Constellation Brands continues to be the golden child for distributors with the growth of its Mexican imports, Goldman Sachs analyst Bonnie Herzog reported in her Q3 “Beverage Bytes” survey.
Goldman Sachs surveyed 45 distributors representing 445 retail outlets – about 75% of the total U.S. outlets that sell alcoholic beverages. Respondents agreed that the total beer category has struggled this year against competition from ready-to-drink canned cocktails (RTDs) and changing consumer habits with the return of the on-premise. They project the total beer category will decline -1% year-over-year (YoY) in 2022 – in-line with distributor estimates in June’s survey – in contrast to the +3% growth the category recorded in 2021.
Constellation has become an outlier this year, outperforming the category to have an estimated +8% increase in dollar sales YoY in 2022, and +5% increase in 2023, according to Herzog. While those estimates are lower than expectations in June (+9% in 2022 and +7% in 2023), they still far outpace the overall beer category.
Survey respondents said they are “bullish” on Constellation’s Mexican imports brands, particularly Modelo and Corona. The majority of respondents (85%) said they’ve seen broad-based brand momentum for Modelo, while 70% said the same for Corona. One respondent added they can see the opportunity for Modelo to “secure the top spot as the No. 1 beer brand in their markets by the end of next year.”
Overall, distributors see a long runway for growth for Constellation’s various brands, driven by consumer demand, demographic trends, brand positioning and the company’s “focused approach.” As a result, Herzog said she expects a raise in the top end of Constellation’s guidance for fiscal year 2023 (FY23).
Constellation is forecasting net sales growth of +8-10% and operating income growth of +3-5%, the company shared in its Q2 2023 earnings report this week.
Distributors also showed optimism for Molson Coors Beverage Company, driven by its “strong core and innovation.” They were especially encouraged by Miller Lite, “which they see poised for continued growth and share gains,” taking share mainly from Anheuser-Busch InBev’s (A-B) Bud Light, Herzog wrote. “Tempered” views were expressed for the company’s other light beer offering Coors Light, “as it benefits from improved advertising support, but is cycling tough comps.”
Distributors forecast flat growth for Molson Coors in both 2022 and 2023, an improvement over projections in June that had the company decreasing dollar sales -2% each year.
Beer Still Facing the Wrath of Tough Comps, Supply Chain and RTD Growth
The total beer category is projected to decline -1% in 2023, a slight decrease from distributors’ June projection of a flat FY23. Distributors noted the “fragmentation in craft” and the growth of RTDs as front-of-mind concerns for the category, as well as the impact of inflation and continued supply chain problems going forward.
Craft is projected to decline -2% YoY in both 2022 and 2023, compared to previous projections of -1% and flat, respectively, “reflecting the difficulty of growing in a saturated market,” Herzog added.
Total beer’s performance in the on-premise has recovered some since shutdowns and restrictions during the COVID-19 pandemic, with the category projected to increase dollar sales +6-7% YoY in the channel in 2022. But the recovery is “unlikely” to counteract the losses from tough 2020 and 2021 comps for the off-premise, Herzog wrote.
The out-of-stock (OOS) issues that have plagued the category may be over though. Just over a third of distributors (36%) described the OOS situation as “bad or very bad” now – a significant drop from June’s survey, when a majority of respondents (60%) used the descriptor. However, for the issues that do exist, the majority of respondents (80%) said they do not expect them to improve until 2023 or beyond.
Heineken was credited with the most OOS problems (“bad or very bad” by 60% of respondents), followed by Constellation (nearly 60%), Boston Beer Company (50%), A-B (45%) and Molson Coors (35%).
Outlook ‘Remains Challenging’ for Hard Seltzer
Distributors forecast a -6% decline in dollar sales for the hard seltzer segment in 2022, and a -4% decline in 2023. While the projection for 2022 is better than expectations in June (-8%), it’s worse for 2023 (-2%), suggesting a more drawn out decline for the segment.
“The outlook remains challenging given ongoing consumer shifts to beer (especially premium light beer), [flavored-malt-beverages] (FMBs), single-serve wine and spirits and RTD cocktails,” Herzog said. “While few distributors see a pathway for the segment to stabilize by next year, most are concerned that the core hard seltzer customer may have already moved on.
“Interestingly, several respondents noted that the hard seltzer category is reminiscent of the craft category about 10-15 years ago from a distribution standpoint, which is being challenged and stretched as the category pushes out new innovation in an effort to stem broad volume declines,” she continued.
White Claw Hard Seltzer (Mark Anthony Brands) remains the share leader of the segment. Previous distributor projections had the brand declining dollar sales -7% in 2022 and -1% in 2023, but those have been adjusted to -4% in 2022 and -2% in 2023, following a similar pattern to the overall hard seltzer segment.
Truly Hard Seltzer (Boston Beer), the No. 2 brand in dollar share in the segment, continues to “cede share” to other offerings. The lackluster performance of the brand was credited as the biggest driver in Boston Beer’s guidance change in Q2 2022, which was lowered from +4% to +10% to now -2% to -8%. Boston Beer’s -7% depletion decline in Q2 was also “primarily driven” by Truly, CEO Dave Burwick said during the company’s quarterly earnings call with investors in July.
“While Truly is expected to remain a dominant brand (along with White Claw), distributors remain concerned that consumers will only continue to shift away to spirits RTDs, FMBs and the beer category as well,” Herzog said.
The majority of distributors surveyed (70%) said Truly’s sales have not improved since earlier to 68% in June. Boston Beer has attempted to tackle declines by reformulating its core flavor offerings to include real fruit juice. While distributors said there has been a slight improvement in Truly’s sales, ultimately, it could only hope to slow, not arrest, continued declines over the longer term,” Herzog said.
Some distributors also shared concerns for the brand’s numerous variety packs, which may be “contributing to consumer fatigue with higher prices and dislike for certain flavors.”
Twisted Tea Has Potential to be $1 Billion Revenue Brand
While Truly has been a battle for Boston Beer, the company’s more than 20-year-old hard tea brand Twisted Tea has recorded a significant uptick in growth. Distributors now forecast a +22% increase in dollar sales YoY for the brand and a +13% increase in 2023.
Twisted Tea now generates about 27% of Boston Beer’s total revenue, producing an estimated $550 million in 2022, and holds a 95% share of the hard tea share in the off-premise, according to NielsenIQ data cited by Herzog. That may only be scratching the surface of its potential, according to Herzog, who said the brand could be a $1 billion revenue brand at some point.
Distributors praised the brands “well-defined target audience, multiple consumption occasions, differentiated product proposition” and Boston Beer’s “strong marketing efforts,” behind the brand. While Twisted Tea was previously seen as a summer beverage, Boston Beer invested $5 million in marketing support in February to launch a year-round campaign.
Boston Beer nearly doubled distribution of Twisted Tea 12-packs in the first half of FY22, the company shared during its July earnings call. Herzog said the brand still has “significant future growth potential, especially in untapped channels such as grocery and on-premise,” as well as with future innovation of both package sizes and flavors.
Still, with that growth, “we are not convinced Twisted Tea (or [Boston Beer’s] other innovations) will be enough to offset Truly’s declines this year or next,” Herzog said.
“Despite an upbeat outlook for Twisted Tea, we continue to believe that the risk-reward for [Boston Beer] still largely skews negative given the importance of Truly to [Boston Beer’s] portfolio – we estimate 40% of [Boston Beer’s] LTM revenue – versus Twisted Tea (about 32%),” she continued.