Constellation Brands disappointed by its craft breweries
The distributor of Corona in the US had the best performance of any brewer in 2017, media say. While craft beer sales have slowed and the overall beer industry remains stagnant, if not in decline, Constellation Brands has continued to grow its business regardless.
Although beer represents nearly 60 percent of its total revenue and 80 percent of its operating profit (wine and spirits contribute the rest), this was the first time in the past ten quarters that Constellation Brands did not beat Wall Street’s expectations when it reported third quarter 2018 results on 5 January 2018.
Part of the explanation is that Constellation paid too much for the craft breweries Ballast Point and Funky Buddha.
Consider this: Constellation Brands did not even talk about its craft-beer acquisitions in its most recent investor call.
In 2015 it bought San Diego’s Ballast Point for USD one billion and soon gloated how fast the acquisition was growing, though that seems to have been more about its being distributed to more markets than it was about actual organic growth, observers say. That realisation hit hard last year, as sales suddenly slowed and forced Constellation Brands to write down the carrying value of the brand by USD 86 million.
Undeterred by the slowdown Constellation Brands has continued to invest in Ballast Point, opening a brewery in Daleville, Virginia, on the east coast in 2017. In 2018 Ballast Point will open a brewery in Downtown Disneyland, becoming one of the few places amongst Disney venues that serves alcohol.
Many think that Constellation Brands overpaid for Ballast Point, but that didn't stop it from buying another brewery. In August 2017 it took over Florida-based craft brewer Funky Buddha. Funky Buddha was projected to produce 35,000 barrels (41,000 hl) beer in 2017, after 27,000 barrels in 2016.
While the purchase price was low compared with Ballast Point – Funky Buddha and the limited-production fine-wine vintner Schrader Cellars together went for an estimated USD 130 million – virtually all of the purchase price was assigned to goodwill. In other words, Constellation Brands basically paid for the names of the company and not any real sales. Constellation Brands could be in for a hard landing here too.
Fortunately, Constellation Brands has not been disappointed by its Mexican beer purchases. It acquired the US rights to the Mexican Modelo portfolio (Corona Extra) when AB-InBev bought out Grupo Modelo and was not allowed to keep the US business. Modelo’s US ales have soared since. Subsequently, Constellation Brands also bought the Obregon brewery from AB-InBev, which allowed it to become fully independent of a supply agreement it had with AB-InBev before the purchase.
The Brewers Association said imports grew 6.8 percent in 2017, outpacing the craft beer segment. The market research company IRI reports that in 2017 imports increased their dollar sales by 8.4 percent to more than USD 6.5 billion. On the strength of its Modelo portfolio, Constellation Brands was the only beer company among the top five to post increases in both dollar sales and volume sales, rising 14.1 percent and 12.5 percent, respectively.
