Constellation Brands its weighing its options in the face of proposed 25% tariffs on goods imported from Mexico and Canada under the incoming second Trump administration.
CFO Garth Hankinson discussed the company’s position during a fireside chat with managing director Dara Mohsenian at the Morgan Stanley Consumer and Retail Conference on Tuesday.
“As we’re thinking about the implications of a potential tariff, it’s a bit hard for us to assess what we would do next, because there’s no specificity yet on what a tariff might look like in terms of what it covers, what’s the duration, what would the amount be,” Hankinson said. “That being said, we’re certainly not waiting for a specific policy to be put in place. We’re working to identify and evaluate the levers that we could pull if the tariff is actually put in place.”
Last week, President-elect Donald Trump pledged to impose 25% tariffs on all imported goods from Mexico and Canada and an additional 10% tariff on goods from China. The tariffs would be enacted on January 20 after Trump’s inauguration.
Per its consent decree with Anheuser-Busch InBev (A-B), Constellation is required to brew its beer in Mexico and import it into the U.S. Its portfolio includes Modelo, Corona, Pacifico and Victoria, some of the brand families with the strongest growth in the beer category.
Hankinson laid out what the company sees as its three options for handling a potential 25% tariff. The first is cutting costs beyond the $300 million cost-savings plan Constellation laid out last year.
The second is to explore bulking up inventory on the U.S. side of the border in advance of any tariffs Trump may levy.
“This is something that we have a little bit of experience in now that we’ve had to deal with some border closure disruptions due to surges in immigration,” Hankinson said. “We’re making sure that we’ve got the right product in this country, which would certainly help, depending on the duration of any tariff.”
Roughly 75% of Constellation’s input costs stem from goods and services in the U.S., with many U.S.-grown ingredients being shipped to Mexico for production, Hankinson noted.
The third would be passing on the cost of the tariff to consumers via “incremental pricing,” Hankinson said, adding that this would need to be done cautiously.
“One of the things that we’re going to want to balance is what’s the right level of pricing so that you don’t impact the top line,” he said. “Certainly, we have momentum in the top line. We want to maintain that momentum because that drives so much more of the algorithm, the profitability of the business, so we don’t want to take any pricing that would, as I say, impair that.”
Hankinson stressed that the company has “a long history of building relationships with different administrations in both countries” and “there’s a really good understanding in both countries of the contributions that Constellation Brands makes to both the U.S. and Mexico.”
Another possible concern for Constellation under a second Trump term would be the effect of harsh immigration and deportation policies, which Hankinson dismissed.
Constellation’s beer consumer base skews heavily Hispanic, and the company is banking on 20% to 30% of its growth coming from “favorable demographics,” he said. Those numbers are based on the current Hispanic population in the U.S. reaching legal drinking age.
“It’s not predicated on outsized immigration growth, so we don’t think that’s a significant risk to our algorithm per se,” Hankinson said.
Below are other highlights from the conversation …
On predicted growth avenues: Constellation shared during a recent investor day that it expects 40% to 50% of the long-term growth for its beer division to come from expanded distribution, 20% to 40% to come from innovation and 20% to 30% to come from demographic changes, Mohsenian said.
The company “still feel[s] really good about all those drivers,” Hankinson said. Through fiscal year 2028, Constellation is expecting to pick up an additional 500,000 points of distribution and has made “good progress.” Its beer portfolio has gained shelf space in the last two fall resets, with double-digit growth this year.
Constellation has “a good pipeline” for innovation and has derived 30% of its growth in the last five years from new offerings, which isn’t limited to “new-to-world product,” Hankinson said.
“That includes price-pack architecture work or incremental SKUs,” he said. “It includes line extensions, for instance, if we add a new flavor to the Chelada lineup, as well as potentially new-to-world products.”
On soft depletions trends last quarter: Constellation isn’t immune to the “macroeconomic headwinds” that are affecting the rest of the beer industry, and its depletions (sales to retailers) slowed to +3.5% on a days adjusted basis. As a result, Constellation had revised its full-year guidance down slightly, but there “are certainly some improvements,” Hankinson said.
“If you think about the macroeconomic background in the last three months, inflation appears to have crested and the outlook for that is that will improve as we move into calendar year 2025,” he said. “We’ve had two interest rate cuts totaling 75 basis points, and the outlook could be for additional rate cuts this year and into next year. So over the longer term, that should be a tailwind for consumers.”
On continued growth for Modelo Especial: The Modelo brand family’s flagship, Modelo Especial, is the No. 1 brand in off-premise channels tracked by market research firm Circana, yet it remains “under-distributed versus its peers,” Hankinson said.
Constellation predicts that about half of its planned additional 500,000 points of distribution will be for Modelo Especial outside the western part of the country, where the brand is strong.
“This is a brand that we’re seeing grow double-digits in the business units outside the West, in the South, the Southeast and Central,” Hankinson said.
Modelo Especial is the No. 1 beer brand in 14 markets and No. 2 in seven markets. In California where the brand is strongest, Modelo Especial has a 20% market share. The brand’s dollar share of total beer is 9.52% nationwide year-to-date (YTD) through November 3, according to Circana.
In the on-premise, Modelo is the No. 4 draft handle nationwide, but No. 1 in dollar sales, Hankinson said.
YTD through November 3, off-premise dollar sales of Modelo Especial have reached $3.711 billion, marking a +9% increase over the same period last year, according to Circana. The brand’s volume, measured in case sales, has increased +8.4% for the period, and its share of dollar sales has increased +0.83 share points.
The Modelo brand family – which includes Modelo Negra, Modelo Oro and the Modelo Chelada family – has grown at a similar clip (+8.9% in dollar sales, +8.1% in volume) and has reached $4.449 billion in dollar sales YTD through November 3, according to Circana.