The big bet Constellation Brands (NYSE:STZ) made in craft beer looks like it's going awry. Having jumped into the industry with both feet and a $1 billion acquisition of Ballast Point Brewing in 2015, the owner of the U.S. based-rights to sell Corona beer has only seen its craft beer ambitions deflate, and it's even had to take impairment charges on its investment.
Now, hidden beneath the recent announcement of its massive $4 billion investment in Canadian marijuana grower Canopy Growth, industry news site Beer Street Journal says the brewer and distiller has fired as much as 60% of its craft beer sales team and folded the remnants into its imported beer division. Constellation Brands isn't throwing in the towel on craft beer -- it recently announced it was building its 10th Ballast Point brewpub -- but it's clear it sees that its priorities now lie elsewhere.
Craft beer is going flat
The craft beer industry is every bit as divided as the beer industry as a whole. The biggest brewers are suffering from falling sales while the smallest breweries are witnessing tremendous growth. Analysts at market research company IRI say craft brewers producing 10,000 barrels or less per year saw volumes soar 31% over the first six months of 2018, while those producing more than 1 million barrels experienced a 2.5% drop.
Ballast Point Brewing was one of the fastest-growing craft breweries in the U.S. when it was just a small, independent regional beer. After Constellation acquired it however, and took its distribution national, the parent company began identifying "negative beer trends" in the brand's portfolio, leading Constellation management to write down $87 million related to Ballast Point's trademark asset.
But not so with its Modelo and Corona brand families, which it acquired from Anheuser-Busch InBev (NYSE:BUD) in 2013. The imported Mexican beer helped drive beer segment sales 11% higher in the second quarter as depletions, or sales to wholesalers and retailers (an industry proxy for consumer demand), jumped 9% for the period, far outpacing the industry.
Big bets to change course
The craft beer purge is reminiscent of what happened at Anheuser-Busch last year when it scrubbed 90% of its craft beer sales team during a reorganization. It said it was largely giving up making more craft beer acquisitions and would instead attempt to grow organically.
Yet Constellation transferring its sales agenda to a staff that will still be prioritizing Corona -- particularly its two new additions, Premier and Familiar, which have been well received by consumers -- suggests Ballast Point and fellow large craft acquisition Funky Buddha will be relegated to the backseat. While it's smart to lead with your strengths, and Corona is showing substantial potential for future growth, Constellation's management does a lot of swinging for the fences, only to strike out occasionally in the process.
Its latest big bet on marijuana can be seen in a similar light, one the market apparently doesn't approve of since it knocked Constellation's stock down about 10% after the company announced the investment (though as of this writing, "STZ" shares have since gained back some of that lost ground).
Corona remains key
Management's record with acquisitions has been spotty over the years, and it has only really been able to grow to its current level because the Justice Department forced Anheuser-Busch to sell off its Grupo Modelo portfolio. Before that, Constellation was largely a mid-level wine and spirits distributor, though it was also a joint venture partner with Grupo Modelo for U.S. distribution rights of Corona.
The gift of Corona ownership, though, catapulted Constellation to the forefront of the beer industry in a steadily growing segment, which management sought to build on by overpaying for Ballast Point even as the industry was shifting to slower growth.
The mass firings in its craft beer sales team shows Constellation Brand's original craft brew strategy was a mistake. Although it's adjusting to the industry trend of small and local by opening more brewpubs, the brewer is also apparently now counting on Corona to carry the entire beer division forward.