Will Corona Keep Constellation Brands Growing?

The Mexican import has been hot, but beer sales are cooling.

Rich Duprey
Rich Duprey
(TMFCop)
Jun 19, 2019 at 7:45PM
Consumer Goods

Beer is very important to Constellation Brands (NYSE:STZ). Its Corona and Modelo families of Mexican beer helped the segment account for 64% of the company's total sales and almost all of its operating income.

Mexican beer also happens to be crucial to the current growth of the craft beer industry. Imported beer accounted for 20% of craft production in 2018, and Mexican beer represented over 72% of all imports. Constellation told investors last quarter that its beer portfolio was the primary growth contributor to the U.S. beer market last year and all of its imported brands achieved record sales volumes.

With Corona and Modelo an essential part of the future -- for the company and the industry -- let's look at the role they might play as Constellation prepares to report its first-quarter earnings at the end of the month.

Bottles of Corona beer beachside

Image source: Constellation Brands.

Brand dominance

Data from the market researchers at IRI give the combined Corona and Modelo brands a 61% share of import dollar sales and 60% of case sales. Modelo's dollar sales surged 18% higher last year, substantially better than the 11.6% increase in Corona sales, and more than twice the amount of the next closest brand, Constellation's Pacifico, at 8.4%.

The only imported beers not owned by Constellation that also showed any kind of growth last year were Diageo's Guinness, which rose 0.9%, and MillerCoors Foster's, which was up 0.7%. Every other major brand family suffered declines in dollar sales, and only Corona, Modelo, and Pacifico saw case sales rise.

Yet that growth did not extend across the brand families. Corona Extra, for example, Constellation's flagship brand, saw sales fall 4% last year while losing 0.1% of market share. The beer distributor's second-biggest beer, Corona Light, tumbled 11.5%.

Constellation was more than able to make up for it with brand extensions like Corona Premier, a super-light beer targeting Anheuser-Busch InBev's (NYSE:BUD) perennial favorite Michelob Ultra, and Familiar, a beer targeted to Latino males that blew up with sales growing almost 140% last year.

But CEO Bill Newlands has told analysts that the line extensions cannibalize sales from existing labels, noting that the better they do, the more they have some impact on its other franchises.

Getting sales growing again

Earlier this year, Constellation also began distributing Corona Refresca, another extension it took nationwide last month. It's a sparkling flavored malt beverage imported from Mexico that seeks to capitalize on the popularity of hard seltzers like Truly from Boston Beer (NYSE:SAM), which are also helping push craft beer sales higher. 

While it's smart to use the Corona name to build up a broader portfolio that might otherwise succumb to brand fatigue, perhaps more worrisome are the reports of Constellation now discounting certain labels heading into the summer.

Corona has typically been positioned and priced as a premium beer above even Michelob Ultra, but industry site Beer Marketer's Insights reported the brewer was dropping the price on Corona Extra, Light, and Premier by about $2 a case, which would still allow it to be ranked above the likes of Budweiser and Bud Light, but would now be equal to or slightly below Michelob Ultra.

Constellation will also be putting more of its beer into cans, which better allows for taking it to parks, beaches, and other places where glass bottles are not permitted.

The price cuts, though, will eat into margins. Last year, Constellation saw operating margins slip to 39.3% despite better pricing because higher marketing and transportation costs offset the gains. Now, it won't have the pricing benefit to keep it aloft, and margins could react accordingly, though it may not show up in its first-quarter results.

Plenty of growth prospects

Constellation Brands still has its wine and spirits business that it has positioned for premium leadership, though it is expecting the shipment volume increases it enjoyed last year to reverse in the first quarter. Having sold off its discount portfolio, it expects net sales and operating margins in wine and spirits to fall this year. Its investment in marijuana producer Cronos Group is another potential growth driver, but that is a long-term play.

That leaves beer to carry the load for Constellation, and though the Corona and Modelo families of brands are more than up to the task, there are individual nuances to be mindful of that may see this premium beer importer slip as the year progresses.