Constellation’s ‘unbelievably ambitious’ strategy is paying off

Constellation Brands pleased investors with its fourth quarter earnings, although sales at the beer and spirits company slightly missed analysts’ expectations.

Shipments from the crucial beer division in the three months to the end of February were US$1.54 billion, a 2% fall from the same quarter in 2021 but in line with Wall Street estimates.

At US$462.2 million, sales of wines and spirits came in 9% below the same time last year, missing analysts’ estimates of US$518 million.

But Constellation’s profits beat expectations and it upped its dividend on the back of increased prices to counter the soaring costs of packaging, raw materials, logistics and labour. It’s all part of what Jon Troutman, the company’s vice president of direct-to-consumer marketing, has called an “unbelievably ambitious” omnichannel strategy.

Constellation made adjusted earnings of US$1.98 per share, topping analysts’ expectations of US$1.82 per share. Significantly, despite the price rises it has pushed through already, Constellation said consumers had stuck to its premium beer brands including Modelo Especial and Corona Extra while demand for its premium and fine wines had also remained robust.

On the back of that trend, Constellation said it expected full-year adjusted profit per share of between US$11.70 and US$12.00, compared with analysts’ average estimate of US$11.68.

For the next 12 months the company predicts beer net sales growth of between 7% and 9% and forecasts organic net sales in wines and spirits to range between minus 0.5% and plus 0.5%. That will reflect net sales that are US$38.5 million lower and US$19.5 million fewer gross profits (less marketing spend) because of
disposals already made.

While the company is confident that it can push through further price rises to protect its margins, chief executive Bill Newlands revealed a significant movement in consumer behaviour.

He noted that as consumers feel the pinch of inflation, demand for the company’s “mainstream brands” has been lower but nevertheless they are seeking more premium-priced products.

Consequently, Constellation is further leveraging its direct-to-consumer routes to market to attract higher-income customers.

“Our higher-end brands have strong growth in our emerging and rapidly expanding direct-to-consumer channels and international markets,” Newlands told analysts.

“Over time, we expect our portfolio to continue to migrate toward the higher end and for these higher-end brands, channels and markets to support our top-line growth acceleration.”

Newlands said that premium brands tend to perform well on direct-to-consumer (D2C) channels and that, by selling successfully to these customers, the company can drive higher margins on its luxury products. That helps protect it from much of the inflationary trade-down that brands targeting lower-income
consumers are seeing.

“We have seen very little trade down against our portfolio,” Newlands said. “Certainly, there has been some, but it tends to occur at lower price points than ours.”

At the height of the coronavirus lockdowns in 2020, Constellation bought eCommerce wine company Empathy Wines.

As on-trade outlets reopened some competitors began to downplay D2C but Constellation has renewed its efforts in that route to market.

It says that in addition to driving sales from Empathy, it has also created sites for some other wine brands and has more “in development” in an effort both to boost margins and to improve its marketing ability.

“Constellation’s effort to develop and implement a true omnichannel strategy across its portfolio of brands is unbelievably ambitious; it is just not happening in the category of beverage alcohol today,” Jon Troutman, the company’s vice president of direct-to-consumer marketing, said.

“The idea of blazing an entirely new trail, similar to what we’ve seen develop in some other consumer goods categories, is an incredibly exciting challenge.”

D2C alcohol sales in the US have increased since before the pandemic.

A PYMNTS survey of more than 3,200 US adults from the first quarter of 2021 found that 15% of consumers had purchased alcohol online for delivery at a later date. Of those, 80% who had begun doing so more often during the pandemic planned to maintain some or all of their increased ordering.

In contrast, a report released earlier this year from Sovos ShipCompliant, in partnership with Wines Vines Analytics, found that that D2C sales of wines are in reverse.

After analysing data from 11,000 US wineries, it found D2C sales volumes fell by 10% in 2022 with average order values falling by 2%, the first decline in 13 years.
In concluded that the downturn reflected the return to drinking in on-licensed premises.