CEO Sands: Mexican imports thriving
04 July, 2017 01:07:00
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CEO Rob Sands: US retailers need significant rethink
But troubled by Ballast Point, perplexed by US retailers
In its latest quarterly financial results US alcoholic drinks consortium Constellation Brands has reported continued success with its portfolio of imported Mexican beers. In fact it has been so successful of late that it has left combative Constellation president and Chief Executive Officer Rob Sands wondering why retailers aren’t stocking more of his products.
For the first quarter of its current financial year, to the end of May, Constellation’s net beer sales increased by eight per cent on a volume gain of seven per cent. As measured by volumes, this represented 71.7 million branded 24-pack, 12-ounce case equivalents.
Performances were strong across the Mexica imports, with fortunes boosted during the quarter by Cinco de Mayo and Memorial Day festivities. While flagship brands Corona Extra and Corona Light each were up by around 6%, up-and-comers Modelo Especial and Pacifico led the way.
“Modelo Especial is on fire, gaining distribution while delivering depletion growth of almost 20% for the first quarter,” reported Sands.
“We expanded our national TV advertising efforts during the first quarter for the Pacifico brand, which posted depletion growth of 20%, representing an acceleration from where we ended fiscal 2017.”
All of which left Sands perplexed as to why retailers weren’t stocking more of Constellation’s fast-growing Mexican portfolio, taking a swipe at craft beer brewers at the same time. In answering a financial analyst’s question about shelf space, Sands noted that Constellation brands are underrepresented compared to its market share.
Sands argued, “And I can tell you right now, retailers need to do a significant rethinking of their assortment in beer. Fundamentally their beer assortment makes no sense anymore for them on the assumption that their goal is to improve their sales and margins as a business.
“It makes no sense – they have 20% of the store allocated to five billion ‘crafts’ that nobody has ever heard of and then to have the vast majority of the rest of the store allocated to low margin declining brands and then a small amount of the store allocated to fast-moving, high margin, high end brands – it just doesn’t make any sense.”
And Sands also dismissed another analyst’s suggestion that Constellation would face stiffer competition with MillerCoors taking on the distribution and marketing Heineken Mexican import Sol.
“A large part of the growth in the beer business is in our portfolio. A lot of people talk about it as in imports or in Mexican, well it’s really Constellation’s imports and Mexican portfolio. So these other entrants don’t really concern us very much.
“Sol’s been around forever and it might sell, I don’t know, a couple of hundred thousand cases in the entire United States so I don’t see it as particularly important.”
In contrast, Constellation admitted that didn’t fare nearly as well with its San Diego based craft beer business Ballast Point, which it acquired in late 2015 for $1 billion.
“This business has not performed to expectations from a growth standpoint. As a result we recorded an impairment charge related to the trademark value of the acquired brands for the first quarter,” reported Sands.
“However, we remain committed to achieving our target return on investment for this acquisition. Ballast Point continues to gain distribution and is currently positioned as a top 20 craft brand in the US market.”
The result was an $87m non-cash write-down on the Ballast Point trademark valuation. In terms of moving the craft business forward, Sands proposed greater alignment with distributors, developing a more focused brand architecture led by the flagship Sculpin brand and investing in Ballast Point’s first consumer marketing campaign.
The production platform
The expansion to 25 million hectolitres of the Nava Brewery, located outside Piedras Negras, was completed during the quarter ahead of schedule. Sands said, “We look forward to completing the next phase of expansion, taking the brewery to 27.5mhl by the calendar year-end.”
The recently acquired Obregon Brewery, located in the Mexican state of Sonora, was reported as performing at a very high utilisation level. Its existing capacity and packaging capabilities are being designed to increase output by early next year.
“These actions have allowed us to take a more measured approach from a time-line standpoint to the greenfield brewery site in Mexicali while ensuring we have product supply to satisfy our growth expectations,” said Sands.
In addition, Sands noted that the availability of additional brewing capacity would allow Constellation to ramp up its support for up-and-coming brands such as Pacifico and Premier, a Corona variant that is meant to challenge Anheuser-Busch’s successful lower calorie Michelob Ultra.
Overall, the operating margin for Constellation’s brewing operations rose by 470 basis points to an impressive 40.3% for the quarter.
As detailed by chief financial officer David Klein, this was made possible by a combination of factors, including a lower cost of goods sold (COGS) figure, foreign currency benefits and favourable pricing. The lower COGS was due to operational benefits driven by supply independence from Anheuser-Busch InBev, better than planned performance at Obregon, lower freight costs and lower material costs, including benefits from in-house glass supply sourcing.
Klein said, “The operational teams at Nava and Obregon performed exceptionally well in the first quarter while the plants were operating at high utilisation levels.
“We’ve been pleased by the lack of transition friction at Obregon that we had perhaps expected going into the year.”
While presenting a rosy picture, Klein forecast that brewing’s operating margin would decline as the year progressed. This would be due to changes in the peso-dollar exchange rate, a lower utilisation of brewing capacity in the second half of the year, and the start-up of new equipment leading to increased head count of around 300 additional hires.
The guidance for capital expenditure for the year, primarily for the Mexican brewery expansion, remained at around $1 billion. Additional free cash flow for the year was forecast at between $725m and $825m.
Looking ahead, for the full financial year Klein forecasted net sales growth to be in the 9% to 11% range, with this including a one to two per cent pricing gain from the Mexican brand portfolio.
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