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Constellation Brands (STZ) |
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WIKI ANALYSIS
Constellation Brands produces and sells over 200 brands of beer, wine, and liquor, but most of the company's revenues come from its Wine business.[1] Constellation Wines is the largest wine company worldwide, though that translates to less than 5% of the global wine business, given the industry's fragmentation.[2] The company is also the US distributor of many well-known beer and spirits brands including Corona, St. Pauli Girl, and Black Velvet.[3] The company earned $4.2 billion in revenue and $99 million in net income in 2010.[4]
Company Overview
Constellation offers products in all major segments of the alcoholic beverage industry. Its primary market is North America, which accounts for around 72% of revenues, with Western Europe and Australasia making up the balance of revenues with 17% and 11% respectively.[5]
Business Segments[6]
Constellation Wines is the firm's biggest segment and the largest wine business in the world, markets wines across all price points, from popular to premium to super-premium, with the portfolio split about evenly between high-end and low-end brands. Constellation Wines owns 24 of the 100 bestselling brands in the US and 8 of the 20 bestselling brands in the UK. This business also includes the production of cider, where Constellation is the second largest domestic producer. Constellation Wines also sells unbranded wines wholesale in the UK. Finally, the Spirits business is the firm's smallest, accounting for only 7% of annual revenues. This segment sells both premium and value brands such as Black Velvet, Chi-Chi’s prepared cocktails, Barton, and Fleischmann’s. Recent acquisitions, such as last year's purchase of Svedka vodka, the fastest-growing premium vodka brand in the United States, have increased the company's premium offerings in all segments.
Crown Imports imports and markets various brands of foreign beers, most notably Corona. The company owns six of the top 25 imported beer brands in the US.
Business Growth
FY 2010 (ended February 28, 2010)[4]
- Net sales fell 10.8% to $4.2 billion. Branded wine sales fell 3% while spirit sales fell 47% during the period. Sales from the company's business segments fell 8% and 6% respectively.
- Net income improved to $99 million compared to a net loss of $301 million in the prior year due to restructuring charges.
Trends and Forces
Consumption Trends
- Slowing Alcohol Consumption Decreases Demand: Western Europeans and North Americans are consuming less alcohol than they have previously. In America, per capita annual consumption has been slowing for decades, from 2.76 gallons in 1980, to 2.43 gallons in 1990, and finally 2.18 gallons in 2000.[7] From 1970-2000 consumption in Italy dropped 44%, France dropped 34%, and Spain by 15%.[8] From 1990 to 1998 alcohol consumption declined 6% in Western Europe, 10% in North America and 12.5% in Australasia.[9]Several demographic trends are contributing to the decrease, including, for instance, a rising level of education (alcohol consumption is negatively correlated to education). As a result, alcohol producers face stagnant markets with low growth prospects. [10] Constellation Brands in particular stands to lose from this trend as the majority of its sales are concentrated in the United States and other developed markets.
- Popularity and Growth of Wine Consumption Drives Largest Segment's Sales: While consumption of wine in traditional wine drinking countries has been stagnant, the popularity of wine has exploded in countries where consumption has traditionally been low, such as Denmark, the Republic of Ireland, and Norway. Growth in Asia, which had been booming for decades, is now also appearing to level off. For example, wine consumption in Japan rose 350% from 1980 to 1998, but only grew .8% in 1999.[11] For Constellation Brands, these trends hold twofold importance; first, the decline in wine consumption in many of its largest markets limits revenue growth there. Second, the changes in demand in markets the firm has not yet entered influence future expansion prospects, which may be minimal if wine consumption continues to slow.
- United States Demographic Trends Influence Consumption of Alcoholic Beverages: The majority of wine drinkers in America are part of the baby boomer generation. This generation is reaching their peak wine drinking age, and have plenty of disposable income. It is believed that the baby boomer trend will continue until around 2015, and will continue to generate profits for the alcohol industry.[12] However, this good news is tempered by some less encouraging data concerning the youngest generation of Americans. The next generation of alcohol drinkers appears to hold off on alcohol more than their parents. The number of teenagers who said they had had a drink was 78% lower in 1999 than in 1982, and the number of college freshmen who say they drink occasionally or often is at record low levels.[13] Since the United States is the firm's largest market with over 60% of sales, these trends are key in determining future demand for its products.
- Trading Up to Higher Priced of Alcohol Consumption Necessitates Adjustments of Portfolio: The global spirits market has benefited from a shift in consumer tastes from beer to higher-priced and trendier alcoholic drinks such as wine and spirits. Constellation Brands' portfolio is about equally split between premium beverages and value drinks, so the effect of this trend on the firm is mixed. On one hand, high margin wines and imported beer brands such as Corona are well-positioned to benefit from this shift in demand. In fact, Constellation is actively making investments and launching joint ventures to gain a larger position in these businesses. On the other hand, with spirits comprising only 7% of sales, the firm cannot fully benefit from the increased popularity in that segment, and value brands across all segments are threatened by the shift in the demand away from such products.
Production Trends
- Rising Commodity Prices Affect Production Costs: Most commodity prices have risen dramatically over the last year. This has hit the alcohol industry hard, since agricultural commodities, such as grains, are key ingredients in producing all types of alcohol. As a player in all categories of alcoholic beverages, Constellation has felt the pressure of higher production costs. At the same time, an oversupply of grapes in all of the company's primary markets (US,UK, Australia) has the potential to increase the quantity of wine on the market, leading to competitive pricing pressures. Most recently, however, the grape glut has been decreasing somewhat, alleviating the pressure on Constellation Brands.
- Potential Increases in Excise Taxes and Regulation Put Pressure on Margins: Taxes and other fees account for over half of the retail cost of alcohol. However, because the average consumer is not aware of this fact, distillers usually cannot raise prices when these taxes increase. Consumers would perceive such a move as price gouging, strongly decreasing demand. Many states in the US, Constellation's largest market, have recently considered proposals to increase excise taxes, and some have passed these proposals, impacting the firm's margins.
Competition
The largest players in the alcohol business are conglomerates that produce and compete in all areas of the business (wine, spirits, and beer). In the wine business, Constellation competes with many small wine producers like Willamette Valley Vineyards, as well as larger players like LVMH Moet Hennessy and Diageo. In the beer business, Constellation competes with Anheuser-Busch Companies, Molson Coors Brewing Company,SABMiller, and Diageo. Finally, a few competitors in the spirits sector include Diageo, LVMH Moet Hennessy L.V., Brown-Forman (BF) and Fortune Brands.
Constellation seeks to gain an advantage over competitors through its diversified structure, covering every segment of the alcoholic beverage industry. The company also distinguishes itself through strategic acquisitions (and their successful integration), which have accounted for over half of revenue growth the past few years. In wine specifically, Constellation has become the single largest distributor, which gives it advantages from various economies of scale. In a fragmented industry where no competitor holds more than 5% of the total market, Constellation Wines' size distinguishes it from smaller firms.
Wine and Spirits
- LVMH Moet Hennessy L.V. (LVMUY) is a producer of all things luxury, from clothing (i.e. the iconic Louis Vuitton brand) to cosmetics (i.e. the Sephora chain of stores). Its wines and spirits division accounts for 20% of revenues and includes brands such as Dom Pérignon, Moët & Chandon, Veuve Clicquot, and Hennessy. The competition between this firm and Constellation brands is minimized by the fact that the former does only 26% of its business in the United States. However, the company's focus on luxury has allowed it to achieve much higher orofit margins than Constellation Brands.
- Diageo (DEO), the world’s largest producer and distributor of alcoholic beverages, was formed by the 1997 merger between Ireland’s Guinness and food and spirits manufacturer Grand Metropolitan. Its portfolio of mostly premium spirits, which include Johnny Walker Scotch, Jose Cuervo tequila, and Smirnoff Vodka, and the recently acquired Captain Morgan rum, compete directly with Constellation Brands. Diageo is especially strong outside of Europe and the United States, where 30% of its revenues come from. By comparison, only 12% of Brown-Forman’s sales come from outside of Europe and the US. As demand in developed markets slows, this may be a key differentiator between the firms.
Beer
- Anheuser-Busch Companies (BUD), while it is most known for domestic brands such as Bud and Bud Light, competes with Constellation Brands through its imported beers segment, which accounts for less than 10% of revenues but almost 25% of operating income. Anheuser-Busch's imported beers are mostly premium brands from Western Europe, Eastern Europe and Asia. Its brands have sold better throughout the United States than Constellation's offerings in recent years. Anheuser-Busch has begun to develop a spirits business, so it will soon compete with Constellation Brands on that front as well.
- Molson Coors Brewing Company (TAP) is one of the largest global brewers by volume, though it is strongest in the Canadian market, where it produces 84% of all beer sold. Its most popular brands include Coors Light, George Killian's Irish Red Lager, and Keystone. Like Constellation Brands, this competitor has formed a joint venture with Grupo Modelo to market Modelo's products in Canada.
References
- ↑ Global Brand Portfolio
- ↑ “Fortune Brands Passes the Bottle to Constellation”
- ↑ Constellation Beers & Spirits
- ↑ 4.0 4.1 STZ 2010 10-K "Selected Financial Data" pg. 24
- ↑ STZ 2010 10-K pg. 2
- ↑ STZ 2010 10-K "Business Segments" pg. 3-5
- ↑ “Alcoholic Beverage Consumption in the U.S.: Patterns and Trends”
- ↑ World Consumption Trends
- ↑ World Consumption Trends
- ↑ Alcoholic Beverage Consumption in the US
- ↑ World Consumption Trends
- ↑ World Consumption Trends
- ↑ World Consumption Trends
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