy had just entered a recession, Consumers had tightened the grip on their wallets and were spending less on beer. In an effort to stay top-of-mind, Crown reworked its Corona Extra advertising campaigns and brought the beach to everyday situations.

The “Find Your Beach” campaign “means something different to everyone but it seems to resonate,” said Joe Salois, the president of Atlas Distributing in Auburn, Mass.. “The campaign plays beautifully during the best beer selling season [summer].”

But iconic advertising alone doesn’t sell over 100 million cases of Corona every year. Knowing this, Crown president Bill Hackett turned his attention on wholesaler execution and price segmentation.

“We have carved out a space for each one of our brands,” he said. “We have differentiated, supported each one with a strong creative and increased our marketing spend year after year. But we are also very clear with our distributor. We tell them what our expectations are at retail and support them with point of sale programs to ensure that their salespeople perform.”

With each brand differentiated and well defined, Hackett said he’s focused on growing overall market share.

“We think we can gain a larger portion of drinking occasions with Corona Light and gain consumers against the Corona franchise in total,” he said.

Hackett expects much of that growth to come at the on-premise level, where Crown didn’t pour beer on draft until 2009. The company has told investors that it plans to focus more on its draft business in 2014.

Currently, Crown only offers the Modelo Especial, Negra Modelo, Corona Light, Pacifico and Victoria brands on tap.

“We were not competitive in 10 percent of the industry volume,” he said. “Now, we are getting more disciplined and reaffirming where each brand should be sold.”

So what’s next?

With Constellation in complete control of the Crown portfolio and a growing brewery in Mexico, Williams said, brands like Modelo Especial, Negra Modelo and Pacifico will help drive volume gains and, over time, increase Crown’s market share to about 15 percent.

“There is no other large brewer in America whose entire lineup of brands has positive growth behind them,” he said. “And now that they own the brewery in Mexico lock, stock and barrel, I think we will see a lot fewer out-of-stocks.”

Constellation brass are also looking to creative line extensions, like the recently announced Bloody Mary-style Modelo Especial Chelada, Modelo Light and “Coronarita” beer cocktails to create additional selling opportunities and introduce new customers to the entire portfolio.

“Innovation comes from the expansion of what we are currently doing,” said Hackett. “We are always looking at new ways for drinkers to consume our brands.”

To help support the planned innovation projects, the company plans to invest $500 – $600 million over the next three years to expand its brewing facilities.

“The doubling of capacity will service all our present requirements, allow us to develop new brands, incremental volumes and explore innovation opportunities,” said Hackett.

But there are headwinds. The onslaught of new craft introductions could create shelf space concerns for some imports, and Constellation’s own new product introductions could distract its wholesale partners, Williams said. He also expects Constellation to gradually increase prices of some brands, something both retailers and consumers might be sensitive to.

But Constellation’s biggest challenge will come from the new burden of owning a commercial brewery.  The company will now be tasked with ensuring that both the quality and supply of beer in the U.S. remains consistent, something they’ve never managed.

“If they have a quality issue with the Modelo or Corona brands and fail to fill the distribution points that exist today, that would be devastating,” Williams said.

Nonetheless, brewery ownership and a planned expansion will allow Constellation to experiment in the craft beer segment, a category that witnessed 17 percent dollar growth in 2012. Crown was already planning its first foray into craft when it was acquired by Constellation, and it is currently developing a Latin-inspired brand with the help of celebrity chef Rick Bayless.

Knowing Constellation’s growing interest in craft, and the fact that the wine portfolio also grew through acquisition, Williams – among others – said he would expect the company to make a purchase in the future.

“I think they will purchase a craft brewery or perhaps even another cider brand,” he said. “Craft is still up and continues to attract more shoppers. It is a highly profitable product, retailers are asking for it and Constellation will have the capacity.”

And, with Constellation’s numerous wine and spirits offerings, innovation and cross-merchandising opportunities could provide some added retail leverage.

“You never know what is around the corner,” said Hackett.  “We won’t pass up a business opportunity because we might have to expand our sales coverage to service a wider network. It is all about the opportunity.”