Dive Brief:
- Constellation Brands' first-quarter profit missed analyst expectations, results the beer giant attributed to higher marketing and transportation costs, according to a company release. Shares in the company, whose beers include Modelo and Corona, dropped nearly 5.5% to $220 in mid-morning trading.
- The company reported net income of $743.8 million, up from $398.5 million in the year-ago period. Sales jumped 6% to $2.05 billion from $1.93 billion. Beer sales rose to $1.38 billion from $1.24 billion for the quarter, but wine and spirits sales slipped to $672 million from $689 million.
- "Our first quarter results are consistent with our expectations for the business and reflect planned investments in innovation for key brands, digital enablement, emerging opportunities, and operational efficiencies," Rob Sands, Constellation CEO, said in the release. "I am especially pleased with the successful execution and momentum of our new product introductions, including Corona Premier and Familiar, which drove industry-leading depletion growth of 9% for our beer business for the quarter."
Dive Insight:
Constellation has poured increased marketing spend into its wine and spirits brands, but the investment has yielded uneven results. The category's sales plummeted more than 10% in the third quarter 2017, then rose 4.3% in the fourth quarter only to drop once again in this most recent period.
This trajectory is interesting, given the fact that U.S. spirits sales are on the rise. Much of this growth is being driven by millennial drinkers, who are developing a growing demand for premium cocktails, whiskey, tequila, gin and bourbon. This demographic also seeks out innovative hybrid drinks, such as Constellation's Cooper and Thief bourbon-barrel aged red wine blend.
In January, the beverage titan took a minority interest in Copper & Kings American Brandy Co., an independent distiller of brandy, gin and absinthe products. It also purchased a minority stake in barrel-aged rum maker The Real McCoy Spirits Co. Both of these deals appear to be savvy investments with brandy and gin performing well with American consumers, but they have yet to drive consistent growth for Constellation.
Still, Wells Fargo analyst Bonnie Herzog was fairly optimistic about the company's quarterly results.
"While we are disappointed by the wide FQ1 EPS & margins miss, we are encouraged by [Constellation's] solid topline beat and affirmation of its FY19 EPS guidance, which implies headwinds impacting Q1 (transport/fx/marketing costs) are expected to be manageable," she said in a report.
On a positive note, the company's beer portfolio continues to edge out competitors. Earlier this year, analysts at the Beverage Forum praised Constellation for its successful marketing of its Mexican brands, including Corona and Modelo Especial. The beer giant, which owns 90% of the premium beer market, saw strong volume growth of 8.9% in 2017 — its fourth consecutive year leading the beer industry. For this quarter, the company attributed some of its beer growth to the March launch of Corona Premier, its new low-calorie light beer and the company's first new Corona-branded beverage in nearly three decades.
The move reflects growing interest in low or no-calorie brews as consumers become increasingly health conscious, a trend that has driven the success of AB InBev's Michelob Ultra. While traditional beer brands struggle to boost sales, shipments of Michelob Ultra have increased every year since 2011, including a 21% jump in 2017.
It's unclear, however, if Constellation's Premier will be able to successfully differentiate itself from products like Michelob Ultra Pure Gold as more light beers enter the crowded market. Premier boasts organic grains, which may appeal to younger consumers, but it's uncertain if shoppers are willing to pay more for this beverage than cheaper light brews on the shelf.
Constellation's flexibility and willingness to explore new categories and reposition itself in existing ones could keep the company at the front of the beer pack. Looking forward, the company's new frontier could be in the marijuana space. The company purchased a 9.9% stake in Canadian marijuana company Canopy Growth Corporation last October, a $191-million deal that will let the two manufacturers develop cannabis-infused drinks and "stay ahead of evolving consumer trends." Constellation faced a few roadblocks during the quarter, but its position in premium beers and spirits should enable its star to continue shining brightly.