Pricing was the clear theme of the question-and-answer portion of Constellation Brands’ first quarter FY2023 earnings call on Thursday.
More specifically, analysts were wondering why the company is hesitant to increase price in an inflationary environment. CEO Bill Newlands reiterated that Constellation’s “long-term algorithm on pricing is +1%-2%,” although last year it increased beer prices +3.5%.
“Frankly, we think that it is particularly important to keep the consumer in mind as we make choices around our pricing algorithm,” he said. “Our current algorithm works very well, and it’s fairly flexible. And the benefit of that approach is it does provide the flexibility as we watch and see how things develop over the course of the year.
“What I can assure you of is we are closely monitoring what is going on both from an inflationary standpoint, as well as pricing, and we’ll be ready to adjust our approach if that proves to be necessary or appropriate.”
Admitting that inflationary pressures are creating an economic environment that can be described as “extraordinary,” Newlands cautioned that he intends for Constellation to “remain balanced, sensible and not get caught up in the whirlwind at the moment and doing things that I would describe as anti-consumer.”
Year-to-date through June 12, Constellation’s price per case at multi-outlet food and convenience stores tracked by market research firm IRI increased $1.46 compared to the same period last year, outpacing the overall beer category (+$1.32). However, several beer category competitors took more price than Constellation, including Kirin-owned Lion Little World Beverages (+$1.86 per case), Sierra Nevada (+$1.66), Boston Beer Company (+$1.61), Mark Anthony Brands (+$1.56), and Diageo Beer Company (+$1.56).
After a quarter in which Constellation’s beer depletions increased +8.7% and shipments grew +17.3%, to 99.5 million case equivalents, the company’s beer business guidance calls for 7%-9% net sales growth and 2%-4% operating income growth this year, which Goldman Sachs managing director Bonnie Herzog questioned.
“We’re all trying to understand your level of conservatism, especially considering it implies that your beer shipments only grow about 3% for the balance of the year despite what I think is pretty darn good momentum behind your brand,” she said. “So what are we all missing?”
CFO Garth Hankinson explained that results look “lumpy” as the company cycles against production issues during Q1 last year. Due to a share repurchase plan and investments to accelerate its digital business, Hankinson said it’s “just a little bit too early” to consider changing the company’s guidance.
“We’re still monitoring macroeconomic conditions as well as what those economic conditions, including inflation, have on the consumer,” he added.
Newlands added that he sees depletions as the primary metric to follow to understand company performance because they are most closely tied to consumer demand, and, in Constellation’s case, reflect share gains.
“Our depletions were very strong, yielding share-gaining performance within the market,” he said. “More importantly, we are continuing to see strong consumer demand throughout the year. And certainly, the consumers continue to be interested with our business despite an understanding that it’s going to be an interesting year relative to questions around inflation and around recession. But we remain very confident in the performance of our business, and I think it was reflected in the quarter we delivered.”
Inflationary pressures have driven up the price of many of Constellation’s inputs, including pallets, cartons, steel, corn and aluminum, Hankinson said. As a result, the beer division’s operating margin declined 260 basis points to 40.2%. Creating further headwinds are costs associated with additions to the company’s facility in Obregon, Mexico.
These increased costs were partially offset by a decrease in hard seltzer-related obsolescence costs. During Q2 of fiscal year 2022, Constellation recorded $66 million in obsolescence charges because it produced more than was necessary. Once a top five hard seltzer brand, Corona Hard Seltzer’s share of the segment has withered to 1.7%, according to Jefferies’ hard seltzer dashboard, which reflects sales during the four weeks ending June 18.