Please ensure Javascript is enabled for purposes of website accessibility

Beer Drives Constellation Brands' Profits. But It's Mexican Beer, Not Craft Beer

By Rich Duprey - Updated Oct 13, 2017 at 8:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It seems only one part of the brewer's premiumization plan is working out.

Premium beer continues to drive the industry, but the story has been a bit different at Constellation Brands (STZ 1.02%). It was the strength of Constellation's portfolio of Mexican beers under the Modelo brand that drove growth and profits in the recently reported quarter, while pricey U.S. craft beer continued to sink.

High on sales from south of the border

Constellation was smart to acquire the U.S. beer business of Grupo Modelo from Anheuser-Busch InBev (NYSE: BUD) in 2013. Because of the Department of Justice's antitrust concerns about A-B InBev controlling too much of the U.S. market, Constellation was able to pick up not only a popular, quality beer, but also gain full control over the Crown Imports marketing business, the Piedras Negras brewery in Mexico, and the exclusive right to sell Corona beer in the U.S.

Friends drink beer at a party

Image source: Getty Images.

In its just-completed second quarter, the Modelo brands of beer were responsible for more than 60% of the growth Constellation enjoyed across its high-end business that spans beer, wine, and spirits. The Modelo brand family saw better-than-20% growth in depletions in the period. Depletions are shipments by distributors to retail customers, and are considered an industry proxy for customer demand. Total beer sales rose nearly 13% in the quarter from a year ago. Constellation reported $2 billion in net sales in the second quarter, up 3% from the year-ago period.

Following last year's election of Donald Trump, many thought Constellation's bet on Mexican beer would run into trouble amid tough talk on foreign trade and the renegotiation of the North American Free Trade Agreement. But those worries were overblown and the stock of the adult beverage distributor has soared nearly 50% from those lows, far outpacing the gains of the S&P 500. In fact, it's been the strength of the Modelo brands that have powered Constellation higher, which stands in stark contrast to how its big craft beer purchase has performed.

Craft beer's lost luster

In 2015, Constellation paid the shocking sum of $1 billion for tiny Ballast Point Brewery, a fast-growing but ultimately regional beer brewer centered around the San Diego area. Craft beer was hot, and with A-B InBev buying up every regional craft brewer in sight, Constellation sought to get in on the action, too.

Yet it was equally true that industry sales were slowing, and it apparently didn't cross Constellation's mind that what played well in California might not win converts elsewhere, so it built a massive 259,000-square-foot  brewery all the way across the country in Virginia.

While Constellation used to crow about Ballast Point being the fastest-growing craft brewer in the country, that was based more on it being distributed more widely; sales weren't really following, and last quarter it was forced to write down the carrying value of the brand by $85 million, an admission it overpaid for the brewery.

Ballast Point's new Virginia brewery

Image source: Ballst Point Brewing.

It doesn't add up

That should've been plain for executives to see from the beginning. In buying the U.S. business of Modelo, Constellation paid $5 billion for a distributor, a brewery with a 10 million hectoliter capacity (about 120 million cases), and a wildly popular beer with a national reputation. Corona Extra alone sold 100 million cases that year, while Modelo Especial moved some 40 million cases.

Fast-forward a few years, and Constellation was willing to pay one-fifth that amount for a niche brand few had heard of that was producing about 4 million cases a year.

Fortunately for Constellation Brands, Mexican beer continues to gain in popularity. According to the craft beer industry's Brewers Association trade group, imports grew 6.8% last year, outpacing the 6.6% growth seen by domestic craft beers.

This past summer, Molson Coors (NYSE: TAP) entered into a distribution agreement with Heineken (NASDAQOTH: HEINY) to bring Mexico's Sol beer, a brand established in 1899, to the U.S. this fall, even though Heineken's Dos Equis and Tecate brands had lackluster results over the first six months of 2017.

Constellation Brands is more than just beer, even though that's the standout star at the moment, and it is gaining from the premiumization that's occurring across all alcoholic beverages. Yet having paid out a princely sum for one craft brewer and recently bought another, Constellation may want to spend its money more wisely by going south of the border instead of buying up regional favorites here.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
STZ
$235.43 (1.02%) $2.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.