The Mexican government issued a decree Tuesday suspending all nonessential operations, including beer manufacturing, through the end of April. During the company’s fourth quarter and full-year 2020 earnings call, Constellation Brands CEO Bill Newlands told investors and analysts that the company’s production facilities are open and operating in Mexico, the U.S., Italy and New Zealand.
“We are taking great care to make sure we are operating correctly,” he said. “I think that will likely be respected by the government. In Mexico, they have obvious concerns for their entire economy, as our country has great concerns for our economy, to make sure that people are being protected. And I think the kind of steps that we’re taking to make sure that we’re protecting our people we believe is best in class.”
Constellation is taking employees’ temperature as they arrive at its facilities and has staggered shifts to encourage social distancing.
Meanwhile, Anheuser-Busch InBev-owned Grupo Modelo, which produces and sells Corona, Modelo and Pacifico outside the U.S., announced Friday it will halt production, according to CNN. Heineken N.V. also announced that it will suspend production and distribution of its products from its seven manufacturing facilities in Mexico, effective Sunday, according to Reuters.
Constellation Brands has 70 days of product in its distribution centers and wholesaler warehouses, 80% of which is on the U.S. side of the border.
“We expect to have no disruption in our ability to produce product and deliver it to retail,” Newlands said.
The unprecedented shutdown of on-premise consumption in the U.S. and sharp uptick in off-premise sales as consumers follow stay-at-home orders across the country has also led to changes in Constellation’s marketing mix.
“During this time, we are focused on the channels the consumer is choosing, namely three-tier ecommerce, direct-to-consumer and the off-premise, especially big box, grocery and club channels, where we are working diligently to ensure high end stock positions for our key SKUs,” Newlands said. “We’ve also adjusted our marketing approach to ensure our consumer messaging is in tune with current realities.”
According to Newlands, Constellation’s wine portfolio had its best-ever direct-to-consumer sales week; other ecommerce-driven methods, such as click and collect, also increased.
In the four weeks that ended March 22nd, dollar sales of Constellation’s beer brands — Mexican imports Corona, Modelo and Pacifico and craft offerings Funky Buddha and Four Corners — increased 24%, Newlands said, citing data from market research firm IRI.
With on-premise consumption virtually on hold indefinitely in the U.S., investors and analysts asked Newlands and chief financial officer Garth Hankinson if Constellation’s beer sales and margins are as affected as other breweries.
Hankinson pointed out that profit margins differ between on-premise and off-premise at the wholesale level, but not for suppliers. As for the precipitous decline of on-premise sales, Constellation’s entire portfolio leans more toward off-premise sales.
“We are — multiple points across beer, wine and spirits — less reliant in on-premise than the industry overall, so our business has been skewed historically, and still is, to the off-premise channel, which, in an instance like this, is very valuable,” Newlands said. “But that’s not to say, as you heard, that we haven’t recognized the many challenges that our friends in the on-premise are having at the moment, and we as a company and many of us as individuals have made significant contributions to help those who are in need at the moment.”
Under various brand flags, Constellation has made several large donations to nonprofits supporting groups affected by COVID-19. Modelo pledged $500,000 to the U.S. Bartenders’ Guild to support out-of-work service industry employees and another $250,000 to first responders, according to a press release.
Last week, Constellation’s $1.4 billion brewery project in Mexicali, Baja California, Mexico, hit a roadblock when voters rejected its construction in a local referendum. Constellation had already invested $700 million in the project. Newlands said the company has since had a “very productive meeting” with President Andrés Manuel López Obrador.
“There is mutual agreement that we have been a strong player in Mexico for 30-plus years, and that strong relationship is going to continue,” Newlands said, but declined to elaborate further. “We will have solutions for the long-term to make sure that we are able to meet the strong consumer demand that we continue to have for our brands.”
Full-Year 2020 and Q4 Earnings Results
Constellation Brands’ net sales, encompassing its beer, spirits and wine business, increased 3%, to $8.344 billion for the full 2020 fiscal year.
Newlands called FY20 “another excellent year of strong results marked by milestones,” including record cash flow and double-digit operating income growth for the company’s beer business.
Net sales of Constellation’s beer products increased 8%, to $5.6 billion, for FY2020, which ended February 29th. Constellation’s portfolio-wide beer depletions increased 7.5%, while its shipment volume increased 6.1%, to 311.9 million 24-pack, 12 oz. case equivalents.
Constellation’s import business — which includes the Corona, Modelo and Pacifico brand families — grew depletions 8%, with portfolio-wide depletions increased 7.5%. Driving the growth of the Corona brand was line extensions Corona Refresca and Corona Premier, which posted double-digit growth, and 16% depletions growth of Modelo Especial.
In Q4, Constellation’s beer depletions increased 10.8%, while shipments increased 7.2%. For the three months ending February 29th, the company’s beer depletions increased 10.8%, while import depletions increased 11.4%. The Modelo brand family in Q4 grew depletions more than 18%, while the Corona brand family increased almost 5%.
As for Corona Hard Seltzer, Constellation said the brand was off to “a strong start,” and has achieved ACV (all-commodity volume) distribution of almost 50% in its first month after launching nationally.
Constellation declined to offer guidance for FY21, citing “potential impacts on the business from COVID-19.”
As of press time, Constellation Brands (STZ) stock was up around 1%, to around $132, which is down considerably from its 52-week high of $214.48.