Don't Tell Constellation Brands the Beer Industry Is Down

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Craft-beer sales have slowed to a crawl and the overall beer industry remains stagnant, if not in decline, but Constellation Brands (NYSE: STZ) continues to brew up growth regardless.

The beer distributor was able to chart a path higher on the basis of its Mexican beer portfolio, which saw depletions jump 9% and drove 80% of total U.S. beer category growth. Even so, although beer represents nearly 60% of its total revenue and 80% of its operating profit, this was the first time in the past 10 quarters that Constellation didn't beat Wall Street expectations. While part of the decline was a result of exiting the Canadian wine business, it can't get past that it wasted money buying two craft breweries.

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Brewing up trouble

Constellation Brands no longer even talks about its craft-beer acquisitions. In 2015 it bought Ballast Point Brewing for $1 billion, and it used to extol 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. That realization hit hard last year, as sales suddenly slowed and forced Constellation to write down the carrying value of the brand by $86 million.

That's a clear indication it overpaid for the brewery, but that didn't stop it from also buying Florida-based craft brewer Funky Buddha Brewing. While the purchase price was exceptionally cheap compared with the Ballast Point acquisition -- Funky Buddha and limited-production fine-wine vintner Schrader Cellars together went for $130 million -- virtually all of the purchase price was assigned to goodwill, which means it basically paid for the names of the company and not any real sales. Disappointment may loom there in the future, too.

Importing opportunity

Where Constellation hasn't been disappointed is by its Mexican beer purchases. It acquired the U.S. rights to the Mexican Modelo brand and its Corona beer label when Anheuser-Busch InBev (NYSE: BUD) bought SABMiller, and sales have soared since. It subsequently also bought the Obregon brewery from Modelo, which allowed it to become fully independent of a supply agreement it had with the brewer before the purchase.

The Brewers Association said import beers grew 6.8%, surpassing craft beer as a whole, and market-research company IRI reports that the trend continued in 2017, with dollar sales increasing 8.4% to more than $6.5 billion. On the strength of its Modelo portfolio, Constellation was the only beer company among the top five to post increases in both dollar sales and volume sales, rising 14.1% and 12.5%, respectively.

A premium play

Flush with growth, Constellation is now preparing to take on the industry's leading players by launching a new low-calorie beer called Corona Premier. Supported by a $35 million investment, the brewer plans to take advantage of the trouble the mass brewers are experiencing.

Light beer has established itself as the country's favorite. Just recently, Miller Lite surpassed Budweiser as the third most popular beer in the U.S., which now makes the top three beers all light beer: Bud Light still ranks as No. 1, Coors Light is No. 2, and now Miller Lite is third.

Corona Premier will come in with 90 calories, positioning it favorably against all three leaders, and Corona Light has 99 calories. What should worry the megabrewers most is that premiumization is the primary trend in beer right now, and Corona Premier will be targeted to drinkers looking to trade up from traditional mass-produced light-beer fare.

Mexican beer remains on a growth tear, and Constellation Brands is capitalizing on one of the industry's strongest segments. Although the brewer's stock has jumped 47% over the past year, it's quite possible it has tapped into a new vein of opportunity that will lead it even higher.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.

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