After another soft quarter and with the potential of tariffs looming, bev-alc giant Constellation Brands revised its financial guidance downward in the release of its Q3 earnings on Friday.
Constellation – which produces and imports popular Mexican beer brands Modelo, Corona, Pacifico and Victoria – shifted its projected net beer sales growth to +4% to +7% (down from +6% to +8% in Q2, which was also down from +7% to +9% in Q1). The company projected operating income growth of +9% to +12% for its beer division for FY2025, a slight revision from the +10% to +12% it called for in Q1.
“This range reflects risks that we see that could potentially occur,” CEO Bill Newlands said during a call with analysts. “That would include things like unemployment, potential tariffs, things of that nature. And the opportunity is just the opposite of that. The upper end reflects if things improve, and we start to see some of these macroeconomic headwinds go the other direction.”
Newlands pointed to “subdued overall spend and prolonged value-seeking behavior among consumers” as “key near-term limiting factors on demand growth” during his prepared opening remarks.
Although Constellation’s beer division recorded growth in all key metrics during the quarter (September-November), all were in the low single-digits:
- Net sales, +3%, to $2.032 billion (+6% in Q2);
- Shipments (sales to wholesalers), +1.6% (+4.6% in Q2);
- Depletions (sales to retailers), +3.2% (+2.4%).
In Q2, when slowing growth first began to appear, Newlands deemed the trend “purely a near-term issue.” During the Q3 call, he said these near-term changes have lasted “a little longer than what we had anticipated.”
“We still don’t see it as anything structural,” Newlands said. “We don’t see it as long-term issues attached to this business.”
Unemployment rates have increased in 31 states, which “always affects” the company, Newlands said, and called out a Wall Street Journal article that examined the spending habits of consumers earning $50,000 or less annually, which is “a portion of our business.”
“Alcohol’s percent of the consumer basket remains consistent,” Newlands said. “The overall basket is down, but our percentage of that basket remains the same. And I think that’s an important thing. We would expect to come out of this trough, and we certainly hope that that’s going to happen in the near-term.”
As retailers prepare for spring resets, Constellation expects “to continue to gain shelf because, frankly, we’ve earned it,” Newlands said. The reverberations of Bud Light’s 2023 catastrophic sales decline in part resulted in Constellation’s portfolio benefiting from “outsized double-digit gains” in shelf space in 2024. Constellation is predicting “a more normal year” for space allocation.
In advance of both increased shelf space and proposed 25% tariffs on goods from Mexico under president-elect Donald Trump, Constellation has stockpiled “a bit more” beer in the U.S. than it normally would, Newlands said.
“Just in case there are any order disruptions, as you would expect, we have a bit more on this side of the border than we have had historically,” he said. “We’ll probably continue to do so until we understand exactly how that all lands, but that’s just good business.”
Beer Institute chief economist Andrew Heritage noted similar activity by many importers in the trade group’s latest economic report, with beer imports declining at the end of 2024 “in order to rebuild inventories with fresh supply in early 2025,” and prepare for possible disruptions.
Constellation’s new brewery in Veracruz on the Gulf of Mexico is slated to open in 18 months, CFO Garth Hankinson said. The first production “module” expected to come online can produce 3 million hectoliters (about 2.55 barrels).
“It’s a relatively small piece of the overall production footprint,” Hankinson said.
The company is more than halfway to its goal of adding 500,000 incremental points of distribution (POD) between FY2024 and FY2028, Newlands said. About half of those PODs are expected to be for Modelo Especial outside the western portion of the U.S., where the brand is strongest, Hankinson said during the Morgan Stanley Consumer and Retail Conference last month.
Constellation is still on track to source 20% to 40% of the beer division’s growth from new products and pack formats, though it is now facing headwinds from “competitive pricing” and “consumer demand” for its light beer brands and the Modelo Chelada family, respectively, Newlands said during the call.
Convenience channel dollar sales of Modelo Chelada Limon Y Sal, the family’s lead offering, decelerated from +18% in the first 11 months of 2024, to +15.2% in the four-week period ending December 1, according to market research firm Circana. To keep the brand tracking in the right direction, Constellation is launching English-language TV ads for it for the first time, Newlands said.
Modelo Oro, Constellation’s challenger to Anheuser-Busch InBev’s Michelob Ultra, increased dollar sales +5.8% and volume (measured in case sales) +4.6% in the first 11 months of 2024 at multi-outlet grocery, mass retail and convenience stores (MULO+C), according to Circana.
Another goal for the company is to draw between 20% and 30% of its growth from demographic changes, and Newlands shared that the percentage of dollars flowing in from the 21- to 24-year-old demographic “is nearly twice that of the beer category” and “has grown at more than twice the rate of the category and the high-end segment, relative to last year.”
Constellation often targets this demographic segment with its Pacifico brand family, which grew depletions nearly +20% during the company’s Q3, Newlands said. Pacifico is the No. 3 beer brand in Southern California and is “still growing double-digits,” he said.
Nationwide, Pacifico is No. 15 in MULO+C channels tracked by Circana, with dollar sales increasing +24.7%, to $403 million in the first 11 months of 2024. The brand increased volume +23.5% and gained +0.19 share points in beer category dollars.
Constellation remained the No. 2 beer category vendor in MULO+C data for the 12-week period ending December 1, with dollar sales increasing +7.5%, to $2.097 billion, and volume +5.7% compared to the same period the previous year, according to Circana.