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2 Big Challenges Constellation Brands Is Facing

By Demitri Kalogeropoulos – Oct 13, 2021 at 5:30AM

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Hard seltzer demand is dropping and the wine and spirts segment is still struggling.

Constellation Brands (STZ -0.11%) recently announced Q3 earnings, which included mostly good news for shareholders. Yet the alcoholic beverage giant also faces a few big challenges.

In this video from "Beat & Raise" from Motley Fool Live recorded on Oct. 6 , Fool contributors Demitri Kalogeropoulos, Rachel Warren, and Brian Withers discuss why the owner of the popular Corona and Modelo beer brands might struggle as hard seltzer demand drops and as it continues to work on its wine and spirits portfolio.

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Brian Withers: Yeah, go ahead Demitri.

Demitri Kalogeropoulos: I've read the report too. I like a lot about this stock too, maybe somewhat because it is boring like that. [laughs]

Some of that headwind there from the wine and spirits is remember they've made some transactions to divest the whole, they've been restructuring that entire thing for few years now, so there is still dealing with some tough comparisons with that. They sold a bunch to EJ Gallo, I think it was. Trying to focus on the more premium side of that.

But I thought it was interesting to that scan through some of the earnings release to kind of, I was looking through. Remember the hard seltzer thing was something that, to watch in this and they did mention and they've got that Corona hard seltzer that they launched about a year ago and they said they had to do.

They didn't spend a lot of time in the earnings release, but they did mention they had to write-off something like $70 million tied to the quick slowdown in the hard seltzer market. I'm sure in their earnings calls they're going to go into more details.

That's maybe, it's interesting that they would still raise their sales guidance and at the same time, still take this big hit in the hard seltzer, I guess that's good news.

Bad news, meaning their sales aren't going to get hit really bad, but they also clearly didn't succeed as much as they wanted with Corona hard seltzer. They were hoping to get that in the top three market share position, but I guess it was more of a small thing.

Warren: Yeah.

Withers: It's interesting.

Rachel Warren: Oh sorry. Go ahead.

Withers: We all want to talk about alcohol.

Warren: We all just want to talk about it. [laughs].

Withers: Go ahead Rachel.

Warren: I was just going to agree and say also that I think that the growth they're seeing in their beer segment is where you're getting that really positive guidance for the earnings per share and everything.

Because I think that's really continuing to propel his business while the others like you mentioned from restructuring and some of these other recent events has been struggling a little bit more. Not that it can't recover in the future, but I do think as a whole the wine and spirits industry has been struggling a bit over the last 4-5 years.

Brian Withers: The beer is a staple I think and the brands like Modelo and Corona just have a tremendous following. It appeals to newer drinkers coming into the age of drinking as well.

There just a well thought out brand. The hard seltzer peace not surprised because we saw Boston Beer have same issues. I think it became, "Oh we're at home. It's the coronavirus. Let's try this new thing." [laughs] I don't know how many people really went back and bought another six pack of the new thing. Then the other point you made Rachel, around the long time struggle with the alcohol industry. They've been pivoting.

I think if you look at the long-term trend of heart alcohol, it's just down over the years and whether it's hard seltzers, these I guess fancy wines that play to the every day [laughs] marketing. I mean it's scary when you look at some of the marketing that they rollout for this stuff. But definitely the wine and spirits side of things has been fighting just a decade's long trend of just gradual reduction in the size of the market.

Warren: I agree. I think it's also that part or the industry is prone to be dealing with a lot more trends. Whereas I feel like people like beer. [laughs]

Withers: Yeah beer is pretty simple. [laughs]

Warren: This is quite a fizzy. I think like on a very basic level, that's part of it too.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool recommends Boston Beer. The Motley Fool has a disclosure policy.

Stocks Mentioned

Constellation Brands Stock Quote
Constellation Brands
STZ
$246.38 (-0.11%) $0.28
Boston Beer Stock Quote
Boston Beer
SAM
$359.32 (0.08%) $0.30

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