Constellation Brands (STZ -0.77%) may be looking to offload some of its wine brands for over $3 billion, according to a recent report from Reuters. While still speculation at this point, such a move wouldn't be surprising. The kids are down with cannabis and the import and craft beer that Constellation specializes in; wine, not as much.
What's on the block?
Anonymous sources told Reuters that Constellation is considering the sale of the Clos du Bois, Mark West, Arbor Mist, and Cook's labels, among others. The proceeds would be used to bolster the diversified alcohol company's presence in beer and cannabis.
That makes sense, especially given Constellation's big investment in Canadian cannabis producer Canopy Growth Corporation (CGC -3.05%), which it announced over the summer of 2018 -- the first deal of its kind for a corporate beer company. That gave Constellation a controlling interest in Canopy Growth, which will be the former's "exclusive global cannabis partner," according to Constellation Brands CEO Rob Sands.
Though Constellation is mainly known for beer today -- it's the third-largest brewer in the U.S. through the Corona, Modelo, and Pacifico brands, as well as regional craft beers like Ballast Point -- it has made big changes in its portfolio in the past to capitalize on the latest trends.
In 2004, the company purchased Robert Mondavi Corp. -- a leader from the West Coast wine movement that started in the 1960s -- as well as other labels that helped anchor a presence in wines. As wine started to lose momentum in the last decade, though, more changes were forthcoming.
In 2013, Constellation bought Grupo Modelo's U.S. business from A-B InBev, giving it exclusive rights to distribute Corona and Modelo in the U.S. That landmark agreement is largely responsible for putting Constellation on the map today, as the Mexican beer brands have soared in popularity since then. Craft beer was also beginning its meteoric rise, so a few years later, the company purchased Ballast Point for $1 billion. The craft beer acquisition was offset shortly thereafter with the sale of Constellation's Canadian wine business for $1 billion in 2016.
The future of alcohol?
If we look only at the timeline of deals, the trend is clear: Constellation's beer brands and weed are in, wine isn't. That doesn't mean wine is going away completely, though. It still pays the bills.
Through the six months ended Aug. 31, wine and spirits brought in $1.26 billion in sales and $369 million in operating income for Constellation Brands. That was good for 29% and 27%, respectively, of Constellation's total. And with the flagship Robert Mondavi brand and other wine labels staying put, the wine segment will remain significant.
What will the possible $3 billion in proceeds go toward, then? Most likely, higher-growth and higher-margin initiatives. For example, Constellation has hinted at further work in the cannabis industry within the next couple of years, and it holds options to increase its stake in Canopy Growth even further. Such a move could make sense, as wine sales have grown at a slower clip and have lower margins than Constellation's bigger beer business. Through the same six months mentioned above, Constellation posted 3.9% growth in wine sales, compared to beer's 10.7% growth. Operating profit margin on wine and spirits was 25.6%, compared with 54.9% on beer.
The trend and the numbers are clear. The wine business is losing appeal at this alcohol conglomerate as consumer tastes migrate toward its import and craft beer, and the nascent recreational cannabis industry has a lot of promise a few years down the road. Constellation Brands is adjusting accordingly and is leading the pack into a new era of alcohol consumption.