Constellation Brands’ Depletions Increase 12% in Q3; Funky Buddha Hard Seltzer to Expand to 10 Markets

Just like almost everyone on the planet, Constellation Brands is “happy to turn the page” on 2020, CEO Bill Newlands said during a call today with investors and analysts to discuss the company’s third quarter earnings.

“I’m mindful of the words of American novelist James Lane Allen, who said ‘Adversity does not build character, it reveals it,’” Newlands said. “This is certainly the case for us.”

The biggest challenge the producer of popular Mexican import brands Corona, Modelo and Pacifico faced in 2020 came in March when the Mexican government ordered the shutdown of all manufacturing industries, including beer. This pause in production led to depleted inventory that was still being replenished into the third quarter and created a gap between shipments (sales to wholesalers) and depletions (sales to retailers) growth.

“Shipment volumes significantly outpaced depletion volumes as product inventories begin to rebuild from a COVID-related slowdown of Mexican beer production earlier this year,” the company wrote in a press release. “Due to continued robust consumer demand, product inventories are now expected to return to normal levels during the fourth quarter fiscal 2021 as shipment volume is expected to continue to outpace depletion volume for the remainder of the fiscal year.”

Shipments of Constellation’s beer portfolio — which includes craft offerings from Funky Buddha and Four Corners in addition to its import offerings — increased 27.1%, to 92.3 million case equivalents (CEs), compared to 72.6 million CEs in the same quarter last year (72.1 million CEs when adjusted to remove volume from the Ballast Point portfolio, which Constellation sold to Kings and Convicts in a deal that closed in March 2020).

Depletions (sales to retailers) increased 12%. In the release, the company estimated that pandemic-driven closures have decreased its on-premise business by 35%.

Constellation Brands’ net sales increased 22% in the third quarter of its fiscal year, which began March 1, to $2.438 billion.

The brightest star in Constellation’s beer family in Q3 was Modelo Especial, which posted nearly 20% depletions growth and grew its share more than any other import brand in channels tracked by market research firm IRI. The Modelo brand family’s dollar sales at off-premise retailers increased 20.6%, to $2.915 billion in 2020 through December 27, making it the third largest brand family in the beer category, according to IRI.

Corona Premier, the Corona brand’s low carb offering, outpaced other Corona offerings in depletions, with an increase of more than 20%, according to the release. Depletions of the Corona brand family increased 12% in Q3. Dollar sales of the Corona brand family increased 9%, to $2.759 billion in 2020, making it the fourth largest brand family in the beer category, according to IRI.

Corona Hard Seltzer, which launched in early March just as the pandemic shut down on-premise outlets, has reached 70% ACV distribution, up from 50% one month after its debut. Dollar sales of the brand’s single SKU, a variety 12-pack, reached $166 million in 2020, according to IRI.

Recent IRI trends show Corona Hard Seltzer’s dollar share of the beer category shrinking, from 0.38 sharepoints over the last 52 weeks, to 0.33 sharepoints over the last 12 weeks, to 0.29 sharepoints for the four weeks ending December 27. Newlands attributed the slow down to seasonality.

“It’s not unusual, I don’t think, as you get more and more people into the category, you get consumers who are either less frequent users or experimenting in the category,” he said. “And oftentimes, there’s some movement around and within categories when that occurs. You couple that with a bit more seasonality that we’ve seen this year than what we had seen in prior years.

“So, I still think it remains a very strong growth category,” he continued.

The top three brands in the hard seltzer segment — Mark Anthony Brands’ White Claw (46.6% share at the end of 2020, according to wholesaler data firm Fintech), Boston Beer’s Truly Hard Seltzer (27.1%) and Anheuser-Busch InBev’s Bud Light Seltzer (10.3%) — accounted for 83% of the segment in December 2020, down from 91% in January 2020.

Corona Hard Seltzer is at No. 4, with a 4.1% share of the segment, according to Fintech. Press Hard Seltzer, which Constellation holds a minority stake in, is the tenth best selling hard seltzer brand, with a 0.6% of the segment.

Constellation’s goal is to overtake Bud Light Seltzer at No. 3. To do so, the company will introduce a new variety pack with four new flavors: pineapple, strawberry, raspberry and passionfruit. The pack will launch early in Constellation’s next fiscal year, which begins in March.

The company is also working to double its capacity for Corona Hard Seltzer production in 2021, Newlands said. To accommodate the brand after it launched, it paused production of Corona Refresca, a fruited flavored malt beverage, in mid-2020, but that brand will return in March, a Constellation spokeswoman said.

“We’ve sold everything we could make this year,” Newlands said during the call’s question-and-answer period. “We were very pleased with the performance [of Corona Hard Seltzer] and, frankly, as I said earlier, that was a bit better than we expected to do.”

Constellation is also pleased with the sales of Funky Buddha Hard Seltzer and plans to expand distribution of its variety pack to 10 new markets — Alabama, Georgia, Tennessee, North Carolina, South Carolina, Maryland, Virginia, West Virginia, and Washington, D.C. — in March, a spokeswoman confirmed. A second variety pack will launch in Florida.

Canopy Growth, the Canadian cannabis company Constellation first invested in in 2017, reported a loss of $12.4 million on a reported basis and $43 million on a comparable basis in Q3. Last month, the company announced plans to close five production facilities to streamline operations.

“We’re pleased with the progress the Canopy Growth team has made in defining and strategically positioning themselves in the U.S. CBD and legal THC cannabis markets, which will be beneficial upon federal permissibility, which was probably enhanced with the change in the Senate that’s occurred in the last 48 hours,” Newlands said, referring to the wins of Democratic U.S. Senate candidates Raphael Warnock and Jon Ossoff in the Georgia special election, which tips control of the Senate to Democrats.

As of press time, shares of Constellation stock (STZ) increased 1.4%, to $227.60 on the New York Stock Exchange.