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P/E ► -15.4   EV/EBITDA ► 15.1 AVG ROA ► 0.7% AVG ROE ► -8.4% AVG Debt to Equity ► 2.35 AVG Current Ratio ► 1.97 AVG Interest Coverage Ratio ► 1.11 VERY LOW

 

 

 

 

 

 

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]

Most people in Constellation's major markets - North America and Europe - are drinking less than they used to. In North America, annual alcohol consumption has fallen from 2.76 gallons in 1980 to 2.18 gallons in 2000, to the consternation of most alcoholic beverage companies. While Constellation has benefited from a a trend away from beer towards wine in North America, in other areas, wine consumption is falling as well.

Following 5 years of steady revenue and operating income growth (19% and 18% annually, on average) Constellation Brands made $700 million in income in 2007.^[4] In recent years, Constellation has used acquisitions to grow its market share, acquiring Rex Goliath wine in 2005, Canada's biggest wine business Vincor International in 2006, and the wine business of Fortune Brands in 2007.

Business Financials

Constellation offers products in all major segments of the alcoholic beverage industry. Its primary market is North America, which accounted for 70% of revenues in 2007, with Western Europe and Australasia making up the balance of revenues with 18% and 12% respectively. The importance of the North American market has grown recently; last year, for instance, it accounted for only 67% of total revenues. ^[5] In the last two years, sales in the United States have grown from $2.3 billion to about $3 billion, a jump of 29%, and sales in Canada have grown 540%, thanks in large part to the acquisition of Vincor International, Canada's largest wine company.^[6] Sales in UK and in Australasia have grown more slowly, with a rise of 9% and 10% respectively.^[7]

^[8]

Constellation Wines, 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.

Constellation's Imported Beers business, which recently became a joint venture with Mexico's Grupo Modelo, imports and markets various brands of foreign beers, most notably Corona. Finally, the Spirits business is the firm's smallest, accounting for only 6% 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.

^[9]

The company's revenues increased at a Compounded annual growth rate - CAGR of 19.6% in 2007, and and operating income kept pace at 18%.^[10] Acquisitions in all segments and their successful integration are responsible for over half of the total increase, though as valuations of potential targets increase, it has become harder to rely on an acquisition-based strategy alone. Other key revenue growth drivers include the shift of the firm's portfolio to emphasize higher-margin premium and super-premium brands and new product development within existing brands.^[11]

For the full year 2007, Constellation Brands recognized revenue of $6.4 billion, and generated $700 million in operating income, which translates to year over year growth of 13% and 5% respectively. The growth was driven by the Vincor acquisition (the company has strong positions in non-US markets such as the UK and South Africa) and the growth in branded wine sales. Operating income growth was offset by integration costs of the acquisition. The branded wine business is the fastest growing segment of Constellation's business (19% growth year on year), followed by beer and then spirits, where growth was flat.^[12]

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.^[13] From 1970-2000 consumption in Italy dropped 44%, France dropped 34%, and Spain by 15%.^[14] From 1990 to 1998 alcohol consumption declined 6% in Western Europe, 10% in North America and 12.5% in Australasia.^[15]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. ^[16] 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.

^[17]

• Popularity and Growth of Wine Consumption Drives Largest Segment's Sales: Wine consumption in Western Europe has fallen from 131 liters in 1990 to 123 liters in 2005.^[18] However, while consumption 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.^[19] 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.^[20] 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.^[21] 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. For instance, in 2007, wine consumption rose 4%, and spirits grew 3.2%, while beer increased only 1.2%. Even within the wine and spirits segments, consumers are increasingly choosing premium and superpremium brands.^[22] 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 6% 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.^[23]

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.^[24]

• 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.^[25] 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.^[26]

• Frequent Acquisitions Result in Integration Challenges and Restructuring Costs: Much of Constellations Brands' growth is acquisition-based. The firm's last major acquisitions include: Sweden's Svedka Vodka brand, the fastest growing imported premium vodka in the United States (March 2007); Vincor International, Canada's largest producer of wines (June 2006); and Robert Mondavi, a California premium wine producer(December 2004). These acquisitions have increased the proportion of premium and super-premium brands in the firm's portfolio as well as the its international sales.^[27] Integrating these acquisitions is an ongoing challenge. With five restructuring plans in force, the firm is constantly adjusting operations to squeeze synergies out of its diverse holdings. In 2007 alone, the firm incurred $32.5 million of restructuring expense in association with activities such as streamlining Australian wine operations, consolidating West Coast production, and creating new distribution and bottling plants in the UK.^[28]

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 (over 14% compared to Constellation's 4.4%).^[29]

• 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. ^[30]

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.^[31] However, while Anheuser Busch is very strong in the United States, where 93% of revenues came from in 2007, Constellation Brands has the edge on this firm internationally. Anheuser-Busch has begun to develop a spirits business, so it will soon compete with Constellation Brands on that front as well.^[32]
• 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. In 2007, Molson Coors joined its US US business with SABMiller's US operations. This joint venture, which is 58% SAB owned and 42% Coors owned, is intended to revive beer sales in the US market, which have remained flat for a number of years for both firms. Like Constellation Brands, this competitor has formed a joint venture with Grupo Modelo to market Modelo's products in Canada.

References

1. ↑ "Global Brand Portfolio
2. ↑ “Fortune Brands Passes the Bottle to Constellation”
3. ↑ Constellation Beers & Spirits
4. ↑ 2006 Annual Report pg. 24
5. ↑ Constellation Brands 2007 10-k. Item 1 - Business. pg. 3
6. ↑ 2006 Annual Report pg. 119
7. ↑ 2006 Annual Report pg. 119
8. ↑ Constellation Brands 2007 10-k. Item 1 - Business. pg. 3
9. ↑ Constellation Brands 2007 10-k. Item 6 - Selected Financial Data. pg. 24
10. ↑ Constellation Brands 2007 10-k. Item 6 - Selected Financial Data. pg. 24
11. ↑ Constellation Brands 2007 10-k. Item 1 - Business. pg. 3
12. ↑ Constellation Brands 2007 10-k. Item 7 - Management's Discussion and Analysis. pg. 27
13. ↑ “Alcoholic Beverage Consumption in the U.S.: Patterns and Trends”
14. ↑ World Consumption Trends
15. ↑ World Consumption Trends
16. ↑ Alcoholic Beverage Consumption in the US
17. ↑ Alcoholic Beverage Consumption in the US
18. ↑ World Consumption Trends
19. ↑ World Consumption Trends
20. ↑ World Consumption Trends
21. ↑ World Consumption Trends
22. ↑ Spirits, Wine and Beer Continue to Grow, but Industry Boom has Slowed
23. ↑ Clarke, Anishka. "Cheers for Constellation Brands." BusinessWeek. 8/23/2005
24. ↑ Clarke, Anishka. "Cheers for Constellation Brands." BusinessWeek. 8/23/2005
25. ↑ Alcohol Prices, Quality, and the Demand for Alcohol
26. ↑ 2007 10-K. Section 1A - Risks. pg 14
27. ↑ 2007 10-K. Section 1 - Business. pg 5
28. ↑ 2007 10-K. Section 7 - Management's Discussion and Analysis. pg 34-35
29. ↑ LVMH Hoovers Profile
30. ↑ Diageo Hoover’s Profile
31. ↑ Beer Church - Top Beer Brands 2006
32. ↑ Anheuser-Busch 2007 10-K. Item 1 - Business