What’s Behind Constellation’s $1.7 Billion Wine Brand Sale

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Constellation Brands (NYSE: STZ) may be best known for its Corona and Modelo beers, Robert Mondavi wine, and Svedka vodka -- and its big investment in legal cannabis major Canopy Growth (NYSE: CGC). But it had a fairly large stable of lesser brands, too. That stable is about to shrink by 40%: It's selling 30-plus of those brands, including Clos du Bois and Mark West, and a half-dozen wineries, to the E. & J. Gallo wine family.

In this segment of the Motley Fool Money podcast, host Chris Hill and Fool senior analysts Andy Cross and Jason Moser reflect on the wisdom of this realignment, and how Constellation Brands might use the profits to capitalize on opportunities for its premium beer brands, as well as the cannabis market.

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This video was recorded on April 5, 2019.

Chris Hill: Constellation Brands is the parent company of Corona beer as well as a portfolio of wine and spirits brands. This week, that portfolio got smaller. Constellation is selling some of its lower-end brands for $1.7 billion. Jason, what are they going to do with that money? More investments in cannabis?

Jason Moser: Probably. Probably a little bit. I liken this to your 'add to your winners' mentality that David Gardner has done such a good job of teaching us through the years. Because when you look at what Constellation does -- beer, liquor wine -- you can see the challenges in all of those spaces, particularly when you look at the craft beer segment. It's just such a saturated market. What they're looking at with the wine segment here is pretty interesting, just focusing on those higher price points, leaving those lower price points to... I don't know, is it Trader Joe's you would go to for the $3-to-$5 bottles of wine? They're apparently pretty good. I also think you're seeing in beer and wine more of a big move toward local. You're seeing more and more customers wanting to support their local vineyards, their local breweries. So, for me, this is about Constellation getting rid of underperformers and thinking, "Hey, where are the opportunities in the coming years?" There's clearly opportunity there with their premium beer offerings. We're talking about Corona, Modelo, Pacífico. They're going to be investing more and more in that lifestyle brand. We've seen commercials from Kona recently investing in that lifestyle brand with Hawaiian beer. I think there is something there.

And then, to your point about marijuana and the market opportunity going forward there, they clearly have a big investment in Canopy. Canopy is still looking at a $1 billion run rate here on the revenue side by next year. I would imagine that if they continue to deliver those results, Constellation will be looking at investing some of that capital into that business and focusing more on the future and getting rid of some of the underperformers of the past.

Andy Cross: I was pretty impressed by this quarter. Their beer market actually has grown pretty nicely with those brands, Jason, that you mentioned. Beer in general for the year was down 1.5% for shipments. That's an increase in drops from the year before. They're actually gaining some market share in a market that, like Jason said, is changing a lot.

What's interesting for the liquor and spirits business is really the growth of these low- and no-alcohol products, the alcopops. That's really a growing market that you start to see a lot of companies invest in, including Diageo, which is a big player in the spirit space.

Moser: The beer market's not easy. We just saw Boston Beer got downgraded. Quarter in and quarter out over the past couple of years, we've seen the only real thing that's driving those depletions numbers for Boston Beer, it's more about the offerings other than beer, -- their seltzer offerings, their cider, Twisted Tea, things like that. They continue to have trouble with that Samuel Adams brand. I think that speaks to Andy's point about a tough time right now in the beer market overall.

Andy Cross owns shares of Boston Beer and Diageo. Chris Hill has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. The Motley Fool owns shares of Boston Beer. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.