Even though it distributes Corona, the No. 1 imported beer brand in the United States, Constellation Brands (NYSE:STZ) doesn't worry about hops prices. It had much to toast with its first-quarter results, but a simple reason beyond demand and pricing power will keep the buzz strong for Constellation Brands no matter what it pays for hops.
The delicious with a slice of lime results
On July 2, Constellation Brands reported its fiscal first-quarter results. Its beer segment revenue, which everybody seems focused on, popped 14%. The beer segment alone now represents 57% of the company's revenue as of last quarter. Rob Sands, CEO of Constellation Brands, pointed out that the company saw gains across its entire beer portfolio and not just Corona.
Constellation Brands is undergoing an "120 Days of Summer" advertising campaign. As the company stated three months ago, each week it will have a different theme. Constellation Brands and Corona have a goal of "owning the summer." Apparently it's working. Constellation Brands expects net sales for the beer segment to grow 10% this year along with operating income growth of between 25% and 30%.
The company states that its beer business saw strong execution during Cinco de Mayo and Memorial Day. Its Modelo Especial and Corona Extra brands have been strong, but the roll-out of Modelo Especial Chelada particularly helped.
Recall from the conference call three months ago that Corona Extra is not only the No. 1 imported beer at over 100 million cases annually, but other companies don't even import half that amount of any beer, just to put this size into some sort of perspective. Meanwhile, its Modelo Especial brand happens to be the fastest growing major beer brand.
Hops prices are hopping
Even though Corona Extra and the other beers in Constellation Brands' portfolio are not IPA beers, which are beers that require more hops than others, Constellation Brands still purchases and uses hops in its brewing. But due to the rising popularity of IPA-style beers across the nation, demand for hops has risen dramatically and taken hops prices up with it to more than double in price as compared to a year ago.
In an interview on CNBC just after the earnings report on July 2, Sands stated, "Hop pricing doesn't really move the needle for us either way." He explained that even though Constellation Brands spends an enormous amount on hops as a company, on a per-unit basis it comes out to a really tiny amount of cost of goods sold. It's so small, in fact, that hops prices don't make a difference in any material way. For instance, the glass in the bottle actually costs the company more than the beer itself. Besides, if you peak into the filings you'll see that Constellation Brands has its hops supply locked in contract for another two years.
Craft beers in particular tend to use a lot more hops, roughly between four and 10 times more than the average non-craft beer. Hop farmers are expanding their farms to meet the increased supply need, but they haven't been able to keep up with the rapid rise in demand.
To speak the obvious, don't be frightened if you see headlines that say hops prices have gone up yet again. If anything, ironically, that could help Constellation Brands. Craft beer companies where hops prices have a material per-unit effect may have to pass it on to consumers in the form of higher prices. Higher prices for competitors are a blessing for Constellation Brands of course.