Constellation Beer Margins Staying

Dear Client:

Not much terribly new during a Constellation CAGNY presentation yesterday, at least for beer…

Still: the good news stories for Constellation Beer largely endure. Including: testing has revealed Corona Refresca is 80% incremental to the Corona franchise — better than Premier’s incrementality rates ” and it broadens appeal to women. Also, it doesn’t cannibalize Corona shelf space as it’s an FMB, on a “different area of shelf and cold box” per chief Bill Newlands.

Still lots of upside for Modelo, too: It’s the number one brand in California, and in its biggest market, LA, it’s bigger than the next two brands combined. As Bill put it: “Modelo is a horse, and that horse has a long way to run.”

Another brand with “lots of room to go” too is Pacifico, said Bill. “As we have extended Pacifico across the country and started national advertising, we have seen double-digit growth outside of the core Southern California franchise base for this brand.” He noted that the advertising has been “particularly effective” too, as “people who are exposed” to the campaign “showed almost a 25% lift in purchases of Pacifico.” Moreover, “a quarter of that came from people who had not purchased Pacifico before.”

All that said, Bill remarked that they see “high single digit sales growth for a long time to come in our beer business.”

With such good news — more of which we’ll report on tomorrow — why did the stock slump a bit during the call?

Maybe it had to do with CFO David Klein’s picture of beer margins, which he said will stay “in range.”

“Our COGS in the [beer] business, we expect to be challenged by inflation headwinds, particularly related to commodities in freight. However, we have a very aggressive productivity improvement agenda on the COG side that we think will help us offset those head winds,” said David.

“We therefore see our margins remaining in the range that they’re in today and any upside potential from our current margin structure in beer will come as a result of us being able to either take more pricing than we have historically [1-2%], or inflation expectations coming in less than we currently project.”

More tomorrow.


As CBD reported yesterday, Boston Beer closed out 2018 with yet another quarter of double-digits depletions gains.

The company reported Q4 depletions up 11%, and full year, 52-week depletion trends up 13%. Shipments for the quarter were up 6.3%; net revenues were up 9.2%.

They attributed the depletions growth to Truly, Twisted Tea, Angry Orchard, and “only partially” offset by the Sam Adams craft beer brands.

But as founder Jim Koch has been saying on the conference circuit, it’s more expensive to sell beverages and grow these days.

Gross margin was 51.9% for Q4, a decrease from 52.4% in the comparable period, and 51.4% for the 52-week period ending December 29, 2018, down from 52.1%.

2019 OUTLOOK GOOD. The new year is off to a strong start, too: Year-to-date 2019 depletions through the six weeks ended February 9 are estimated to be up 12%.

Full-year 2019 depletion and shipment growth is now estimated between 8% and 13%, somewhat less nebulous than last quarter’s preliminary guidance of “high single digits to low double digits.”

SHIPMENTS TO BE “SIGNIFICANTLY HIGHER” THAN DEPLETIONS IN Q1 2019. Looking ahead to 2019, Boston Beer CEO Dave Burwick said they are “targeting double-digit top-line growth and, importantly, a significant increase in our operating income.” He added that they “expect first quarter shipments growth to be significantly higher than depletions” as they manage supply chain and capacity “to ensure our distributor inventory levels are adequate to support drinker demand for our brands during the peak summer months.”

That likely has to do with the promised early shipping of Truly this year to its top 200-plus wholesalers in advance of the summer selling season [see BBD 12-20-2018]. Recall, they were caught out of stock for the hot product last year, resulting in the loss of potentially a million cases of sales last summer.


Connecticut has some unusual but time-tested pricing laws for bev-alc, which were challenged by giant package store chain Total Wine & More, owned in part by Congressman David Trone.

The 2nd Circuit ruled in favor of Connecticut in its defense of its alcohol pricing laws. “Total Wine had challenged the Connecticut alcohol laws on price post, price hold, ban on price
discrimination/volume discount and minimum retail pricing provisions,” writes NBWA general counsel Paul Pisano. “The 2nd Circuit upheld the district court’s decision. This opinion is a traditional antitrust review matter, and issues of alcohol policy (concerns of lower prices of alcohol and impact on public health) or other 21st Amendment issues did not really impact the court’s analysis in this case.”

The court relied on precedents and concluded that the pricing laws did not violate antitrust law, specifically the Sherman Antitrust Act. “The court opinion noted that 2nd Circuit precedent can only be changed by higher court precedent or an en banc panel. It remains to be seen if the Appellant will seek for en banc review by the 2nd Circuit or file an appeal with the Supreme Court,” says Paul.

BOTTOM LINE: This is a victory for states’ rights in general and three-tier in particular. Antitrust is something federal courts take very seriously. But when a federal court says a state can dictate how bev-alc is priced — even without considering public health effects — that’s generally a good precedent for future challenges to state-based alcohol regulation.

Until tomorrow,

Harry, Jenn, and Jordan

“I have left orders to be awakened at any time in case of national emergency, even if I’m in a cabinet meeting.” – Ronald Reagan

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