Two Keys to Sales Growth for This High-Flying Beverage Giant

In Industry Focus: Consumer Goods segment on beer, wine, and spirits producer Constellation Brands (STZ 0.53%), we dive into the company's operations and product lineup to understand how management continues to aggressively drive growth, including the opportunity afforded by its very popular Mexican and craft beers.

A full transcript follows the video.

This video was recorded on Oct. 10, 2017.

Vincent Shen: There's also been a push in investments at the company, in terms of their operations and their brewing facilities, and how they hope to see efficiencies come out of that to also help sustain this incredible growth they're seeing in their beer business. Could you tell us a little bit about that, Asit?

Asit Sharma: Sure. Very interesting, listeners, the company was a $3 billion company in 2013 when it acquired these rights to Grupo Modelo's Mexican beer portfolio from Anheuser-Busch InBev, the world's largest alcoholic beverage company. Some of you listeners know it very well. What's so interesting is, $3 billion in 2013 was their annual revenue. Constellation Brands has grown that revenue to almost $8 billion through expanding this Mexican portfolio, not just acquiring it and putting it out there but adding innovation to the product lines and scaling the distribution. There was a clue when the company made this purchase that revenues would continue to soar. It was a really subtle clue. The company laid out a timeline of investing a couple of billion dollars in manufacturing.

Here we are five years later, the company will spend almost $4.5 billion in a five year period which ends in 2019. It now has three breweries in Mexico and a glass making facility. This is something that you can use as an investor, if you want to know, this age-old question, will a company keep being able to sell so much, and the stock will keep popping? Well, if a beer manufacturer is investing billions of dollars in capacity over a five year period, you know the demand is there. They wouldn't make that capital investment if they didn't think the demand was tremendous. And lo and behold, year after year, they exceeded their earnings numbers. But I want to make the point, to those of you who are out there who puzzle over these companies, if they had not made that investment, they wouldn't have had the sales. You can have a great product, but if you don't have the means to produce it and the demand is out there, you can't meet the demands, so your revenue can't grow. They did two things very well. Constellation Brands management recognized that Mexican beers would continue to explode in popularity in the U.S., and they recognized that if they spent the money, they would be able to make those sales. And that's what happened.

Shen: Yeah, they were able to see, in terms of the subcategories within the beer industry, imported, craft were driving growth, and they made their investment where they thought it would give them the best returns. And in terms of the efficiencies and the profitability that they're seeing from these investments in these facilities, gross margin at Constellation is already up 7 percentage points over just the past three fiscal years. And it continues to trend upward. The same goes for the bottom line, as well.

But you mentioned the investment that the company's made in order to meet that demand and how it should be a good indicator of at least their long-term outlook for the strength of that Grupo Modelo portfolio that they acquired. I also see a challenge there going forward, beyond the discipline that they're able to maintain in terms of the specialty and craft segment, the acquisition that they made, whether they wanted to make other deals, I feel like we've seen with how craft has gone through this incredible period of growth, all these companies were acquiring popular craft brands, but now we're seeing craft lose shelf space with retailers, lose some of that cachet that it had. Ultimately, I feel like the industry and its consumers can be a little bit fickle, so it'll be interesting to watch whether this Mexican import portfolio will be able to deliver this impressive growth year in, year out. I think it's important, what you mentioned earlier, Asit, the fact that they had beer, wine, and spirits at Constellation. So the fact that, right now, the beer business is about two-thirds of the company, as they can hopefully diversify and right size that in terms of their wine business, in terms of their spirits, and expand that as well, hopefully that reduces some of the risk that the company sees there. Any final thoughts from you before we move on to our next earnings take?

Sharma: Those are all great points. I know you and I were trading some notes before the show. We're talking about the Chelada drinks that Constellation Brands has introduced. Michelada, forgive my pronunciation, those of you who speak Spanish and speak it well --

Shen: You got it well.

Sharma: It's a type of very delicious preparation of beer where you rim the glass with salt, add lime, some spices, sauces. The company is trying to recreate that experience in a bottle, which it has a Modelo line, and it calls those Cheladas. This is an example of really focused innovation. What happened with the craft beers, which Vince was talking about, was the company got really excited about the soaring popularity of craft. And after the Ballast Point acquisition, it built a plant on the other side of the country, it threw a whole bunch of new brands out of Ballast Point at the market. The problem was, craft drinkers don't like beers which lose their taste after a few months. If you see six brands where you're used to seeing one great brand out of Ballast Point, you're not necessarily going to pick up those other ones. And then, the next craft guy or girl who comes in next week, he or she sees when it came in, and doesn't want to buy the product. And they have a lot of product sitting on shelves. So, two examples. Focused innovation and just throwing something at the wall. And the company was chastened in their most recent conference call. I think they'll be fine if they focus on what they know how to do well.

Shen: Yeah. I think that's why they spoke about that more professional approach that they wanted to take, that more disciplined approach they wanted to take with these new brand acquisitions, be it in the craft segment or some of the other parts of the business in terms of spirits and wine as well.